BCG matrix and portfolio analysis: see which units earn cash and where to invest

In most firms with more than one activity, money flows quietly from one part to another. The mature product line pays for the new one; profitable service contracts cover the loss on projects. Nobody decided this; it grew. The BCG matrix makes those flows visible, so you can decide which activities deserve more money, which should hand over cash and which you should stop.

Bruce Henderson, founder of the Boston Consulting Group, popularised the matrix in The Product Portfolio (BCG, 1970); BCG credits his colleague Alan Zakon with the first sketch. Below you find how the growth-share matrix works, its broader cousin the GE-McKinsey nine-box matrix, a version for small businesses and the limits to keep in mind.

What is the BCG matrix?

The matrix places each business unit or product group on two axes. The vertical axis is market growth, a stand-in for how much cash a unit needs. The horizontal axis is relative market share: your share divided by that of your largest competitor, a stand-in for how much cash the unit generates. Henderson's reasoning was that margins and cash generation rise with market share, while growth needs cash to pay for extra assets.

Henderson called the last group pets; they are often called dogs. His point was that a company needs units that generate cash and units worth investing that cash in, and that every unit should eventually generate cash. A unit with a relative share above one leads its market. For growth, choose a dividing line that suits your markets, such as the average growth of the markets you serve.

The GE-McKinsey nine-box matrix

The BCG matrix reduces attractiveness and strength to one measure each. The nine-box matrix, which arose with General Electric and McKinsey in the early 1970s (source: McKinsey, September 2008), widens both. The vertical axis is the attractiveness of the industry, which you can score on factors such as size, growth, profitability, competitive pressure and regulation. The horizontal axis is the unit's competitive strength in that industry, for example share, brand, cost position and distribution. Each axis is scored high, medium or low.

Units above the diagonal are candidates for investment and growth, units on it for selective investment, and units below it may be best sold, closed or run for cash. The richer picture has a price: the result depends on which factors you choose and how you weight them, so agree the scoring before anyone scores. Porter's five forces help with attractiveness, and a market and customer analysis with strength.

How to make a BCG matrix in five steps

1. 01

   Split the business into units

   Each with its own market, customers and competitors: product groups, customer groups or regions.

2. 02

   Define the market

   Too wide and every unit has a tiny share; too narrow and every unit leads. Use the market in which customers actually compare offers.

3. 03

   Measure and draw

   Plot growth and relative share per unit, with bubble size for revenue and an arrow for the trend over the past three years.

4. 04

   Add cash flow and return

   Check whether each unit's real cash flow and return on capital match its quadrant, with a financial analysis.

5. 05

   Give each unit a role and a budget

   Build, hold, harvest or exit, with investment to match the role.

Worked example: a food group with four units

A food producer with revenue of €240 million has four units. The dividing lines are market growth of 5% and a relative share of one.

Fictitious Firmfocus example. Relative share = own market share / share of the largest competitor (for the leader: of the next largest). The logic works in any currency.

The investment budget stays at €12.0 million, but €2.5 million, about a fifth, moves between units, mostly from cakes to frozen bakery. After investment the group still has €7.0 million in cash. Bread alone provides €10.5 million after its own investment, which covers the €4.0 million that frozen bakery and plant-based snacks absorb: the cash cow pays for the star and the question mark.

Two parts of this picture are judgement, not arithmetic. Frozen bakery scores only medium on strength because the group lacks food-service sales staff, so money alone will not make it a lasting star. And plant-based snacks get a deadline: if relative share has not clearly risen within a year, the group stops investing.

From matrix to budget

The matrix only matters if the budget follows it. Reviewing more than 1,600 US companies between 1990 and 2005, Stephen Hall, Dan Lovallo and Reinier Musters found that capital allocations were essentially fixed for roughly one-third of business units (source: McKinsey, March 2012). The third of companies that reallocated most earned on average 30 percent higher total returns to shareholders each year than the third that reallocated least (source: McKinsey, March 2012).

• Agree the triggers in advance: for example, a question mark that misses its share target loses its funding.
• Start each budget from the role: not from last year's amount plus a percentage.
• Ring-fence money for question marks: so the cash cow's own requests do not squeeze them out.

Limits of the BCG matrix

BCG revisited its own matrix in 2014 and concluded that it is still relevant, with important changes. Market share is no longer a direct predictor of sustained performance, and businesses move between quadrants faster: in BCG's sample, the average time in a quadrant fell from four years to less than two (source: Boston Consulting Group, June 2014). BCG's advice is to review the portfolio more often, experiment more and replace share with a better measure of competitiveness.

• The market definition drives the answer: the same unit can be a star or a pet depending on how you draw the market.
• Low growth is not always unattractive: a slow market with recurring revenue may be worth more than its growth suggests.
• Cash is not capability: the matrix says nothing about the people and skills a unit needs to win.

Portfolio analysis for a small business: margin and growth

Most small firms do not know their market share, and their units are product or customer groups rather than businesses. Replace relative share with gross margin, which shows how much each group contributes, and keep growth on the other axis. Take an IT services firm with 25 staff:

Fictitious Firmfocus example. Dividing lines: the firm's average gross margin of 36.2% and growth of 10%.

Compare each margin with the industry figures to see whether a low margin belongs to your firm or to the product. One link the table does not show: several managed-services clients first came in through a hardware sale. Before dropping hardware, count how many contracts it brought.

Small business vs larger organisation

Pitfalls in portfolio analysis

• Treating the quadrant as a verdict: it is a starting point for a discussion, not the decision itself.
• Starving the cash cow: cut its investment too far and it declines before the stars can take over.
• Too many question marks: spreading money over many bets means none of them wins share.

Portfolio choices connect to where you grow, in the Ansoff matrix, and to buying or selling units, in acquisitions and alliances. To test the options, use evaluate and choose. All models are in strategic choices, part of the strategy overview.