Business models are created to provide profitable products and services in the current scenario and make provisions to identify changes that will maintain the company profits in the future. A sound business strategy also questions and addresses prospects always.
What is the BCG Matrix?
Boston Consulting Group created the BCG matrix, also popularly recognized as the Boston or Growth-Share Matrix, that provides a strategy that helps analyze products as per relative market share and growth. The BCG model has been effective since 1968 and helps the company get insight into products that help them capitalize on market share growth opportunities and give them a competitive advantage.
The Managing Director and Senior Partner of BCG, Reeves Martin, quotes about 50 years since its launch that the BCG matrix model will continue to be a valued tool for companies to understand their potential.
Market Share and Relative Market Share
The market share of a company refers to the identified market percentage it controls. On the other hand, relative market share is the percentage of the market that a company does not control. Relative Market Share is another dimension that helps in measuring the business portfolio. A firm with high production reaps from larger economies in size and experience curve, resulting in larger profits.
As per market-driven management, 33% of relative market shares or more are acknowledged as strong.
What is the Growth-Share Matrix?
BCG’s founder, Bruce Henderson, created the Growth-Share Matrix strategy in 1968 and published it as an essay titled “Perspectives,” which, even today, is taught as the main topic in business schools. It was implemented by more than half of Fortune 500 companies who owe a large portion of their success to it.
Growth-Share Matrix or BCG Matrix is a framework built to manage a portfolio that helps companies prioritize their various businesses best. The Growth Share Matrix table is split into four quadrants. Each quadrant has a unique symbol representing profitability to a certain degree. The symbol consists of Stars, Question Marks, Dog, and Cash Cows. The businesses are assigned to each of these four categories. The executives decide where to allocate their capital and resources to generate the most value and cut losses.
The Four Symbols of BCG Matrix or Growth-Share Matrix
There are four quadrants into which firms’ brands are classified. Let’s take a closer look at their position and function as we discuss their potential:
Dogs
Dogs represent a low market share compared to competitors and function in a market with slow growth. Generally, they should not be invested in as they beget negative or low cash returns. But this may not always be the case. Some dogs turn out to be profitable for a much longer time than expected. They provide collaborations for SBUs or other brands or help counter moves by competitors. It is better to run a more in-depth analysis of a brand to ensure whether they should be divested.
Strategic choices: Retrenchment, liquidation, divestiture
Cash Cows
They are regarded as the most profitable brands. They must be milked so they can provide the maximum cash amount. The cash profited from cows must be invested in to support stars for further growth. Cash Cows help to maintain Stars. But this may not always be the scenario. Large SBUs or Corporations fall into the Cash Cows category and can innovate processes and products, and potentially become Stars themselves. So, Cash Cows themselves need support to innovate.
Strategic choices: Product development, divestiture, diversification, retrenchment
Stars
Since they belong and function in high growth industries, maintaining high market share, Stars are cash users and generators. These are primary units where the company needs to invest. The Stars turn into Cash Cows when they become very profitable. Not all Stars turn out to be Cash Cows; however, they are prone to rapid changes, especially in industries. Such industries face constant challenges with innovative products that can be exceeded by technological progressions. So, a Star regresses to a dog rather than being promoted as a Cash Cow.
Strategic choices: Horizontal integration, vertical integration, market development, market penetration, product development
Question Marks
Self-Explanatory, to its name, Question marks consist of brands that need some consideration. In the fast-growing market scenario, they hold a low market share and become Cash Cow. Despite a large investment, Question Marks do not succeed every time and continue to struggle in getting market share and end up being dogs. Therefore, they need a close consideration if they should be invested in or not.
Strategic choices: Market penetration, product development, market development, divestiture
How to Calculate Relative Market Share in the BCG Matrix?
One can calculate relative market share in the BCG matrix in five simple steps.
Step 1 – Select a Unit:
BCG matrix helps to analyze separate brands, SBUs, firms, or a product as a unit. Select and define the unit which one wants to analyze.
Step 2 – Outline the Market:
Outline the market that needs to be outlined or defined carefully. An incorrectly outlined market will end up in a low classification of one’s unit. For instance, market leader Mercedes-Benz may be classified as a Dog in the passenger vehicle market solely based on its relative market share of less than 20%. But in the luxury car market, based on its impact as a market leader, and will be classified as a Cash Cow.
Step 3 – How to calculate relative market share:
Revenues or Market share both qualify to be calculated for Relative market share. One can calculate Relative market share by dividing one’s brand market share or revenues by revenues or market share of the industry’s largest competitor. For example, if the competitor holds a market share of 25% in the computer industry and one’s firm holds 10% in the same fiscal year, based on the calculation, the market share will be 0.4.
Relative Market Share = One’s firm’s market share or revenues / Biggest competitor’s market share or revenues
The X-Axis represents the Relative market share with the top left corner at 1, the midpoint is set at 0.5, and the top right corner is at 0.
Step 4 – Calculate Market Growth Rate:
The growth rate of an industry can be retrieved from industry reports available for free online. One can also calculate Market Growth Rate by looking at the market’s largest competitor’s average revenue growth. It is calculated in percentage.
Step 5 – Calculate Market Growth Rate:
One can plot one’s brands after calculating the above measures, on the BCG matrix. Draw a circle for each brand. The circle size must correspond to the brand’s size proportion.
