What Is BCG Matrix?
The BCG matrix is a technique for designing a company’s product portfolio to evaluate each product’s performance and share in the market. It is a graphical representation of a two-by-two (4-celled) matrix created by Boston Consulting Group, USA. It analyses the growth and share of the firm in the market compared to its rivals.
It aims to look over the business potential according to its environment. Also, it depicts the market dominance of the business. It is intended to support long-term strategic planning and aid a company in assessing growth opportunities by looking at its product portfolio to choose where to invest, discontinue, and develop products.
Table of contents
- It is a tool to evaluate the current worth of a company’s units or product lines. The growth-share matrix assists the business in determining which goods or divisions to keep, market, or increase investment.
- The four separate groups in the matrix are – dogs, cash cows, stars, and question marks. Businesses can use these matrices to determine the importance of their business activities.
- The x-axis represents the market share, and the y-axis shows the market growth rate.
BCG Matrix Model Explained
The BCG matrix is a growth-share matrix that refers to a planning tool that uses visual representations of a company’s goods and services to assist it in deciding what to maintain, sell, or spend more. The well-known management consulting company Boston Consulting Group is known by the initials BCG.
The Boston Consulting Group’s management expert, Bruce Henderson, created it as a tool for portfolio planning in the early 1970s. Henderson believed that the business units of a firm that were more mature and producing substantial amounts of cash could provide the capital needed by the expanding business units. In addition, the product line could get a cost advantage by investing to dominate the market in an expanding area.
The term “growth-share” refers to the fact that a firm’s units can be divided into four groups depending on mixes of growth and share compared to the main rival. Industry attractiveness is proxied by market growth, while the competitive advantage is proxied by relative market share. Thus, the growth-share matrix maps the positions of the business units within these two crucial profitability factors.
This hypothesis has two assumptions. They are the following –
- First, a more significant cash generation will follow an increase in overall market share.
- Second, expanding markets entails capital expenditures to boost capacity, which soaks up cash reserves. Therefore, a company’s position on this matrix indicates its cash use and generation.
The structure of the BCG Matrix strategic management is explained below.
- Stars: They signify business units with a significant market share. Stars may make money, but because of the rapidly expanding market, they need substantial investments to stay in the front. Usually, cash flow here is minimal.
- Cash Cows: They are business segments with a substantial market share in an established, slowly expanding sector. Cash cows are businesses that require low capital commitment and produce cash that may be invested in other business units.
- Question Marks: They signify company units with a small relative market share. They need significant money to keep or increase their market share. New products and services with a promising commercial future are typically marked with a question mark.
- Dogs: They stand for companies with low market shares in slow-growing industries. They produce little money or need a lot of money. These business units have cost disadvantages due to their limited market share.
How To Use It?
Here are four recommended approaches for using the matrix to plan a company’s strategy:
- Build – Spend more on Stars and Question Marks if the firm concentrates on innovation. By spending more on a Question Mark, the firm can drive it toward becoming a Star and then a Cash Cow.
- Hold – Keep a product within the same quadrant, and don’t make any additional investments.
- Harvest – To raise a product’s total profitability, decrease investment and extract the most cash flow possible.
- Divest – An investment made in a product should be transferred and used elsewhere.
Its application can be understood better through the following examples.
Example #1 – BCG Matrix For Apple
- Stars – iPhone has always been Apple’s main product! However, due to the growing number of competitors, its growth could be more apparent, and its demand is relatively high.
- Cash Cows – MacBook is among the current market leaders. Its hefty selling price is because it is manufactured in vast quantities and its quality is respected.
- Question Mark – Apple TV is a new device with poor profitability at the time as it is not on par with its rivals, such as the Amazon “Firestick” and Alexa, etc. It does, however, have significant room for expansion.
- Dogs – iPads are becoming a specialized marketable item for graphic artists and companies. Growth is possible, but it’s fresher than it was a few years ago.
Example #2 – BCG Matrix Of Nestle
- Stars – Nescafé could lead to a future with a higher return on investment. It may need to make significant investments to become more apparent in this market, but once they do, these items might quickly become cash cows.
- Cash Cows – KitKat is already a popular product. They demand relatively little financial outlay.
- Question Mark – Nesquik is considered the dilemma among some of Nestlé’s milk products. Because it is in the developing stage, this sector needs further investment. Additionally, investing in it carries a high degree of risk.
- Dogs – Nestea and Other Items in this category don’t offer many noteworthy advantages. Future investments are therefore viewed as a waste of money.
Advantages And Disadvantages
The pros and cons of it can be understood in the following ways.
- It is simple and clear to use and comprehend.
- Larger businesses can use it to obtain volume and achieve results. It foretells a company’s future behavior.
- Businesses here are either low or high, but they can also be classified as medium. As a result, the business’s genuine character could not be apparent.
- It is quite challenging to define what is high or low.
BCG Matrix And Ansoff Matrix
The Boston and the Ansoff Matrix are marketing tools created to assist businesses in exploring their product portfolios and planning where to concentrate their efforts.
Some of the aspects of them are as discussed:
- While the Boston matrix compares each product line on two metrics, that is, market share and market growth, whereas Ansoff compares new and old products to the markets in which they are offered for sale.
- The BCG matrix marketing creates a strategy for a company’s current products in a particular market. It determines goods earning the most money, which have the highest potential to do so in the future, which ones the company should invest in, and which ones should be discontinued, which is made easier.
- Ansoff matrix is used to develop a product strategy for various markets. It examines whether current models should target existing and new markets and if introducing new items into new or existing markets will be profitable.
Difference Between BCG Matrix And GE Matrix
Large organizations use the BCG matrix to determine how resources should be distributed among various business divisions. At the same time, the GE matrix aids businesses in determining their strategy concerning multiple product lines. Therefore, the GE matrix was developed to overcome the limitations of the BCG matrix.
|Market growth and market share.
|Business growth and attractiveness.
|Into two degrees: high and low.
|Into three degrees: strong, average, and weak.
|Help firms deploy resources among business units.
|Help firms to prioritize investment among business units.
Frequently Asked Questions (FAQs)
It signifies clearance for the firm to invest and expand. The green zone encourages firms to “move forward,” to develop and grow and pushes it to employ growth tactics. As a result, green zone businesses draw significant investment.
Use of it is appropriate if:
– It is a sizable manufacturer.
– The company offers a wide variety of products, or if they operate several separate business units (SBUs), they have a good market share in several areas.
– The company prefers to be logical and approach planning from a strategic perspective.
The BCG Matrix’s application has undoubtedly changed to reflect the digital era. However, it is still a helpful tool when examining the big picture, even though it is less critical than it once was.
This article has been a guide to what is BCG Matrix. We explain its examples, advantages, disadvantages, comparison with Ansoff Matrix, and how to use it. You may also find some useful articles here –