As your business is growing, you might add new products or services to your business portfolio. A business portfolio refers to a company’s overall set of products and services that the business offers. But as your company grows, it might be challenging for you to decide “where to invest more money”, especially if your financial resources are limited. To deal with such situations and deciding which of your products/services is more desirable and profitable than others, a strategic management tool can be used: the Boston Consulting Group’s Matrix (BCG Matrix).
The BCG matrix is a growth-share matrix where the vertical axis represents the market growth rate whilst the horizontal axis represents relative market share. To see how this matrix looks, check out our Pinterest post that we did on the BCG matrix.
The BCG Matrix is divided into 4 quadrants based on the analysis of market growth and relative market share. By combining these variables, the company can determine where to allocate extra financial resources and from where they can cash out. Hence, the main purpose of this tool is to help you make better investment decisions about your business portfolio.
Market Growth: measures the market’s attractiveness
Relative Market Share: measures the company’s competitiveness
Now, let’s tackle each quadrant separately and give you tips on how to decide which product/service that you offer fits into each part.
- Stars are the products/services with the highest market share and are situated in a fast-growing industry. These generate the most amounts of cash due to their ideal position on the matrix, however they also require large investment in order to maintain their growth rate. To decide which product is the “star” in your business portfolio try to answer these questions:
- Will demand increase for this product/service over the next 5 years?
- How large is the contribution margin?
- Contribution margin (CM) can be calculated as:
- Sales Revenue – Variable Costs (particular for the product/service
- If the CM is higher than all other products in the business portfolio, then this product or service might be your Star.
- Question Marks are those products/services that operate with a low market share, but in a high growth market. A question mark is usually a newly introduced product in the market. If managed well, the question marks can easily be turned into stars through right investments and dedication. However, if you do not put in the effort required for the Question Marks in your portfolio, they can very quickly turn into a Dog (read below). That’s why it is crucial to ask yourself whether you have the bandwidth to grow a Question Mark. If your answer is uncertain, then it is best to postpone the launch of this product/service.
- Cash Cows are your best products that operate in a maturing, or even declining, market and the revenues begin to stagnate. You should hold on to the cash cows for as long as you are making a profit. If your expenses are higher than the revenues generated, then the Cash Cow becomes a Dog. However, there might still be hope for a Cash Cow to be turned into a star through improving the demand for the particular segment. We will tackle this in our next blog article (stay tuned!).
- Dogs are represented by products/services that are in a declining market with a small market share. Although these products can ‘break-even’ (neither consume large amounts of cash nor create large amounts of cash), they should still be considered as unattractive for investments. If a product/service has entered this stage, it is best to liquidate it / remove it from your portfolio. The chances for revival are very slim, which is why you should not invest more money into it. Instead, liquidate it, so that it does not drain your financial and other resources.