A corporation with a large portfolio must evaluate its product lines on a regular basis to determine which are lucrative, which are losing money, and which require improvement. This method enables the organization to better deploy its resources in order to run more efficiently. While the organization has numerous techniques and tools at its disposal to accomplish this aim, the BCG matrix, established by the Boston Consulting Group, is widely regarded as the gold standard for identifying cash cows, stars, question marks, and dogs.
But what exactly is the BCG matrix, and what do these acronyms imply?
What is the BCG Growth-Share Matrix?
The Boston Consulting Group’s growth-share matrix (also known as the BCG matrix) is a business tool that analyses a company’s product portfolio or SBUs (strategic business units) to assist them to determine where to spend, where to cease, and which items to develop further.
The BCG matrix does this by putting a company’s products or SBUs on a four-square matrix. The y-axis depicts market growth rate, while the x-axis reflects relative market share.
Companies choose where resources should be deployed to produce the most value or where to let loose and minimize losses by categorizing their company offerings into one of these four categories.
The quadrants of the BCG Matrix are :
4 Elements of a BCG matrix
A BCG growth-share matrix may provide a fast snapshot of how products are performing and help you construct a foundation for future study if you are dealing with a product portfolio. Analysts utilize the chart by creating a scatter graph and ranking business units (or products) based on their relative market shares and growth rates.
1. Cash cows
In a slow-growing industry, they are items or business units having a large market share. These units generally create more income than is required to keep the firm running.
Cash cows are goods that have a high return on investment but operate in a mature sector that lacks innovation and development. These items earn more money than they use.
Typically, these items are used to fund ongoing operations (including stars and question marks).
Dogs have a small market share in an established, low-growth business. These divisions often “break even,” making just enough income to keep the company’s market share. Many investors decide to sell off their pets.
Dogs have quite a small market share and operate in a slow-growing market. They do not make or demand a good amount of money. They are often not worth investing in since they provide little or negative financial returns and may need substantial quantities of money to sustain. These items incur cost disadvantages due to their limited market share.
3. Question marks
Question marks, sometimes known as problem children, operate in a fast-growing sector but have a small market share. They have the ability to acquire market share, become stars, and ultimately turn into cash cows. Question marks should be carefully considered to see if they are worth the expenditure necessary to increase market share.
Question marks have great growth potential but a limited market share, making their future prospects uncertain.
Because the growth rate is tremendous here, they may become cash cows and, eventually, xstars with the correct methods and investments. However, because they have a little market share, bad investments might cause them to be downgraded to Dogs even after significant investments.
Stars are units having a large market share in a rapidly expanding industry. They’ve graduated question marks on a market- or niche-leading trajectory.
Star units are the category’s leaders. These items have –
When the market matures, these stars transform into cash cows with massive market shares in a sluggish growth market. These cows are milked in order to support additional creative items that will help generate future stars.
When to use a BCG matrix
A BCG matrix may help your company in a variety of areas, including marketing, project management, and strategic management. The matrix may also be used to analyze business portfolios.
How To Make A BCG matrix?
So far, we’ve learned that items are categorized into four groups. Now we’ll discover how and on what basis that categorization is made.
In the following sections, we will better understand the five phases of creating a BCG matrix by creating one for L’Oréal.
1. Choose the product
The BCG matrix may be used to examine Business Units, individual brands, products, or a company as a whole. The unit used has an influence on the entire analysis. As a result, specifying the unit is required.
2. Define the market.
A poorly defined market might result in poor product categorization. For example, if we did the same analysis for Daimler’s Mercedes-Benz automobile brand in the passenger vehicle industry, it would be a flop, but it would be considered as a cash cow in the prominent car market. As a result, precisely defining the market is a necessary requirement for gaining a better knowledge of the portfolio position.
3. Calculate the relative market share.
Market share is the percentage of the overall market that your organization serves, defined in either revenue or unit volume terms.
In a BCG matrix, we utilize determining in Relative Market Share to compare our product sales to the sales of the main competitor for the same product.
Relative Market Share = this year’s sales of the product/this year’s sales of the leading competitor.
In an automobile business, let’s assume that the market share of your competitor was 25% and the market share of your company was 10% in that year. Therefore, your relative market share would be 0.4. On the x-axis, the relative market share is shown.
4. Calculate the market growth rate
The pace of growth in the sector may be easily discovered using free web resources. It may also be computed by calculating the average revenue growth of the top corporations. The market growth rate is expressed as a percentage.
The market growth rate is often calculated as (Product sales this year – Product sales last year)/Product sales last year.
Markets with high growth are those in which the overall market share available is growing, implying that there are numerous chances for all enterprises to profit.
5. Draw the circular shapes on a matrix
After you’ve calculated the above metrics, all that remains is to plot the brands on the matrix. The x-axis represents relative market share, while the y-axis represents the industry growth rate. For each unit/brand/product, draw a circle the size of which should ideally equal the proportion of income earned by it.
How To Use A BCG Matrix?
Now that we’ve divided the brands into four groups, let’s look at what strategies the organization should employ for each:
Products in this quadrant are appealing because they are in a robust market and are highly competitive in the category. They have a large market share and a strong growth rate; therefore, there is room for revenue growth.
They may have been costly to produce, but given the length of their Product Life Cycle, they are worth investing in for promotion. If a celebrity is successful, he or she will become a cash cow as the category grows (assuming they maintain their relative market share).
However, there is an important point to be noted that is – not all stars turn into cash cows. This is most common in rapidly changing sectors, where even breakthrough items can be superseded by new technology developments, turning a star into a dog rather than a cash cow.
Most enterprises begin as unanswered questions. These need massive investments in order to gain or maintain market share. Question marks have the potential to become stars and cash cows, but they may also become dogs or depart. For question marks, investments should be high; else, negative cash flow may result.
Question marks, like stars, may not always succeed, and if they are unable to achieve market share despite significant investment, they become dogs. As a result, prior to making investment selections in this area, extreme caution is recommended.
They create profits by investing as little money as possible in low-cost support) and must be managed to ensure ongoing earnings and cash flow. These are huge corporations or business units that excel in innovation and have the potential to become stars.
Cash cows require a strong market position and the ability to defend your market share. The corporation should capitalize on its sales volume and utilize its size of operations. Cash cows can also be utilized to fund other ventures.
Because of their tiny market share, these items have cost disadvantages, and while they may earn enough income to break even, they are rarely, if ever, worth investing in. Unless a dog has another strategic goal, it should be liquidated if it has fewer chances of gaining market share (there is Low scale of economies: so difficult to make a profit).
These are toward the end of the Product Life Cycle; thus, the number of dogs in the firm should be kept to a minimum. A company’s present operations should be optimized. All non-value-added activities and features should be removed. The company must either reposition the offering to produce positive cash flow or sell the company.
BCG Matrix Templates
The BCG matrix templates on SlideUpLift are the ideal canvas for creating and sharing your BCG matrix. Begin by picking one of these professionally created BCG Matrix templates. These basic templates enable real-time collaboration on portfolio analysis and take less than a minute to set up. A full matrix may be used to evaluate your organization’s strength and product portfolio.
Source: BCG Matrix tool By SlideUpLift
Source: BCG Matrix tool By SlideUpLift
Wrapping It Up
Business models are built on delivering lucrative products or services now, as well as attempting to identify changes in offerings that will keep the organization successful in the future. The current moneymakers are obvious, but a solid company plan also asks, “What about the future?”
The BCG matrix is a technique for assessing items based on growth and relative market share. A BCG matrix assists firms in analyzing their industry’s existing and future competitive landscapes and then planning appropriately.