Summary of the BCG Model.  

The BCG Model is based on the product life cycle theory that can be used to determine what priorities should be given in the product portfolio of a business unit. To ensure long-term value creation, a company should have a portfolio of products that contains both high-growth products in need of cash inputs and low-growth products that generate a lot of cash. It has 2 dimensions: market share and market growth. The basic idea behind it is that the bigger the market share a product has or the faster the product’s market grows the better it is for the company.

Placing products in the BCG matrix results in 4 categories in a portfolio of a company:

1. Stars (=high growth, high market share)

– use large amounts of cash and are leaders in the business so they should also generate large amounts of cash.

– frequently roughly in balance on net cash flow. However if needed any attempt should be made to hold share, because the rewards will be a cash cow if market share is kept.

2. Cash Cows (=low growth, high market share)

– profits and cash generation should be high , and because of the low growth, investments needed should be low. Keep profits high

– Foundation of a company

3. Dogs (=low growth, low market share)

– avoid and minimize the number of dogs in a company.

– beware of expensive ‘turn around plans’.

– deliver cash, otherwise liquidate

4. Question Marks (= high growth, low market share)

– have the worst cash characteristics of all, because high demands and low returns due to low market share

– if nothing is done to change the market share, question marks will simply absorb great amounts of cash and later, as the growth stops, a dog.

– either invest heavily or sell off or invest nothing and generate whatever cash it can. Increase market share or deliver cash.

Source: http://www.valuebasedmanagement.net/methods_bcgmatrix.html