Last Updated on July 18, 2023 by Ossian Muscad
The BCG Matrix is a tool businesses use to analyze their product portfolios and assess the relative performance of each offering. This matrix helps organizations identify which products are growing quickly, which are stable and mature, and which should be divested or have resources reallocated. It also provides insight into how different products interact within an organization’s portfolio. This article will discuss the basics of the BCG Matrix, provide practical examples of its usage, and offer advice on how you can use it to improve your decision-making processes.
What is the BCG Matrix?
The BCG Matrix, short for Boston Consulting Group Matrix, is a valuable tool employed in strategic management. It aids organizations in scrutinizing their diverse product offerings. This matrix segregates a company’s products or services into four distinct categories: Stars, Cash Cows, Question Marks, and Dogs. Each category signifies a different degree of market share and potential for growth.
The BCG Matrix serves as a guide for businesses to make informed decisions about their product portfolio. With its help, they can strategically allocate resources, determine investment priorities, and decide which products should receive more investment or be divested. However, it’s crucial to note that the BCG Matrix is one instrument among many in the toolbox of strategic analysis and should be used in conjunction with other tools for a comprehensive evaluation.
Brief History of the BCG Matrix
The BCG Matrix was developed in the 1970s by Bruce Henderson, the founder of the Boston Consulting Group. He designed this matrix as a comprehensive portfolio planning tool to assist companies in evaluating their product lines, enabling them to make informed decisions on which products to invest further in and which to divest from. The concept is built around four quadrants, categorizing a company’s Strategic Business Units (SBUs).
Henderson’s model operates on the premise that an increase in market share will result in increased cash generation. Simultaneously, it suggests that a product being established in a burgeoning market will necessitate continual investment for producing goods/services and expanding capacity, which would invariably be a significant cash consumer.
Advantages of Using the BCG Matrix
Utilizing the BCG Matrix offers numerous benefits, such as the following:
- Its concept is straightforward and comprehensible, making it easily accessible to different levels of management.
- This tool facilitates effective evaluation of existing opportunities and strategy formulation to maximize their potential.
- It guides companies in determining the optimal allocation of cash resources, aiming to enhance future growth and profitability.
- The matrix presents a structured framework for resource distribution across various products while providing a snapshot comparison of the product portfolio, enabling quick and easy assessments.
- The BCG Matrix also promotes strategic thinking by pushing companies to assess their products in the broader market context, encouraging a proactive approach to product management and future planning.
Limitations of the BCG Matrix
While the BCG Matrix is a beneficial tool, it has certain limitations that you need to consider. That way, you can thoroughly assess if it’s your right strategy. These limitations include the following:
- The model primarily uses two dimensions: relative market share and market growth rate. These factors don’t necessarily guarantee profitability, attractiveness, or success.
- It overlooks the potential synergy between different brands or product lines.
- The model assumes that businesses with lower market shares are less profitable, which is not always the case.
- Achieving a high market share can be costly and doesn’t necessarily translate into increased profits.
- ‘Dogs,’ or low market share products, can sometimes offer unique competitive advantages for businesses.
- The matrix doesn’t account for emerging competitors with swiftly growing market shares, potentially skewing strategic decisions.
Comparing BCG Matrix with the Ansoff Growth Matrix
The BCG Matrix and the Ansoff Growth Matrix are widely used strategic planning instruments businesses employ to examine their product portfolio and pinpoint growth prospects. However, they vary in their methodologies and focal points.
The BCG Matrix assesses the current product portfolio of a company by considering two key factors: the rate of market growth and the market share. The products are categorized into four groups: Stars, Cash Cows, Question Marks, and Dogs. This matrix aids businesses in making decisions regarding resource allocation and investment, focusing on growth potential and profitability.
Conversely, the Ansoff Growth Matrix scrutinizes a company’s growth opportunities by considering products and markets. The matrix organizes growth strategies into four quadrants: Market Penetration, Market Development, Product Development, and Diversification.
The Ansoff Growth Matrix equips businesses to identify potential growth avenues and make strategic decisions about product innovation and market expansion.
The Four Quadrants of The BCG Matrix
The Boston Consulting Group (BCG) Matrix is a strategic management tool that classifies a firm’s products or services into four categories, each represented by a quadrant. These quadrants are defined by market growth rate and relative market share.
Stars
Products in the Stars quadrant have a high market share in high-growth markets. They are the leaders in the business and often need continued investment to sustain their growth. If successful, Stars can eventually become Cash Cows as the market’s growth rate declines.
Cash Cows
These products have a high market share in a low-growth industry or market. They generate more cash than what is necessary to maintain their market share. Because of their strong position and low growth needs, they are often seen as the company’s foundation and are desirable for generating strong cash flows and profits.
Question Marks
Also known as “problem children,” these products have a low market share in high-growth markets. They require significant resources to increase their market share. If this cannot be accomplished, they should be sold off. Deciding whether to invest in or divest from these products can be challenging for management.
Dogs
Dogs are products with a low market share in low-growth markets. They neither generate substantial cash nor require massive amounts of cash. Often, these products are cash traps because of the money tied up in them, and companies usually opt to divest these products or businesses.
Each quadrant has different strategic implications and requires different resource allocations and management strategies.
BCG Positions Through Product Life Cycle
The BCG Matrix can be effectively utilized to analyze the lifecycle of each Product in your portfolio. The life cycle of a product comprises four stages: introduction, growth, maturity, and decline. By pinpointing where each Product resides in its lifecycle, you can ascertain its relevant position on the BCG Matrix.
During growth, products are generally classified as “Question Marks” in the BCG matrix. These products, having a low market share in a high-growth market, necessitate substantial investment for growth and market share capture, but they hold the potential to evolve into “Stars.”
As products mature and amass market share, they transition into the “Star” category of the BCG matrix. Boasting a high market share in a high-growth market, these products contribute significantly to the business’s revenue and profit.
With time, “Stars” may morph into “Cash Cows.” Products in this position have a high market share in a slow-growth market. They generate substantial cash flow for the business but require less investment compared to “Question Marks” or “Stars.”
Eventually, products may end their lifecycle and shift into the “Dog” quadrant of the BCG Matrix. These products, with a low market share in a low-growth market, may yield limited revenue and profits and often require significant investments to maintain or enhance their market position.
How To Make A BCG Matrix?
Creating and utilizing a BCG matrix is relatively simple. You must gather information about each product or service in your portfolio: relative market share and growth rate. Plot each Product on the matrix according to its market share and growth rate; the higher the market share, the further right it should be placed, while faster-growing markets should be placed higher up. With that said, follow the steps outlined below to create a compelling and successful BCG Matrix:
Step 1: Determine the Strategic Business Unit (Product-Market Fit)
The first step in creating a BCG matrix is to identify the specific business unit, Product, or brand you want to analyze. This selection is critical as it sets the foundation for the entire analysis process.
Step 2: Define the Market
Defining the market accurately is crucial to understand your portfolio’s positioning correctly. An incorrect market definition could lead to misclassification of products. For instance, Mercedes-Benz would be a ‘Dog’ in the overall passenger vehicle market due to its less than 20% market share, but it becomes a ‘Cash Cow’ in the luxury car segment.
Step 3: Calculate the Relative Market Share
Market share, measured by revenue or unit volume, reflects how much of the total market a company serves. The BCG matrix uses relative market share, comparing a product’s sales to its leading competitor’s. You can compute it as follows:
Relative Market Share = Your Product’s sales this year / Leading competitor’s sales this year
For instance, if your competitor has a market share of 25% and you have a 10% market share, your relative market share would be 0.4.
Step 4: Determine the Market Growth Rate
Using online resources or analyzing leading companies’ average revenue growth can help gauge an industry’s growth rate, commonly expressed as a percentage. Here’s the calculation:
Market Growth Rate = (Product’s sales this year – Product’s sales last year) / Product’s sales last year.
High-growth markets offer a larger pool of potential customers, providing ample opportunities for companies to generate revenue.
Step 5: Plot and Position the Circles on the Matrix
Once you’ve determined the market share and growth rate for each Product or business unit, plot these as circles on a two-by-two grid of the BCG matrix, with market share on the x-axis and growth rate on the y-axis. The size of each circle should correspond to the product or business unit’s market share: a larger market share means a larger circle. It is possible to draw this visualization using software tools or draw manually.
Sample BCG Matrix
Understanding how the BCG Matrix works requires looking at an example. That’s why we will take the example of Apple Inc., a well-known technology company with a diverse product portfolio. Here’s how some of their products might be categorized in the BCG Matrix:
- Stars: The iPhone could be considered a Star. It dominates a rapidly growing market with a large market share. Despite the competitive smartphone industry, the iPhone continues to be a leader due to its innovative features and strong brand loyalty.
- Cash Cows: The MacBook is a Cash Cow. It has a high market share in a relatively low-growth market. MacBooks are popular and generate substantial revenue, but the overall laptop market isn’t growing as fast as the smartphone market.
- Question Marks: Apple Watch might be considered a Question Mark. It has a lower market share in a high-growth market. Wearable tech is rapidly growing, but Apple Watch faces stiff competition from other tech giants.
- Dogs: The iPod is a Dog. It holds a small portion of the market in a market with minimal growth.. With the advent of smartphones that can store and play music, the demand for standalone music players like iPods has significantly declined.
Remember, the BCG Matrix is a simplified representation and may not fully capture the complexities of the market or business strategy. Also, the classification of products into different categories can change over time with changes in market dynamics.
Create and Utilize the BCG Matrix Using a Low-code Platform
As businesses grow and evolve, so does their product portfolio. Manual analysis of a business’s product portfolio is tedious and time-consuming. A low-code platform like DATAMYTE can help automate this process with its drag-and-drop interface to quickly create applications that can analyze your product portfolio in real-time using the BCG matrix. With DATAMYTE, you have all the tools you need to quickly create a BCG Matrix application and understand the positioning of your products in the market.
DATAMYTE is a quality management platform with low-code capabilities. The DataMyte Digital Clipboard, in particular, is a low-code workflow automation software that features a checklist and smart form builder. This tool lets you create a comprehensive BCG matrix checklist for your product portfolio, providing an automated way to measure and analyze market share and growth rate.
To create a checklist or form template using DATAMYTE, follow these steps:
- Log in to the DATAMYTE software and navigate to the ‘Checklist’ module.
- Click “Create Checklist.”
- Add a title to your checklist; select the category where it belongs.
- Start adding items to the checklist by clicking “Add Item.”
- Define the description of each item, what type of answer it requires, and other relevant specifications (e.g., reference documents, acceptance criteria, limits).
- Assign a team member responsible for conducting the inspection using the checklist.
- Add signature fields for approvals (e.g., supervisors, quality assurance personnel).
- Save the checklist—you can now access it anywhere, and it will be available for use on any device.
DATAMYTE also lets you conduct layered process audits, a high-frequency evaluation of critical process steps, focusing on areas with the highest failure risk or non-compliance. Conducting LPA with DATAMYTE lets you effectively identify and correct potential defects before they become major quality issues.
With DATAMYTE, you have an all-in-one solution for creating and implementing the BCG Matrix. It provides an insightful way to evaluate product portfolios and develop strategies for growth. Book a demo to learn how DATAMYTE can help you optimize your product portfolio with the BCG Matrix.
Conclusion
The BCG Matrix is a powerful tool businesses use to evaluate their product portfolios and identify areas for potential growth. It provides an insightful way to assess the relative market position of each Product and develop strategies for success. With the help of a low-code platform like DATAMYTE, businesses have all the tools they need to create and implement the BCG Matrix quickly. Start today!
