BCG matrix which is also known as Boston Consulting group matrix was developed in 1970s. It is a planning tool to plot company’s offering or services in four different quadrants or in square matrix by identifying your product lines and what you should do with them? It is also known as Growth-share matrix. It is used by company to decide what SBU’s we should keep and invest more, which one they should sell or divest.
Before we understand how to construct BCG Matrix lets understand these terms first
1) Market growth rate
2) Relative Market Share
3) SBU (Strategic Business Units).
The 1st variable on Y- axis is is the Market Growth Rate. It is the rate at which a market’s size is growing. We can figure out the market growth rate from industry reports, which are usually available online. So the formulae to calculate Market growth rate is
Market Growth Rate = Total sales in current year / Total sales in previous year
Say for examples if your company’s sales is growing by 15%, but the industry is growing by 20%, you are lagging behind your competition by 5% or Industry is growing at 12%, then you are leading ahead of your competition by 3%.
Competition is very severe in markets that has low growth. Now every company is fighting to get some share in the fixed pie.
The 2nd variable on X- axis is the Relative Market share. One such assumption that we take in BCG matrix is that if a company has very good market share then it is successful from a financial standpoint. Market share is generally expressed as a percentage and to have high market share, you generally have to be in market for a very long time, have been benefited from economies of scale and customers have purchased your products and have been somewhat satisfied if you’re going to generate high market share.
Market share is defined in terms of the percentage of your company in the industry that is measured either in revenue terms or unit volume terms. So the formulae to calculate market share is :
Market share = ( Company’s Total sales / Total Industry Sales) * 100
Say for example, let’s say that the total sales in your industry were $10 million last year. Your company sales total sales is $100,000. The to calculate market share we have $100,000 / $10 million. It come to .01 and If we multiply this by 100, you find that your market share is 1%.
SBU is an independent fully functional business unit which has its own vision and mission goal and objectives. They have their own functions like HR, Finance, Operations etc.
- First construct a square matrix of 2×2 .
- On the Y-axis we list Market growth rate and on X-axis we list Market share.
- Now add SBU’s as “Star, Cash Cows, Question Mark, Dog) in each of these four quadrants based on following :
- Stars in the Upper Left matrix. They are the one whose both market share and growth rate are high. Company’s ultimate goal is to keep all it’s products in Star. But more star means more expenses. In addition, the stars lead to a large amount of cash generation and cash consumption. Therefore, an attempt should be made to maintain market share and support further growth; otherwise, a star will become a cash cow.
- Cash Cows in the lower left matrix. They are those whose market share is high but Growth rate is low. It means you can take money from here and can invest somewhere else. Basically, cash cows of company helps in investing like Stars. Maturity phase of product generally come under cow. I case of cash cows you usually engage in a harvest strategy which means we will reduce financial support. The product is now already going to sell by itself. It makes no sense if we still continue to put more money into it. Instead, we should focus on generating as much cash inflow as possible. Companies in this category generally follow stability strategies. In addition, these companies required little investment and generate cash that can be used for investment in other business units.
- Question marks in upper right matrix. They are also called problem children because they generally are problematic. They are those whose market share is low but their growth rate is high. Because we don’t know much about them and how they are going to behave in the future. Now when you are introducing a new product in the market, they are generally placed in question marks because you will introduce new product in the growing market, but you are not aware of its market share. Maybe you shift from question mark to star but directly shift is rare. But generally, it has seen that one in question mark has the potential to enter Star.
- Dogs in the lower right matrix. They are the one whose both market share and growth rate are low. Declining phase of product generally come under dog. It means you should not invest more in Dog’s. What will you do after spending money on it? Remove the products in dog category. They’re sucking up a lot of cash. We don’t necessarily want to invest in them. But why would anybody have a dog in their portfolio anyway? Well, the thing is, is it’s not always starting out as a dog. Think about it. Sometimes it’s a question mark that doesn’t work out and becomes a dog, or sometimes products cycle through. I mean, think about the first PlayStation. When it came out. It was a total question mark because the console gaming industry was growing like crazy. And then we didn’t know we’re going to be and it started off as a small time player. Right.
- Now place your products or SBU’s in either of these four quadrants based on their position with respect to Market growth rate and Market share.
- BCG Matrix of Apple
- BCG Matrix of Coca-Cola
- BCG Matrix of Nestle
Apple has lot of products from iPhone to Laptops to iPod and many more.
Lets plot the BCG matrix of Apple company.
Star: iPhone is Apple’s cash cow and has higher return on assets than its market growth rate therefore Apple can invest the excess cash generated in other projects or products.
Question mark: Apple are now introducing Apple Smart TV’s.
Cash Cows: iPads, 10 years ago when it first came out was a star for Apple but not now. Apple’s MacBook has steady market share and revenue, which make MacBook a cash cow for the Apple.
Dogs: iPods at one time as the best thing that they have invented at that time but Apple fails to make this a successful product
- Stars: Coca-Cola is a star product with a high market growth rate and a high market share. It is the company’s flagship product and generates a lot of revenue. Coca-Cola needs to continue to invest in its stars to help them maintain their market share and grow even faster.
- Cash Cows: Sprite, Fanta, and Dasani are cash cow products with a low market growth rate and a high market share. These products are mature and generate a lot of cash flow for the company. Coca-Cola can use this cash flow to invest in new products or services, or to acquire other companies.
- Question Marks (Problem Child): Powerade and Minute Maid are question mark products with a high market growth rate and a low market share. These products are new and require a lot of investment to grow their market share. Coca-Cola needs to decide which question marks are worth investing in and which ones should be discontinued.
- Dogs: Coca-Cola Zero and Vitamin water are dog products with a low market growth rate and a low market share. These products are declining and may be discontinued. Coca-Cola needs to decide whether to discontinue these products or to invest in them in an attempt to turn them around.
- Stars: Nespresso, Nescafé, and KitKat are star products with a high market growth rate and a high market share. They are the company’s flagship brands and generate a lot of revenue.
- Cash cows: Maggi, Nesquick, and Nestlé Pure Life are cash cow products with a low market growth rate and a high market share. These products are mature and generate a lot of cash flow for the company.
- Question marks: Nesquik Cereal, Nespresso Vertuo, and Starbucks Coffee are question mark products with a high market growth rate and a low market share. These products are new and require a lot of investment to grow their market share.
- Dogs: Nestlé Toll House, Nestlé Crunch, and Milkybar are dog products with a low market growth rate and a low market share. These products are declining and may be discontinued.
Cadbury BCG matrix / BCG matrix of Cadbury
- Stars: Dairy Milk and Cadbury Dairy Milk Silk are star products with a high market growth rate and a high market share. They are the company’s flagship brands and generate a lot of revenue.
- Cash cows: Cadbury Dairy Milk Caramel, Cadbury Dairy Milk Oreo, and Cadbury Dairy Milk Crunchie are cash cow products with a low market growth rate and a high market share. These products are mature and generate a lot of cash flow for the company.
- Question marks: Cadbury Dairy Milk Bubbly, Cadbury Dairy Milk Caramello, and Cadbury Dairy Milk Oreo Cookies and Cream are question mark products with a high market growth rate and a low market share. These products are new and require a lot of investment to grow their market share.
- Dogs: Cadbury Fruit & Nut, Cadbury Dairy Milk White Chocolate, and Cadbury Dairy Milk Whole Nut are dog products with a low market growth rate and a low market share. These products are declining and may be discontinued.
Limitations of a BCG matrix
Below are some of the key limitations of the BCG Matrix:
- Oversimplification: One of the primary limitations of the BCG Matrix is its oversimplification of the market dynamics. By categorizing products into only four quadrants based on market growth rate and relative market share, the model overlooks the complexities and nuances of the market environment.
- Incomplete Analysis: The BCG Matrix considers only two factors, market growth rate, and relative market share, while ignoring other crucial variables, such as competition, customer preferences, technological advancements, and macroeconomic factors.
- Historical Focus: The BCG Matrix relies heavily on historical data, analyzing a product’s past performance rather than providing insights into its future potential. In rapidly changing markets, past performance may not accurately reflect future prospects.
- Lack of Market Dynamics: The BCG Matrix does not account for the pace at which markets evolve or how quickly a product’s position may change. In dynamic industries, the model’s static analysis may lead to inaccurate strategic recommendations.
- Subjective Market Definitions: Defining the market and calculating market share can be subjective and may vary depending on the chosen criteria. Different market definitions can lead to varying assessments of a product’s position.
- Ignores Synergy: The BCG Matrix evaluates products in isolation, disregarding potential synergies and interdependencies among products within a company’s portfolio. A product considered a “dog” alone may add value when combined with other offerings.
- Limited Guidance on Strategy: While the BCG Matrix classifies products into different categories, it does not provide specific guidance on the appropriate strategies for each category. Companies need to devise strategies separately for investment, divestment, or repositioning decisions.
- Not Suitable for Diverse Businesses: The BCG Matrix is most effective for businesses with a single core market. Companies with diverse product lines or operating in multiple industries may find it challenging to use the matrix effectively.
- Neglects Non-Market Factors: The model does not account for non-market factors, such as social, environmental, and ethical considerations, which are becoming increasingly important for businesses today.
- Limited Application Beyond Products: The BCG Matrix is primarily designed for analyzing products and does not address other aspects of a company’s business, such as services, partnerships, or digital initiatives.
Despite its limitations, the BCG matrix can be a useful tool for businesses to get a broad overview of their portfolio and make strategic decisions about resource allocation. Lets look at some benefits of a BCG matrix.
Benefits of a BCG matrix.
- Portfolio Analysis: The BCG Matrix allows companies to comprehensively analyze their product portfolio by categorizing products into four quadrants based on their market growth rate and relative market share. This segmentation offers a clear overview of each product’s performance and potential.
- Resource Allocation: By classifying products into different quadrants, such as Stars, Cash Cows, Question Marks, and Dogs, the BCG Matrix aids in effective resource allocation. It helps businesses prioritize investments, allocate budgets, and align resources with strategic goals.
- Decision-Making Support: The BCG Matrix simplifies complex data and presents it visually, making it easier for decision-makers to understand the current and future prospects of products. It facilitates strategic decision-making by providing a structured framework.
- Strategic Direction: With insights from the BCG Matrix, companies can identify growth drivers (Stars) and steady revenue generators (Cash Cows) within their portfolio. This enables the alignment of strategic priorities with business objectives.
- Market Positioning: The BCG Matrix helps identify products with growth potential (Question Marks) and those that may require divestment or repositioning (Dogs). This enables businesses to seize new opportunities and optimize their market positioning.
- Risk Management: By diversifying their product portfolio, companies can manage risk effectively. The BCG Matrix encourages a balanced mix of products, reducing exposure to potential losses from underperforming products.
- Competitive Benchmarking: The BCG Matrix facilitates benchmarking against competitors, allowing businesses to compare their product portfolio’s performance with industry best practices. It helps identify areas for improvement and potential competitive advantages.
- Communication: The BCG Matrix provides a straightforward and concise way to communicate product performance to stakeholders, fostering a common understanding among executives, investors, and employees.
- Efficient Resource Utilization: Focusing resources on high-potential products (Stars and Question Marks) optimizes resource utilization and avoids wasting investments on products with limited growth prospects.
- Continuous Monitoring: The dynamic nature of the BCG Matrix encourages companies to continually monitor and reassess their product portfolio. This promotes proactive adjustments to strategic plans based on changing market conditions.
- Flexibility: The BCG Matrix can be adapted to suit different industries, businesses, or even other elements of a company’s operations, beyond just products.
In conclusion, while the BCG Matrix remains a valuable tool for assessing a company’s product portfolio, it is crucial to be aware of its limitations. Companies should supplement the BCG Matrix with additional strategic tools and market insights to make well-rounded decisions that align with their overall business objectives and changing market dynamics.
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