The Boston Matrix and Product Portfolio Analysis
The Boston Matrix (or BCG Matrix), developed by the Boston Consulting Group, is a tool for analysing a business's portfolio of products by plotting each one on a two-by-two grid: market growth rate on the vertical axis (how fast the overall market for that product is growing) and relative market share on the horizontal axis (that product's market share divided by the market share of the largest competitor in that market). The resulting four categories are Stars (high growth, high relative share, needing continued investment but generating strong future returns), Cash Cows (low growth, high relative share, generating strong reliable cash with little investment needed), Problem Children or Question Marks (high growth, low relative share, requiring a decision on whether to invest heavily to build share or withdraw), and Dogs (low growth, low relative share, usually candidates for withdrawal or divestment). The matrix helps a business balance its portfolio, using cash generated by Cash Cows to invest in Stars and Problem Children, and links closely to decisions about where a product sits on the product life cycle.
Before you start
Make sure you're comfortable with these topics first:
Method
- Calculate relative market share for the product: its own market share divided by the market share of the largest competitor in that market (not simply the product's raw market share).
- Compare the market's growth rate to a stated or reasonable boundary (commonly around 10%) to classify it as high growth or low growth.
- Plot the product against the two axes: high relative share and high growth is a Star; high relative share and low growth is a Cash Cow; low relative share and high growth is a Problem Child; low relative share and low growth is a Dog.
- Explain the strategic implication of the category the product falls into, e.g. a Cash Cow should be milked for cash rather than heavily reinvested in, since its market is no longer growing fast.
- Where a business has several products, discuss the balance of the whole portfolio, since a business overloaded with Dogs and no Cash Cows will struggle to fund future Stars.
- For an evaluate question, weigh the limitations of the model, such as market share being difficult to define precisely, or the model ignoring qualitative factors like brand reputation, alongside its usefulness for resource allocation decisions.
Worked example
A company's Product A has a market share of 25% in a market where the largest competitor holds a 50% share, and that market is growing at 12% a year. Using a market growth rate of 10% as the boundary between high and low growth, calculate Product A's relative market share and identify its likely position on the Boston Matrix.
- Calculate relative market share: Product A's share divided by the leading competitor's share = 25 / 50 = 0.5.
- A relative market share below 1 means Product A holds a smaller share than the market leader, so it is classed as low relative market share.
- Compare the market growth rate of 12% to the 10% boundary: 12% is above the boundary, so the market is classed as high growth.
- Combine the two results: low relative market share and high market growth places Product A as a Problem Child (Question Mark) on the Boston Matrix.
- As a Problem Child, Product A needs a strategic decision: invest heavily to try to build its market share while the market is still growing, or withdraw it before the market matures and it risks becoming a Dog.
Practice questions
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Q1Name the four categories of the Boston Matrix.Show answer
Answer: Stars, Cash Cows, Problem Children (Question Marks), and Dogs.
Q2State the formula for relative market share.Show answer
Answer: Relative market share = the product's own market share / the market share of the largest competitor in that market.
Q3A product has a low relative market share and is in a low-growth market. Which Boston Matrix category is it in?Show answer
Answer: A Dog.
Q4A company has a market share of 40% where the next largest rival has 10%. Calculate its relative market share.Show answer
Answer: 40 / 10 = 4.
Q5State one strategic use a business can make of cash generated by a Cash Cow.Show answer
Answer: Using it to fund investment in a Star or a Problem Child product elsewhere in the portfolio.
Q6Explain one limitation of using the Boston Matrix to make investment decisions.Show answer
Answer: It relies on market share and market growth figures that can be difficult to define or measure precisely, and it ignores qualitative factors such as brand reputation or how well a product fits the company's strategic aims.
Exam-style questions
Written in the style of a A Level Business exam paper, with a full mark scheme.
Analyse the benefits to a business of using the Boston Matrix to manage its product portfolio.
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TerraSnack sells three products. Crisps have a 35% market share in a market where the largest rival holds 35% (market growth 2% a year). Protein bars have a 10% market share where the largest rival holds 40% (market growth 18% a year). Herbal teas have a 45% market share where the largest rival holds 15% (market growth 15% a year). Using a market growth boundary of 10%, evaluate how TerraSnack should prioritise investment across its three products.
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