The BCG matrix (also known as Boston Box) is a framework to assist in decision-making on existing product lines.
Developed in the 1970s, it was used to evaluate how a company should think about its portfolio on the basis of two criteria: a product’s relative market share and the market growth rate that resulted in four archetypes: The Dogs, Question Marks, Stars and Cash Cows.
- Components of a BCG Matrix
- What is a BCG Matrix used for
- When to use BCG Matrix
- Using the Tool
- Example of BCG Matrix
- BCG Matrix tips
- Advantages and Disadvantages of BCG Matrix
The BCG Matrix (also known as the Boston Consulting Group analysis, the Growth-Share matrix, the Boston Box or Product Portfolio matrix) is a tool used in corporate strategy to analyze business units or product lines on the basis of two variables: relative market share and rate of market growth.
A corporation can plot its business units accordingly and determine where to allocate extra (financial resources, where to cash out and where to divest by combining these two variables into a matrix.
Therefore, the main purpose of the BCG Matrix is to make corporate-level investment decisions. Four different category labels can be attributed to each unit depending on how well the unit and the sector is doing: Dogs, Question Marks, Cash Cows and Stars.
Components of a BCG Matrix
BCG Matrix Example: Samsung’s Product Portfolio
Samsung is a conglomerate with a variety of products consisting of many strategic business units (SBUs). Samsung sells tablets, cameras, televisions, microwaves, refrigerators, washing machines, and even insurance and chemicals.
This is a good business strategy to have because it spreads risk across a wide range of business units. If for example, something might happen to the camera industry, Samsung is still likely to have positive cash flows in other product segments from other business units.
This allows Samsung to deal with the economic downturn elsewhere. Nevertheless, even in a well-balanced product portfolio, corporate strategists would have to make decisions about allocating capital to all of those business units and distributing cash.
Where do you put most of the capital, and where are you supposed to divest it? The BCG Matrix uses Relative Market Share and the Market Growth Rate to determine that.
Relative Market Share
This variable was used by the developer of the BCG Matrix to actually calculate the competitiveness of a firm. Compared to its biggest rival, the exact indicator for Relative Market Share is the share of the focus company.
So, if Samsung has a market share of 20 percent in the mobile phone industry and Apple (its main competitor) has 60 percent, the ratio will be 1:3 (0.33), suggesting a relatively poor position for Samsung.
The ratio would be 2:1 (2.0) if Apple had only a share of 10 percent, indicating that Samsung is in a reasonably good position, which could be reflected in above average revenues and cash flows.
The cut-off point here is 1.0, which means that in order to have a strong relative market share, the target company should at least have a market share comparable to that of its largest competitor.
Market Growth Rate
The second variable is the Market Growth Rate, which is used to calculate the attractiveness of the market. Rapidly rising markets are what companies normally aim for since they offer long-term, interesting returns on investment.
However, the downside is that businesses in rising markets are likely to need to invest in order to make growth possible. For example, investments are required to finance marketing campaigns or to increase capacity. High or low growth rates can vary from industry to industry, but typically about 10% per annum is chosen as the cut-off point in general.
This suggests that the market growth rate would be considered strong if Samsung were to work in an industry where the market is growing 12 percent a year on average.
Question Marks (low share, high growth)
In general, ventures or start-ups start off as Question Marks. Question Marks (or Problem Children) are companies which operate in a high growth market with a low market share. They have the potential to acquire market share and ultimately become stars (market leaders).
Question Marks can grow exponentially if handled well and thus consume a significant amount of cash expenditure. If Question Marks do not succeed in becoming a market leader, when market growth decreases after years of cash consumption, they might degenerate into Dogs.
Therefore, question marks must be carefully evaluated in order to assess if the investment needed to increase market share is worthwhile.
Stars (high share and high growth)
Stars are business units in a fast-growing sector with a large market share (potentially market leaders). Because of its high relative market share, Stars produce large sums of cash but often need large investments to battle rivals and sustain their growth rate.
In order to ensure future cash flows in the long run, effectively diversified businesses should still have some stars in their portfolio. In addition to the promise that Stars provides for the future, they are also very nice to have for the image of your company.
Cash Cows (high share, low growth)
Eventually, market growth could decline after years of operating in the industry and sales may stagnate. Your stars are likely to turn into cash cows at this point. Profits and cash flows are projected to be high, since they still have a significant relative market share in a stagnating (mature market.
Investments needed should also be low because of the lower growth rate. Therefore, cash cows usually produce cash in excess of the amount of cash required to sustain the business.
For investments in other business units, this ‘excess cash’ should be ‘milked’ from the Cash Cow (Stars and Question Marks). Ultimately, Cash Cows add balance and stability to a portfolio.
Dogs (low share, low growth)
Dogs are called business units in a slow-growth or declining market with a limited relative market share. Usually, these units break even (they neither generate nor consume a significant amount of cash) and generate just enough cash to sustain the market share of the company.
Thus, for investors, these companies are not so interesting. Dogs are likely to be divested or liquidated, as there is still capital involved in these business units that could be used in units with more promise.
What is a BCG Matrix used for
The majority of business models evaluate conditions and products or services that are already profitable. It is easy to recognize the current money makers, but what about the future? The BCG Matrix is capable of doing just that.
A portfolio management framework
The BCG Matrix is designed to assist with strategic planning and growth opportunities in the long term. This is achieved by portraying the brand portfolio of a company on the basis of its relative market shares and future growth in the industry.
Companies will now determine where to invest with this matrix, whether to discontinue or develop products, or identify changes in offerings that will keep the business profitable in years to come.
The BCG Matrix was based on the logic that market leadership leads to superior returns that are sustainable and high growth rates show the markets where leadership should be built.
Ultimately, a self-reinforcing cost advantage is achieved by the market leader that rivals find difficult to duplicate. These high rates of growth therefore signal which markets have the greatest potential for growth.
When to use BCG Matrix
This BCG matrix would be included in the analysis section of a strategic plan or a marketing plan. It is mainly part of the internal analysis of the company as it considers the relative strengths and opportunities of the overall portfolio of the company.
It may also be included in the “competitive analysis” portion of the company’s reported plans if the BCG matrix is also plotted by rival organizations and portfolios.
Then in the strategy (and perhaps the budgeting) section of the strategic and/or marketing plans, reference should be made to the guidance provided by the BCG matrix (which would have been included in the earlier section/s of the documented plan.)
The BCG matrix is used if:
- The firm is a large manufacturer
- The company has a wide range of products or if there are many business units (SBUs)
- In certain markets the firm has fair amounts of market share.
- The company likes being analytical and having a strategic view of its planning.
Using the Tool
Although BCG analysis has lost its importance due to many limitations, it can still be a useful tool if performed by following these steps:
- Step 1. Choose the unit
- Step 2. Define the market
- Step 3. Calculate relative market share
- Step 4. Find out market growth rate
- Step 5. Draw the circles on a matrix
Step 1. Choose the Unit
The BCG matrix can be used as a unit to evaluate SBUs, distinct labels, products or a business itself. Which unit would be chosen would influence the analysis as a whole. Therefore, identifying the unit for which you will do the analysis is important.
Step 2: Define the Market
Defining the market is one of the most critical things to do in this analysis. This is because poor classification can lead to an incorrectly identified market.
For example, if we were to evaluate the Daimler Mercedes-Benz car brand in the passenger vehicle segment, it would end up as a dog (it holds a relative market share of less than 20 percent), but in the luxury car market, it would be a cash cow.
To better understand the portfolio position of a firm, it is necessary to clearly identify the market.
Step 3: Calculate Relative Market Share
In terms of sales or market share, relative market share may be measured. It is determined by dividing the market share (revenues) of your own brand by the market share (or revenues) of your largest rival in that business.
For instance, if the market share of your rival in the refrigerator industry was 25% and the brand market share of your business was 10 percent in the same year, your relative market share would be just 0.4. Relative market share is given on x-axis.
Relative Market Share = Your Firm’s Market Share (or revenue) / Largest Competitor’s Market Share (or revenue)
Step 4: Find out market growth rate
To find the rate of growth for the industry, online industry reports can be used. If this is not possible, then the annual sales growth of the industry’s leading companies can be calculated by looking at it. This measurement is a percentage on the y-axis and is plotted.
Step 5: Draw the circles on a matrix
You should be able to plot your brands on the matrix after computing all the steps. For each brand, you can do this by drawing a circle. The size of the circle should equate to the proportion of the brand’s business revenue.
Example of BCG Matrix
Example of BCG Matrix– L’Oréal
L’Oréal S.A. is a French personal care company headquartered in Clichy, Hauts-de-Seine with a registered office in Paris. It is the largest cosmetics company in the world and has established field operations focusing on hair color, skin care, sun protection, make-up, perfume, and hair care.
The Company has a large range of brands in four divisions: Consumer Products, L’Oréal Luxe, Products for Professionals and Active Cosmetics.
It contains, among others, L’Oréal Paris, Maybelline New York, Garnier, Lakme, Yves Saint Laurent, Giorgio Armani, Kiehl’s, Krastase, La Roche-Posay and SkinCeuticals.
It provides a wide range of items in six market segments: skincare, cosmetics, haircare, hair coloring, fragrances and others. The offer of skincare includes facial skincare, face cleaners, body care and products for sun protection. The Company owns stores and ecommerce websites. It is active globally.
Step 1: Choose the product/firm/brand
We choose the firm L’Oréal for analysis.
|L’oreal Luxe||Active Cosmetic Division||Consumer Product Division||Profession Products|
Viktor&Rolf Matson Martin
La Roche-Po say
|L’Oreal Paris |
L’Oreal Professional Kerastase Matrix
Art of Hair
Step 2: Identify Market
The chosen market is the Cosmetics Industry which includes primarily- Skincare, Makeup, Haircare, Hair color and Fragrances.
Step 3: Calculate Relative Market Share
|L’OREAL Category||Market Share (1)||Leading Rival||Rival’s Market Share (2)||Relative Market Share (1)/(2)||Category Growth Rate|
|$31.6 Bn |
|$24 Bn |
Step 4: Find out Market Growth rate
Overall Growth rate in Cosmetics Industry (as of 2018) = 6.4%
Step 5: Draw the circles on a matrix
BCG Matrix tips
To perform a BCG analysis, some valuable tips are:
- Collaborate-there would be a better result for a study with multiple viewpoints.
- Using the skills and resources inside the organization that are already available.
- Along with other approaches, such as SWOT analysis, Porter’s Five Powers, competitor analysis, or scenario preparation, use BCG Matrix.
- To track changes in the market climate, integrate the study into an ongoing process.
- Try not to get bogged down by gathering large quantities of quantitative information without adequately evaluating and interpreting the data.
- Don’t leap to the past or present-based conclusions about the future.
Advantages and Disadvantages of BCG Matrix
There are many benefits of the BCG Matrix, including:
- The BCG-Matrix is useful for executives to determine the balance in the existing Stars, Cash Cows, Question Marks and Dogs portfolio of companies.
- BCG-Matrix is applicable to large organizations that are searching for impacts on volume and experience.
- The model is simple and easy to understand.
- It offers a foundation for management to decide and plan for future actions.
- If the experience curve can be used to its benefit by a company, it should be able to develop and sell new goods at a price that is low enough to achieve early market share leadership. It is destined to be lucrative until it becomes a star.
Some Limitations of the BCG Matrix include the following:
- Only two dimensions, relative market share and market growth rate, are used by BCG Matrix. These are not the only profitability, attractiveness or performance metrics.
- It neglects the effects of brand synergy.
- Company with low market share can also be profitable.
- High market share does not necessarily translate to high profits because there is often a high cost that goes into having a high market share.
- Dogs can often assist the company or other products in gaining competitive advantage.
- The model neglects small competitors that have fast-growing market shares.