In the 1970s, Bruce D. Henderson, founder of the Boston Consulting Group, came up with The Product Portfolio (aka BCG Matrix, or Growth-share Matrix), which would look at a successful business product portfolio based on potential growth and market shares. It divided products into four main categories: cash cows, pets (dogs), question marks, and stars.
- The Product Portfolio origin story
- Assumptions underlying the Product Portfolio theory
- Cash cows
- Pets (dogs)
- Question marks
- The Success Sequence
- The Disaster Sequence
- BCG Business Model
- Key highlights
- BCG Matrix Examples
- Key takeaways:
- Other strategy frameworks to use in conjunction with the BCG Matrix
- McKinsey 7-S Model
- Porter’s Generic Strategies
The Product Portfolio origin story
It all started back in the 1970s, when Bruce D. Henderson, the American businessman, founded the Boston Consulting Group (BCG) in 1963 as part of a bank, The Boston Safe Deposit and Trust Company. The BCG became independent by the end of the 1970s, and by then Bruce Henderson had come up with The Product Portfolio (aka BCG Matrix or growth-share matrix).
Assumptions underlying the Product Portfolio theory
According to The Product Portfolio theory, it’s fundamental to look at cash flows, to build up a successful portfolio, and this is based on four primary rules:
- Rule 1: High market shares bring high margins and cash flows.
- Rule 2: Growth requires cash to be maintained.
- Rule 3: High market share will be either earned or bought.
- Rule 4: No product market can grow forever.
Cash cows are products with high market share and slow growth. They generate cash in excess for what it takes to maintain the market share. According to The Product Portfolio theory, cash should be invested back in cash cows only to maintain them, but most of the excess cash produced by cash cows should be invested in new products (question marks, see below), which have the potential to become cash cows in the future.
As Bruce Henderson explained in his piece, all products either become cash cows or pets.
Question marks are low market share, high growth products.
They require far more cash than they can generate, otherwise, they will die. The only way out is if they become stars, otherwise, they will decay into dogs.
Stars are high share, high growth products.
While they are leaders, they generate substantial cash. Yet, they will become large cash generators only when they will turn into cash cows, as their growth rate will slow down. However, they will have high market shares, thus becoming more stable products, requiring diminishing investments and high cash generation.
The Success Sequence
Bruce Henderson, founder of BCG, in his Product Portfolio, explained how in a successful sequence of cash allocation, stars over time become cash cows. And the abundant cash generated by cash cows will be invested back in question marks, that will need, over time, to become stars, to trigger a positive loop.
In short, stars over time become cash cows, due to market dominance and saturation, thus creating a condition of a product with a slower growth rate, and yet high margins and cash flows. The cash flows generated by cows will need to get invested back to question marks, that for the time being, will make substantial cash. To triggering a positive loop, those question marks will need to be turned into cash cows, or else they will decay and turn into dogs.
The Disaster Sequence
Bruce Henderson, founder of BCG, in his Product Portfolio, explained how in a disaster sequence of cash allocation, excess cash from stars is invested in question marks, that turn into dogs. And how excess cash from cash cows invested in dogs turns a negative loop.
In a disaster sequence the cash generated gets invested inefficiently, thus either using the excess cash from cash cows into products that will turn into dogs. Or the excess cash from stars into question marks, that will decay into dogs.
BCG Business Model
- Back in the 1970s, Bruce Henderson, founder of the BCG consulting produced a cornerstone piece called The Product Portfolio, which would become the foundation of what is also known as the BCG Matrix or Growth-Share matrix.
- The BCG Matrix assumes that the success of a portfolio of business products will highly depend on how the cash will be allocated over those same products. More precisely high market shares products will also bring high margins and cash and vice versa.
- The matrix divides the products into four main categories: cash cows, dogs, question marks, and stars.
- In a success sequence, stars generate cash and over time they will turn into cash cows. Cash cows have low growth but high market share and as such generate large cash flows to be invested in question marks, to turn them in stars, that over time will become cash cows, and trigger again this positive loop.
- In a disaster sequence, the excess cash from stars is invested in question marks that decay into dogs. And the excessive cash from cash cows is invested back into cash cows that over time decay into dogs.
- Read next: SWOT Analysis.
BCG Matrix Examples
The BCG matrix was developed in 1968 by Boston Consulting Group founder Bruce Henderson in a short essay titled Perspectives. At its peak, Henderson’s model was used by approximately 50% of all Fortune 500 companies. Today, it is still one of the most popular product portfolio analysis methods and is a central component of many business school curriculums.
The approach places a firm’s products and/or services into a 2×2 matrix with four quadrants that measure market share and growth rate. Each quadrant is described as follows:
- Question marks – high market growth/low market share products.
- Stars – high market growth/high market share products.
- Dogs – low market growth/low market share products, and
- Cash cows – low market growth/high market share products.
In this article, we’ll explain some BCG matrix examples from the likes of Coca-Cola and Apple.
Coca-Cola is one of the most recognizable brands in the world, but its true global presence combined with shifting consumer preferences means it does not necessarily dominate every market it enters.
- Question marks – as the soft drink industry undergoes rapid transformation toward healthier alternatives, the question mark quadrant is perhaps the most important to Coca-Cola. To that end, the company has invested a lot of money in low or no-calorie drinks such as tea and fruit juice. Diet-Coke is another product that falls within this quadrant. Despite attempts by Coca-Cola to market it as a healthier alternative, the product has not been able to gain significant traction.
- Stars – bottled water is one product that Coca-Cola has been able to move from the question mark quadrant to the stars quadrant. Brands such as Kinley, Dasani, and Glaceau Smartwater are significant players in the rapidly growing bottled water market. In the United States alone, sales of the latter two brands accounted for $1.911 billion in sales during 2021.
- Dogs – Coca-Cola Life is an example of one product that falls in the dogs quadrant. The product, which was a lower-calorie version of Coca-Cola, was made with the natural sweetener stevia. Critics derided the company for greenwashing, but, in any case, consumers showed little interest in the natural alternative.
- Cash cows – the Coca-Cola company has quite a few cash cow products, none more significant than Coca-Cola itself. Growth is limited since the product is sold in more than 200 countries and territories around the world. However, the drink remains immensely popular and a market leader despite a decline in global soft drink sales.
Apple can boast a diverse product line that caters to a wide audience base. Let’s take a look at various Apple products in terms of the BCG matrix.
- Question marks – while Apple has a dominant market share in many contexts, Apple TV and Apple AirPods face strong competition from both established brands and smaller companies. Apple TV in particular is a reasonable quality product that was simply ahead of its time. It may become more popular when consumers can appreciate the importance of the fact that it is part of the Apple ecosystem.
- Stars – the Apple iPhone is a star product that continues to deliver. With each update, the iPhone seems to set new innovative standards and smash previous sales records. The iPad and Smartwatch are not far behind.
- Dogs – the iPod could be considered an example of a dog product. While it only took the company five years to sell 100 million iPods, the longevity of the portable music player market was cut short by smartphone innovations and the rise of music streaming services.
- Cash cows – in terms of cash cows, the MacBook, iMac, and iPad enjoy relative dominance in their respective markets. These three products enjoy high brand equity, with devoted consumers more likely to purchase Apple products over comparable (and sometimes cheaper) alternatives.
- The Boston Consulting Group (BCG) matrix, also known as the product portfolio matrix, is a tool used to assess the strategic position of a company’s brand portfolio. The matrix was developed in 1968 by Boston Consulting Group founder Bruce Henderson.
- Coca-Cola is one of the most recognizable brands in the world but is not immune from failed product launches or intense competition. As the soft drink industry wanes and consumers choose healthier alternatives, the question mark quadrant is perhaps the most relevant to the company’s long-term success.
- For Apple, products in the question mark quadrant may become more successful over time since they are integrated with other, more popular products. The iPhone, iPad, and Smartwatch are all products that enjoy tremendous market share, while the company’s laptop and desktop products are considered cash cows.
Other strategy frameworks to use in conjunction with the BCG Matrix
What other tools can you use in conjunction with the BCG Matrix? Let’s look at five tools and frameworks.
- Ansoff Matrix
- Competitive Advantage
- Porter’s Five Forces
- Aida Model
- Growth Matrix
- Digital Strategy Matrix
- Speed-Reversibility Matrix