“A company should have a portfolio of products with different growth rates and different market shares. The portfolio composition is a function of the balance between cash flows.… Margins and cash generated are a function of market share.”
— Bruce Henderson
The Boston Consulting Growth-share Matrix in short, called the BCG Matrix was first created in the year 1970 by Bruce Henderson and the Boston Consulting Group. The main objective was to develop a tool that would assist the companies to find out which investments in products and services are worth investment and time.
When we consider a big company, we can see the range of different products, multiple strategies and a huge market share. For such companies planning and strategizing their next move can be a little complex.
Companies have to make decisions about their investments like- whether they should continue with the product or cut off. They need to analyze each business segment and make decisions.
In such situations a BCG Matrix can provide utmost help. In this blog we will learn more about the Boston Consulting Growth-share Matrix.
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What is a BCG Matrix?
A BCG Matrix is a tool, which is used to graphically represent a company's products and services in such a way that the company can decide which one is worth the investment and which one should be cut off.
It is a simple 2*2 matrices with 4 quadrants. The Y axis represents the market growth and the X axis represents the market share. Each box in the matrices has its own unique features. In short, this matrix focuses on 2 main questions:
Let us find out the answers.
Market share means the overall percentage of the shares of the company in the market. It is calculated by the number of units of product sold by the company or the overall revenue.
Every company keeps a check on the market share very closely. Here is a simple example. Suppose you ran a soda shop in your area and you sold 100 glasses of soda in the summer. You have 2 competitors who sold 25 and 75 glasses of soda as well.
The total number of soda glasses sold are 200 (100+25+75) and out of these 200, you sold 100. Therefore you have a 50% share in the market. (100*100/200).
It is difficult to quantify the growth potential of the company. It is usually forecasted based on the past trends and history. But with the help of BCG Matrix you can forecast it easily.
Here is the portfolio of Procter and Gamble’s Products to find out their growth potential. The very first is the market of “Bathroom Tissue”. In the US, bathroom tissue usage has declined by 0.7% since 1992.
Next is the market of “Skin care products”. In the US, the demand of Skin care ranges has increased and the growth in this area is visible.
Thus, in growth potential we generally analyze markets and find out the drivers which lead to market growth.
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Advantages of BCG Matrix
It is very easy to maintain and simple to understand. It assists the companies to make relevant investment and growth related decisions. Since it is easy to maintain, companies can properly strategize.
It also helps the managers to maintain the portfolios and check the balance of all the four categories of products as per the BCG matrices.
The BCG Matrix shows that the relationship of profits and market share is proportionate. If the market share of a company increases so will its profits and vice-versa.
It only divides the products into 4 categories thus, making the overall operations much more easier, simpler and efficient.
Limitations of a BCG Matrix
Just like every other planning tool, BCG Matrix has its own limitations which are:
According to the BCG Matrix, a business can be either high or low. But in reality, some businesses are in the medium phase as well. Therefore, it might not reflect the actual position of the business.
The distinction that this Matrix makes is very subjective.
The market share cannot be clearly defined.
Many complications arise when we collect data to calculate the market share and growth potential for this tool.
The assumption of this tool that every business is independent of each other is not true.
With the help of this matrix the managers cannot define or understand accounting synergies that exist among the Strategic Business Units.
It ignores the competition from the substitute products.
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4 Categories of Products in BCG Matrices
BCG Matrix is 2*2 with 4 quadrants. These quadrants are- Stars in the upper left, question marks in the upper right, cash cows in the upper left and dogs in the lower right side.
Each product is placed in a quadrant based on its growth share and potential. Therefore, each product has its own features. Given below is the breakdown:
4 Categories of Products in BCG Matrix
Just like the name suggests, products which are the best in growth and share are included in stars. The products placed in stars make the most cash and profits.
Monopolies and products that are first to capture the market share are usually termed as stars. Since these products are high-rated they also take most cash for production. Thus, the money that star products make is utilized in their production.
After a certain phase, these star products are later turned into cash cows. The companies can make decisions to invest in the star products as they promise higher returns in the future.
Strategic choices that you have: Vertical Integrations, Horizontal Integrations, Market penetration, Market Development and Product Development.
Cash cows just like their name generate more money than it consumes. Products that have a high market share but low growth potential are included in this quadrant.
The money earned from cash cows can be used-
- To make question marks a market leader.
- To cover the administrative costs.
- To generate funds for research and development activities.
- To set off the service debt (if any).
- Pay dividends to the shareholders.
When making the investment decisions, companies can invest in cash cows to generate revenue, maintain productivity and milk the gains that are generated.
Strategic options that you have- Diversification and product development.
Dogs, also referred to as pets, have low market share and low growth potential. You can constantly see them at break even point i.e. no profit or no loss. They do not consume much money nor do they make much money.
Businesses have often got their investments tied up or blocked in dogs. This is why they are called “cash traps”. The last resort for companies making dogs is divestiture.
Sometimes ex-cash cows can become dog products. While making investment or growth decisions, companies should kill the dog products. They are not sufficient to generate enough revenues for the companies.
Strategic options that you have- Retrenchment, Divestiture and Liquidation.
The products that have high potential for growth but very little market share are put into this quadrant. A lot of investment is done into them but results are not sufficient. The end result is always the same i.e. they lose money.
But you might witness many companies that have turned their question marks into stars with the help of adequate resources and improved strategies.
While making investment and growth decisions, if the company feels that the product has the potential to gain market share, then question marks are worth investing for. If not, then they can cut it off.
Strategic options that you have- Market penetration, Product development. Market development and divestiture.
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Example of a BCG Matrix
Let us look at a real life example to understand the BCG Matrix better.
“Pepsico” is one of the largest companies with a perfect product mix that has captured a huge market share for such a long time. The BCG Matrix of Pepsico shows the following information about its products:
Pepsi, which is a number one aerated drink across the globe witnesses a decline of 8.4% of its total market share. But it is still a star product for Pepsico.
Apart from Pepsi, we have Aquafine which is the number one packaged mineral water brand across the globe especially in the US. Tropicana, Mountain Dew and Gatorade are other star products of Pepsico.
Frito Lay, i.e the most popular Lays chips are the Cash cow products of Pepsico. It has a market share of around 58% in the US only. Imagine how much it is in countries like India, Pakistan, Bangladesh etc.
In Pepsico’s BCG Matrix, you will find no product in the Dog category. But sometimes, some of the seasonal products made by Pepsico are put in as Dogs like Pepsi Real Sugar etc.
There are some uncertainties about the future of diet foods and sodas. Therefore some of Pepsico’s products are put in this quadrant. It includes- Diet Coke, Quaker Oats, Max etc.
The BCG Matrix uses both market share and growth potential to analyze the product portfolio of a company. Therefore, it is also directly related with the product life cycle and the experience curve. For a star product- high volume means reduction in costs and better yield.
In case of question marks you will not have this benefit. In case of cash cows you will have the same advantage as of stars. High volume will lead to better profits. Dogs are the worst. They lead to cash traps and cash drains.
For a company that wants to gain market dominance must use the opportunities it has in hand. While the product is in its maturity stage companies deal with loyal customers, so it is difficult to capture market share during this phase.
A balanced BCG Matrix is a perfect tool to analyze the product portfolio of any company.