This’s all you need to Know About BCG Matrix!
BCG Matrixstands for Boston Consulting Group Matrix also known as Portfolio Matrix. It isa 2 × 2 matrix built for strategic planning. It is used for individualbusiness units or products. Strategy for individual business units and productsis planned in accordance with the overall corporate objectives. It’s also knownas share/growth matrix.
If you’re reading this blog post, you might be:
- A student who is preparing this topic for exam
- A business who wants to analyze its products or business units with the help of b BCG Model/Matrix.
This’s why,I have explained portfolio matrix from two different perspectives, one is forstudents and the other one is for businesses. This doesn’t mean you should skipthe other one, this is just to make it better for you.
Backgroundof BCG Matrix
Boston Consulting Group Matrix was created in 1969. Boston Consulting Group is an American management consultancy firm. It has more than 90 offices in over 50 countries. It’s one of the big three strategy consulting firm. It has won multiple awards including “Best Firm to Work for” by Consulting Magazine in 2016.
First, I’m explaining share/growth matrix for students. I’ll ask 9 questions and will answer them myself. This is how you can learn and memorize this topic for the exam.
1. What is the main objective of
The mainobjective of this Matrix is to assist the management in allocation of funds todifferent business units and products.
2. What is the BCG Matrix?
BCG Matrixis a 2×2 Matrix where:
- One side of the matrix represents the market growth, and
- The other side of matrix represents market share of the product or business unit.
3. Who can use
Share/Growth Matrix is for businesses with multiple products or business units. However, small firms can boost their performance in the market with the help
4. How to Draw a BCG Matrix?
BCG Matrixcan be represented as follows:
5. What is Market Growth in BCG Matrix?
The middleof growth side of bcg matrix is set to 10% per year. If growth is greater than10%, it is said as high whilst if growth is less than 10%, it is called a lowergrowth rate. Remember that 10 is just an arbitrary figure.
Marketshare is usually measured as annual sales held by the firm as a percentage oftotal annual sales in the market. For example, if a product ‘ABC’ of entity sayXYZ Ltd has 1,000 annual sales, whilst total annual sales in the market aresuppose 20,000. Then XYZ has 1,000/20,000 market share for their product ‘ABC’.
However, inBoston Consulting Group Matrix market share is calculated by taken the annualsales of a product as a percentage of the annual sales by the biggestcompetitor in the market. The midpoint of market share side of the matrixrepresents the situation where annual sales for the product of the entity isequal to annual sales by the biggest competitor in the market.
High Market Share is where the entity in focus is the market leader for a product.
Low Market Share is where the entity in focus has very low sales as compared to its biggest competitor in the market.
7. What are the Four Quadrants of the BCG Matrix?
As BCGMatrix is a 2×2 matrix, it has 4 quadrants. Thesequadrants are represented by:
- A Question Mark,
- A Star,
- A Cash Cow, and
- A Dog
I willdiscuss each of these in detail for your understanding:
A questionmark is a product that has low market share in a high growth market. Since themarket is growing quickly, investments are encouraged for such a type ofproduct. However, this will require huge investment of cash to grow the productand to maintain the current market share.
A questionmark is called question mark because it might drop down to a dog or might pushup to a star.
Star is aproduct that is the market leader in a high growth market. It has a high marketshare as compared to its biggest competitor in the market. A considerableamount of cash investment is still required to maintain the current position.
A cash cowis a product that is the market leader in a low growth market. The marketgrowth for such a product is even in negative. As the name suggests, cash cowgenerate enough cash. This is because being a market leader in a market withnegative growth, competitors do not mount an attack on such a market. The cashgenerated by cash cow is invested in Question Marks and Stars.
A dog is aproduct that has a low share in a low growth market. The market growth isnegative like in a cash cow, but here the product is not the market leader. Youdo not need to invest in a dog, because if your product is a dog, yourcompetitor will have a ‘cash cow’ in the same market. Your competitor will haveenough cash to defend its position.
Therefore,a dog might be evaluated for a closure or selling it to someone else.
8. How to Base Strategic Decisions on BCG Matrix?
BCG Matrixcan be used to:
- Evaluate the cash required by individual products or individual business units, and
- Whether a product or business unit is required to be disposed or not.
Suchdecisions about individual products or business units are made in accordancewith the overall objectives of the organization. After evaluating individualproducts or business units, management can then make strategic decisions aboutthe products.
|Question Mark||Whether to invest more heavily to gain a higher market share Whether to invest more heavily to gain a higher position Whether to invest more heavily to gain the market leading position Whether to withdraw from the market|
|Cash Cow||Whether we are able to achieve high economies of scale Whether we have gained enough experience to be efficient in a cash cow Whether it is generating enough cash to support question marks and stars Whether a competitor is planning to target the market where we have a cash cow|
|Dog||Whether a dog is using more cash than it generates Whether the product need to be closed immediately or we need to wait a few more years.|
9. How To analyze a Question Mark, a Star, a Cash Cow and a dog with the help of BCG Matrix?
- How To analyzea Question Mark, a Star, a Cash Cow and a dog with the help of BCG Matrix?
|Question Mark||As a dog has a small share in a high growth market, so an entity cannot last long with such a small share, as biggest competitor will have the advantage of high economies of scale.|
|Star||According to bcg matrix, a star uses more cash than it generates in its initial phase. However, it should gradually change to cash neutral and then finally to a self-financing stage. They might generate high returns in future.|
|Cash Cow||A cash cow should generate enough cash to be used for question marks and stars. If it’s not generating enough cash, cash cow is not worth it.|
|Dog||An entity should not invest in a dog as it is very difficult to achieve a market share in a low growth market.|
BCG MatrixAnalysis for Your business
We cananalyze our products with the help of Boston portfolio matrix. Boston matrix isa handy tool if you want to know the current market status of your products. Inthe next few steps, Sacred Accounting will guide you through proceduresenabling you to build your own matrix for your own product.
Step 1Determine the Products to be Analyzed
First, youshould decide about product/products to be analyzed with Boston consultinggroup matrix. Let say you’ve six products A, B,C,D,E and F to be analyzed viaBoston consulting group matrix.
Step 2Collect the Required Data
Second, youneed the required data to build your matrix. This includes researching themarket, your biggest competitor and your own product. You need:
- Annual sales made by your product/products
- Annual sales made by your biggest competitor for the product/products, and
- Growth in the market.
Let say wecollected the following data:
|Product||Your Market Share (%)||Your Biggest Competitor’s Market Share (%)||Growth in the Market (previous year actual) ($)||Growth in the Market (current year actual) ($)||Growth in the Market (next year budgeted) ($)|
Step 3Create a BCG Matrix
We havecollected data in our second step, now you need to draw a 2×2 matrix, you can also find one for yourself online.
Step 4 Fillyour Quadrants
Nowevaluate each of your product and start filling your products.
This way,you’ll get all your products in any one of the four quadrants. Now, you need toanalyze each quadrant and look for the products falling in each quadrant. Letsuppose we got the following matrix:
Products Aand C falling in Question Mark,
Product Dfalling in Star,
Product Efalling in cash cow, and
Product Band F falling in dog.
Step 5Start Planning a Strategy for Each Product
This means youneed to define a strategy for each of your products. Before setting out astrategy, remember the golden rule:
- Milk the cowswithout killing the cows,
- Spend on thestars,
- Experiment onquestion marks to see if they can result in stars, and
- Don’t feed thedogs.
|A and C (Question Marks)||You are having a small share of A and C in your target market, while your competitors are earning a lot, that’s surely not the end. You need to invest your money on A and C. You need them to be stars. You need them to earn money for you. For this you will have to conduct research, this will find you strategic gaps in the market. You will fill these spaces and we will outperform our competitors.|
|D (Star)||D is your cash cow for the future. You need to push it up to a cash cow by spending money wisely on its marketing. This way, you will be able to maintain your market share and even convert your product to a cash cow.|
|E (Cash Cow)||This might be your ideal state according to bcg matrix. You’re earning a lot of money; you need to spend this money on your star (D) and Question Marks (A and C). You must defend your market share. Ideally, you should be in a position which is not reachable by your competitors.|
|B and F (Dogs)||You need to close this product. There should be no double mindedness in that decision. You only need to decide when to close the product. You might close it immediately if it’s generating negative cash flows. Otherwise, you might wait for some time if it’s generating some cash.|
Why isBoston’s Matrix Criticized?
BCGanalyses should be performed carefully as there are certain weaknesses inBoston matrix. Boston matrix has often been criticized for the followingweaknesses:
Accordingto BCG Matrix,
- Competitive strength of a product in a market depends upon its market share. So, if a product has a low market share, it’s not sufficiently competitive.
- New investment should only be made in a market where annual sales growth is high. Thus, a business should not invest in a market where growth is very low.
However, experts argue that these two assumptions are incorrect because:
A productcan have a low market share, still it might be competitive. Typical example isPorsche, which has a low share as compared to its competitors i.e. Toyota andGeneral Motors. Still Porsche is earning very high profit. They key points forcompetitive strength of a product are:
- Its Quality
- Brand name, reputation and
- Low costs (offering a product for a low price)
Similarly,a company might benefit from a product in a low growth market.
Marketshare and size of the market are not the only factors to decide about aproduct. Other factors might be relevant for the decision such as strength ofthe competition, cost base and brand strength.
Anothercriticism on bcg matrix is that it is used to analyze only individual businessunits or market segments rather than the whole market.
BCG matrixuses arbitrary figure to determine high market share or low market share andhigh growth or low growth. In practice it might be difficult to determineexactly high and low growth and market share.
Suppose 10 is the mid figure of the growth sideof the matrix, a star had 10.2 sales growth in the previous year whilst for thecurrent year it was 9.9. What do you think? Should we reduce Research andDevelopment spending on this star?
What didyou learn?
- Definition of BCG Matrix.
- Advanced Understanding of Boston’s Share/Growth Matrix.
- How BCG is used to analyze product-market portfolio for strategic planning.
PracticeQuestion on Portfolio Matrix
I guess,you’re having enough understanding of Boston Matrix now. That’s why SacredAccounting wants to test your knowledge. Submit the answer to the followingquestion and get a response with your answer checked:
Let say we collected the following data for 8products of NHIRKM Engineers:
|Product||NHIRKM’s Market Share (%)||NHIRKM’s Biggest Competitor’s Market Share (%)||Growth in the Market (previous year actual) ($)||Growth in the Market (current year actual) ($)||Growth in the Market (next year budgeted) ($)|
- Create a BCG Matrix for all the products of NHIRKM Engineers.
- Devise a strategy for each of the 8 products?
What would be your strategy, if youand your competitor have equal market share, whilst growth in the market isconstant for current and the previous year and is expected to be constant fornext year also? Comment with your answer!
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