In a business sense, a portfolio simply means the range of products sold by a business.

No business has an infinite supply of money to invest. So, when a business has a portfolio of
products it must decide how to allocate investment, such as marketing budget or R&D resource, to
that portfolio. The Boston Matrix is a tool which can help in making these decisions.

The BCG Matrix works on the principle that every company should have a portfolio containing both
high-growth products requiring cash investment and low-growth products that throw off excess
cash. Having both types of products will ensure long-term business success.

How It works

 The horizontal axis of the BCG Matrix represents the amount of market share of a product
and its strength in the particular market. By using relative market share, it helps measure a
company’s competitiveness.
 The vertical axis of the BCG Matrix represents the growth rate of a product and its potential
to grow in a particular market.

Question Marks

 Products in the question marks quadrant are in a market that is growing quickly
but where the product(s) have a low market share.
 Question marks are the most managerially intensive products and require extensive
investment and resources to increase their market share.
 Investments in question marks are typically funded by cash flows from the cash
cow quadrant.
 In the best-case scenario, a firm would ideally want to turn question marks into stars.If
question marks do not succeed in becoming a market leader, they end up becoming dogs
when market growth declines.

Dogs

 Products in the dogs quadrant are in a market that is growing slowly and where the
product(s) have a low market share.
 Products in the dogs quadrant are typically able to sustain themselves and
provide cash flows, but the products will never reach the stars quadrant.
 Firms typically phase out products in the dogs quadrant (as indicated by B) unless the
products are complementary to existing products or are used for a competitive purpose.

Stars

 Products in the star quadrant are in a market that is growing quickly and one
where the product(s) have a high market share.
 Products in the stars quadrant are market-leading products and require
significant investment to retain their market position , boost growth, and
maintain a competitive advantage.
 Stars consume a significant amount of cash but also generate large
cash flows.
  As the market matures and the products remain successful, stars will migrate to
become cash cows. Stars are a company’s prized possession and are
top-of-mind in a firm’s product portfolio.

Cash Cows

 Products in the cash cows quadrant are in a market that is growing slowly and
where the product(s) have a high market share.
 Products in the cash cows quadrant are thought of as products that are leaders in
the marketplace. The products already have a significant amount of
investments in them and do not require significant further investments
to maintain their position.
 Cash flows generated by cash cows are high and are generally used to finance
stars and question marks.
 Products in the cash cows quadrant are “milked” and firms invest as little cash as possible
while reaping the profits generated from the products.

Advantages of The Boston Matrix

 It shows if your portfolio is balanced. For example, if you have too few products in your
portfolio then you could be in the dangerous position of having all your eggs in one basket.

Limitations of the Boston Matrix

 Market growth rate is not an accurate measure of a market’s attractiveness to a business.

 Market share doesn’t actually predict how much cash a product generates. For example,
dogs can be profitable, and stars can have a high market share and high growth but be
operating in an extremely low margin industry and therefore never be particularly profitable.
 It does not account for external factors, known as environmental factors. These factors
include such things as the emergence of new technologies or potential changes in tax laws.
To analyze external factors you can use a PEST Analysis.
 It is only a snapshot of the current situation. It doesn’t look to see what is likely to happen to
a market in the future. A McKinsey Matrix is a better tool to use to analyze your portfolio if
you’re looking to understand what’s likely to happen in the future.

Summary

The BCG Matrix is a method of examining a portfolio of products by relative market share and
relative market growth.

This results in the portfolio broken down into stars, cash cows, dogs, and question marks.

The information within the matrix can then be used to create the right portfolio mix (or a balanced
portfolio).
In other words, the portfolio should have enough stars to secure the future high-growth of the
organization. It should have enough cash-cows to supply the funding for this future growth, and it
should have enough question marks in the portfolio with the potential to be turned into future stars.

Apple as an Example for the Boston Matrix

Stars: The iPhone is the star of Apple’s portfolio. It’s has a high market share in a market that is
still growing. The iPhone generates significant profit but still requires investment to
transition to into tomorrow’s cash cow.

Cash Cows: The iPad and MacBook are the cash cows of Apple’s product portfolio. These products
have a high market share but the market for these products isn’t really growing
anymore. They require relatively little investment for them to continue to be
profitable.
Dogs: The iPod is the dog of the portfolio. The market isn’t growing as people tend to use their
phones to listen to music and podcasts these days. This change in consumer behaviour
results in a shrinking market share. Thus, doesn’t make sense to invest into the iPod.
Question Marks: The iWatch is the one product in Apple’s portfolio with a question mark hanging
over it. It certainly has the potential to become as big a market as the phone
market, but there are still many unknowns. Apple will need to analyse the iWatch against its other
up and coming products to decide where to invest for the future.

The Boson Matrix and the Product Life cycle.

Interpreting this diagram, we can see that most products will start life as question marks.

Those question mark products that become successful, that is, those products that can maintain
their category leadership as their market grows, will turn into stars.

Eventually, as market growth slows, they turn into cash cows. These cash cows generate high profits
and require little in the way of investment.

Towards the end of the product’s life, the cash cow becomes a dog as sales growth stops completely
or starts to decline.