What it means
The BCG matrix is a tool that sorts a company's products or divisions into four groups using two measures: the growth rate of the market and the unit's share of that market compared with its biggest rival. A star sits in the high-growth, high-share group.
It is a leader in a market that is expanding quickly. Stars are attractive but demanding.
They often produce strong profits, yet they also need large investment in capacity, marketing and product development to defend their lead. The net cash flow from a star can therefore be modest or even negative, despite its impressive sales.
The usual advice is to keep investing so that the star holds its position. If it stays the leader when the market slows, it typically moves into the cash cow group, which is high share in a low-growth market and generates more cash than it needs.
Those cash cows can then fund new stars and question marks, the group of low-share units in fast-growing markets. To place a unit, managers calculate relative market share, which is the unit's share divided by the share of the largest competitor.
A value above 1 means the unit is the market leader. Growth is judged against a threshold chosen by the company, often around 10% a year, though the line is a matter of judgement.
The matrix is a simple prompt for discussion, not an exact science. Critics point out that it ignores factors such as profitability, synergies and the difficulty of defining a market.
A product's position can also shift quickly if a competitor launches a new rival or if the market's growth rate changes. For a portfolio manager or executive, the practical use is balance.
A healthy company has some stars to build future earnings, some cash cows to fund them and a few promising question marks that might become stars. Too many stars can strain cash, while too few can leave the company without future growth.
In practice
Real-world examples.
Example
A consumer electronics company leads a fast-growing smart speaker market with a 35% share. The division earns strong sales but spends heavily on research and marketing. Executives classify it as a star and approve more capital to keep its position.
Example
A food group's plant-based range holds the top position in a quickly growing category. The finance team notes that it consumes cash for new production lines. The board agrees to fund it from profits earned by the group's mature dairy brands.
Example
A software company reviews its product portfolio and finds that one cloud product has a relative market share of 1.8 in a market growing 25% a year. It labels the product a star and plans hiring and marketing. Another product with low share and slow growth is considered for sale.
Formula
Calculation
Relative market share = Unit's market share / Largest competitor's market share
Suppose a company's electric scooter division holds 30% of a market growing at 12% a year, and the nearest rival holds 20%. The relative market share is 30% / 20% = 1.5. Since the share is above 1 and the growth of 12% is above a threshold of 10%, the division is a star. If the division generates $60 million of operating cash flow but needs $50 million of investment to keep growing, its net cash generation is only $10 million.Case study
Seen in the real world.
Meadowbrook Beverages is a fictional drinks company that used the growth-share matrix to review its brands. This illustrative company found that its sparkling water brand had 28% of a market growing at 14% a year, while its largest rival had 20%. This is a fictional scenario, not a real company.
The brand's relative share of 1.4 made it a star, but it was absorbing most of the company's capital spending. The finance director kept investing in new bottling capacity, funded by cash from the mature cola brand. Three years later, as the market growth slowed to 5%, the sparkling water brand became a cash cow and funded the launch of a new energy drink.
Watch out
Common mistakes.
- Assuming a star always makes a lot of cash. Stars often consume as much cash as they earn because of the investment needed.
- Using a loosely defined market. A narrow or wide definition can change the share and growth, and so the classification.
- Treating the matrix as a complete strategy. It ignores profitability, risk and links between businesses.
Questions
People also ask.
What happens to a star when the market slows?
If it keeps its leading share, it usually becomes a cash cow, generating more cash than it needs.
How is relative market share calculated?
Divide the unit's market share by the share of its largest competitor, so a result above 1 shows market leadership.
What are the other categories in the matrix?
Besides stars, there are cash cows, question marks and a fourth group of low-share, low-growth units that are usually reviewed for sale or closure.
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