Do you need a strategic tool to help you navigate your product portfolio?
In the business world, where growth and profitability are essential, the BCG Matrix can be a valuable guide. Also known as the Boston Consulting Group Growth-Share Matrix, it is a powerful tool that can help you understand the performance and potential of your products or services.
Imagine having a roadmap that shows you how well your products are performing and how they might fare in the future. With the BCG Growth Share Matrix, you can avoid guessing which products deserve your attention and resources. Instead, you can focus on the products most likely to succeed and divest from those less likely to be profitable.
In this article, we will explore the BCG Matrix in more detail and show you how to use it to make informed decisions about your product portfolio.
What Is the BCG Growth Share Matrix?
BCG Growth Share Matrix Definition
The BCG Growth Share Matrix, developed by the Boston Consulting Group, is a tool that helps companies decide which products or units to keep, sell, or invest in.
The BCG Growth Share Matrix, developed by the Boston Consulting Group (BCG) in 1970, is a strategic planning tool that visualizes a company’s products and services. Its primary objective is to assist the company in making informed decisions regarding what to retain, divest, or allocate additional resources to.
This matrix arranges a company’s offerings within a four-quadrant grid, with the vertical axis denoting the rate of market growth and the horizontal axis representing market share.
Often referred to as the Product Portfolio Matrix, the BCG Matrix is a widely employed method for portfolio analysis. It categorizes a firm’s products and/or services into one of four quadrants, each characterized as either low or high performance, based on their relative market share and market growth rate.
The Four Quadrants of the BCG Matrix
Before diving into each quadrant’s specifics, let’s briefly revisit the BCG Growth Share Matrix itself. This matrix visualizes a company’s product portfolio, plotting products on a graph with two axes: market share and market growth rate.
- Market Share: This axis represents the market portion a company’s product captures. It can be low or high, depending on the product’s popularity within its market.
- Market Growth Rate: This axis measures how quickly the market is expanding. It can range from slow to high growth rates.
Now, let’s explore the four categories within the BCG Growth Share Matrix.
Dogs (or Pets): Low Market Share, Low Growth
Dogs, situated in the lower right quadrant of the BCG Growth Share Matrix, represent products with both low market share and slow growth rates. These products often get seen as underperforming assets for the company.
Strategies for Dogs
- Sell or Liquidate: In many cases, it’s wise to divest from dogs. Selling or liquidating these products can free up company funds that remain tied up.
- Reposition: However, some dogs can get repositioned to better align with market needs or as complementary products to existing offerings.
Cash Cows: High Market Share, Low Growth
Understanding Cash Cows
Cash cows, found in the lower left quadrant, are products that enjoy a substantial market share but operate in markets with slow growth rates. These are typically mature products.
Strategies for Cash Cows
- Milk for Cash: The primary strategy for cash cows is to milk them for as long as possible. They generate steady cash flows that can get reinvested elsewhere.
- Finance Growth: Cash cows’ cash flows can get used to finance the growth of stars and question marks.
Stars: High Market Share, High Growth
Stars occupy the upper left quadrant and represent products in high-growth markets with a substantial market share. These products have significant growth potential.
Strategies for Stars
- Invest Aggressively: Stars require substantial investments to maintain market leadership and capitalize on their growth potential.
- Transition to Cash Cows: Successful stars can transition into cash cows as market growth rates decline.
Question Marks: Low Market Share, High Growth
Understanding Question Marks
Question marks in the upper right quadrant represent products operating in high-growth markets but with a low market share. These products hold promise but are resource-intensive.
Strategies for Question Marks
- Frequent Analysis: Continuously assess the performance of question marks. They may warrant increased investment if they show growth potential.
- Consider Divestment: Divestiture may be prudent if a question mark fails to gain traction.
How to Use the BCG Matrix for Strategic Planning?
Here’s how you can effectively use the BCG Growth Share Matrix for your strategic planning process:
Choose the Product or Business Unit
Start by identifying the specific aspect of your organization you want to analyze using the BCG Growth Share Matrix. It could be the entire company, strategic business units (SBUs), clear product lines, or individual brands.
The choice depends on your strategic objectives and the level of granularity you need. Consider factors like the industry, market, competition, and your position when making this selection.
Define the Market or Industry
Once you’ve identified what you want to analyze, precisely define the market or industry to which it belongs. Accurate classification is essential for meaningful results. Misclassifying a product’s industry can lead to misleading conclusions.
For instance, a luxury product might appear as a “dog” if mistakenly compared to mass-market products. However, it could have a more significant market share when assessed within its luxury market.
Calculate the Relative Market Share
Determine the relative market share of the chosen unit. You can calculate this by dividing the unit’s revenue or market share by its largest competitor’s revenue or market share.
This calculation provides insights into the unit’s competitive position. Plot the relative market share on the x-axis of the BCG Growth Share Matrix.
Determine the Market Growth Rate
Find or estimate the market growth rate for the selected industry or market. Industry reports or historical data can help you determine this rate. If data is scarce, you can estimate it by analyzing the average revenue growth of major competitors and making future projections.
The market growth rate is expressed as a percentage and plotted on the y-axis of the BCG Growth Share Matrix.
Draw Circles on the Matrix
After calculating the relative market share and the market growth rate for all the business units or products you’re assessing, it’s time to populate the BCG Matrix.
Place each unit or product in the appropriate quadrant by drawing a circle around it. The size of each circle should correspond to the generated business revenue of that unit or product. This step visually represents the position and significance of each unit within the portfolio.
Once you’ve completed these steps and filled out the BCG Growth Share Matrix, you’ll have a clear visual representation of your organization’s product or business unit portfolio.
This matrix can guide your strategic planning efforts by helping you identify which units need investment, which you can maintain for cash flow, which require strategic repositioning, and which should potentially get divested.
Examples of How Companies Use the BCG Matrix
Here are some real-world examples of how companies use the BCG matrix:
- Coca-Cola: Coca-Cola’s main product, the Coca-Cola beverage, is a “cash cow” due to its dominant market share and consistent revenue generation.
Other brands in their portfolio, such as Diet Coke and various bottled water brands, may be classified differently. For example, Diet Coke could be a “star” or “question mark” depending on its market performance.
- Samsung: In the consumer electronics industry, Samsung’s smartphones and tablets could be considered “stars” due to their high market share and growth potential.
With a 60% sales share, Samsung’s home appliances might get categorized as a “cash cow.”
- L’Oréal: L’Oréal operates in the cosmetics industry, which generally experiences a growth rate of 4.8%.
L’Oréal’s various brands within skincare, makeup, haircare, hair coloring, and fragrances could get assessed using the BCG Matrix, with some as “cash cows,” “stars,” or “question marks” depending on their market performance.
- PepsiCo: PepsiCo’s flagship brand, Pepsi, might be considered a “cash cow” or even a “dog” in some markets where its growth has stagnated.
However, other products in their portfolio, such as snacks like Lay’s or healthier beverage options, might be classified as “stars” or “question marks” depending on market dynamics.
- Apple: Apple’s iPhone and Mac product lines could be viewed as “cash cows” given their established market positions and consistent revenue streams.
However, newer products or services, like Apple Watch or Apple Music, may be seen as “question marks” due to their evolving market presence.
Benefits and Limitations of the BCG Matrix
Companies have widely used the BCG matrix for decades, but it has both benefits and limitations.
Benefits of the BCG Matrix
- Simplicity: The BCG Growth Share Matrix provides a simple visual representation of a company’s portfolio, making it easy for managers and executives to understand and communicate the current state of their products or business units.
- Resource Allocation: It helps organizations allocate resources effectively by identifying which products or business units deserve more or less investment based on their categorization. Stars typically require more investment to maintain or increase market share, while Dogs may require divestment or harvesting.
- Portfolio Analysis: It offers a structured approach to analyze the balance and diversity of a company’s portfolio. It can help organizations identify potential gaps or overreliance on certain products or markets.
- Strategic Focus: The BCG Matrix encourages organizations to think strategically about the growth potential of their products or units and prioritize efforts accordingly. It prompts discussions about how to move Question Marks into the Star or Cash Cow category.
- Competitive Analysis: It highlights a company’s relative position in the market by comparing its market share to competitors. It can inform competitive strategies.
Limitations of the BCG Matrix
- Market Definition: Defining the market can be subjective and challenging. Different market definitions can lead to varying categorizations within the matrix.
- Market Growth Rate: Market growth is not always a reliable indicator of future profitability. High-growth markets can be unprofitable due to intense competition or high operating costs.
- Market Share as a Sole Metric: Relying solely on market share as the measure of competitiveness may overlook other important factors such as product quality, customer loyalty, and brand strength.
- Limited Strategic Guidance: The BCG Growth Share Matrix provides a static snapshot and does not offer specific strategic recommendations. It merely categorizes products without suggesting how to improve or manage them.
- Doesn’t Consider Synergies: The BCG Matrix doesn’t account for potential synergies between different products or business units in a portfolio. It may lead to suboptimal resource allocation.
- Neglects External Factors: It doesn’t consider external factors like regulatory changes, economic conditions, or disruptive innovations impacting a company’s performance.
- Difficulty in Categorization: It can be challenging to categorize products accurately, especially when they have complex characteristics or are in the early stages of development.
In summary, while the BCG Growth Share Matrix provides a straightforward framework for analyzing a company’s portfolio, it should be used with other strategic tools and a deep understanding of the business environment.
Its limitations make it essential for organizations to use it as a starting point for strategic discussions rather than a definitive decision-making tool.
Due to market uncertainty, start as “Question Marks” for new products. Gather market data over time to assess market share and growth. Shift to “Stars,” “Cash Cows,” or “Dogs” based on performance. It guides resource allocation and strategy for new products.
Calculate Relative Market Share (RMS) by dividing a product’s market share by the leader’s share. Determine Market Growth Rate (MGR) for the product’s market. Plot products using RMS and MGR to classify them as Stars, Cash Cows, Question Marks, or Dogs.
Utilize the BCG Matrix when assessing your product or unit portfolio, especially for resource allocation, portfolio analysis, competitive positioning, strategic planning, and periodic review. Its timing depends on your strategic planning cycle and portfolio analysis needs.