What is a BCG Matrix and How Does it Work?
A BCG matrix aids companies in analyzing their industry’s present and potential competitive landscapes and then planning accordingly.
Business models are focused on delivering profitable goods or services now, as well as identifying improvements in offerings that will keep the business profitable in the future. The latest moneymakers are obvious now, but a sound business plan still considers the future.
The BCG matrix, also known as the Boston or growth-share matrix was created by the Boston consulting group matrix and offers a strategy for assessing goods based on growth and relative market share. Since 1968, the BCG model has been used to help businesses understand which products can better help them leverage on market share growth opportunities and gain a competitive advantage.
Putting together the matrix
To evaluate your own company, you’ll need data on your products or services’ relative market share and growth rate.
When analyzing market growth, you can objectively evaluate your competitive advantage over your largest competitor and plan for three years of growth. If the market is highly fragmented, however, absolute market share can be used instead.
You can then either draw a Boston consulting matrix or use an online BCG matrix template program. Many are either free, subscription-based, or part of another charting service, such as Miro’s free one.
Place each of your goods in the box that corresponds to their market share and growth. The position of the dividing line between each quadrant is determined in part by how your business stacks up against the competition.
Also Read: Business Research Steps with Example
The following is a breakdown of each quadrant of the BCG matrix:
- Stars: Corporate divisions or goods with the highest market share and revenue are referred to as stars. Stars are also used to describe monopolies and first-to-market goods. In most cases, this means that the amount of money coming in equals the amount going out. If stars can maintain their momentum once a high-growth market slows down, they can gradually become cash cows.
- Cash Cows: A cash cow is a market leader that produces more money than it absorbs. Cash cows, according to NetMBA, include the cash needed to turn a question mark into a market leader, cover the company’s operating expenses, finance R&D, service corporate debt, and pay dividends to shareholders. Companies are encouraged to invest in cash cows to sustain current productivity levels or to passively “milk” the profits.
- Dogs: Dogs, or pets as they are also known, are units or items with a small market share and a slow growth rate. Dogs are commonly referred to as “cash traps” because companies invest money in them even though they get nothing in return. These divisions are excellent candidates for sale.
- Question Marks: These parts of a company have a lot of growth potential, but they have a small market share. They spend a lot of money but give back so little. Question marks lose money in the end. If a product has the potential for success, companies should invest in question marks; if it does not, they should sell.
Strategizing for the BCG matrix
- You can critically analyze each business unit or product now that you know where they stand.
- To increase a product’s market share, increase investment in it. You can, for example, transform a question mark into a star, and then into a cash cow.
- If you can’t afford to put more money into a commodity, keep it in the same quadrant and ignore it.
- Reduce your investment and strive to extract as much cash as possible from the commodity to boost its overall profitability (best for cash cows).
- Release the funds that have been stranded in the business (best for dogs).
- To maintain a stable cash flow and have goods that can protect your future, you need products in each quadrant of your BGC matrix.
Cash flow’s place in the BCG matrix
To get the most out of the BCG matrix, you must first understand cash flow:
- Market share affects profit margins and cash flow. High margins and a large market share go hand in hand.
- You must invest in your assets to expand. Growth rates determine the additional cash needed to keep a share.
- Market share must be won or purchased. Purchasing market share necessitates a further investment or increment.
- No product demand will continue to expand indefinitely. When growth slows, you must take advantage of the opportunity; if you wait too long, you will miss out. The payoff is money that can’t be put back into the product.
- The last point is much more important now than it has ever been. The market now moves at a faster pace than it did 40 years ago, and BCG has since published recommended revisions for analyzing and acting on matrix data.
- Keeping a healthy supply of question marks on hand prepares you to jump on the next big thing. Cash cows, on the other hand, must be milked efficiently because they are more likely to fall out of favor – and profitability – sooner. More methods can be found on BCG’s website.
An example of a BCG matrix in real life
Looking at a real-life BCG matrix example and then sharing the matrix with your team will help you understand BCG-based development. Coca-Cola, which owns a lot more drinks than just its name brand, is a typical BCG matrix example.
Diet Coke and Minute Maid are question marks in the Coca-Cola BCG matrix, as these brands have a small following but plenty of space to expand. Kinley and Dasani, two of its bottled water brands, are stars because they dominate the market in Europe and the United States, respectively, and display no signs of slowing down.
Coca-own Cola’s drink is a cash cow because, despite its high market share, it grows slowly, a classification that makes sense considering the company’s ubiquity among soft drinks. Coca-Cola, on the other hand, is a dog, since legislation prohibiting soft beverages – not to mention public opinion against them – has reduced soda sales. The real-life BCG matrix example from Coca-Cola demonstrates an important point: A commodity may often be classified as belonging to more than one group.
Another viewpoint as an alternative
The BCG matrix is a great tool, but it isn’t right for every company. Some businesses discover that they don’t have products in each quadrant, nor do they have consistent movement of products between quadrants as their product life cycle progresses.
Instead, some consultants recommend using the GE/McKinsey matrix, which provides more categorization choices and calculates goods based on business unit strength and sector attractiveness rather than market share, which can be difficult to manage. Comparing the two models will uncover secret insights that will help the company grow faster.
BCG Matrix’s Limitations
The BCG Matrix creates a structure for allocating resources to various business units and allows for quick comparisons of multiple business units. However, there are some drawbacks to BCG Matrix, such as:
- Businesses are classified as low or high in the BCG matrix, but they may also be classified as medium. As a result, the true essence of business can be obscured.
- In this model, the market is not specified.
- With a large market share, there are also high costs.
- Dogs may also assist other companies in achieving a competitive advantage. They can often reap even more than cash cows.
- The four-celled approach is thought to be overly simplistic.
We have covered all the relevant details about BCG matrix -right from its definition to purpose, in this informative blog. Hope you find it handy.
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