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What is the BCG matrix?


What is the BCG matrix?

What is BCG Matrix? It is a form of portfolio analysis, one of the most popular analytical tools used in product management and brand marketing. The Growth-share matrix was created in 1969 by Bruce Henderson — the founder of Boston Consulting Group. His idea occurred to be very successful — the method has been used by the world’s biggest companies helping them in executing company vision.

 

The horizontal axis of the Growth-Share matrix measures the product strength in the analyzed market by using the amount of market share of the product. Using a comparison of the size of shares to other companies, the BCG matrix can also help companies determine their competitiveness. The vertical axis represents the market growth of products in the company portfolio.

 

The scale of the matrix is also essential. It is necessary to know that the market growth rate depends on the industry, and the variance of this factor is high. However, a growth rate lower than 10% is considered low, while a growth rate greater than 10% is recognized as high.

BCG matrix is not perceiving each factor separately. It focuses on the relationship between elements and, on their basic, select categories.

Categories of product BCG models in the matrix

Stars

Stars are market leaders that have high growth rates. They are potential market leaders and have huge potential but also require a lot of expenses. On the one hand, they generally have increased sales and can bring a lot of cash. On the other hand, stars need constant and significant expenses. Companies should make huge investments to maintain their current growth rate and successfully compete with other strong companies on the market. Every company should always have some stars to be well-diversified. Having started in the company portfolio guaranteed profits in the future. Moreover, Stars not only ensure long-term cash flows but also attract the attention of investors and strengthen the corporate image. When the growth rate slows down, the stars become cash cows.

 

Cash cows

The cash cows category includes products that have a high market share but low growth rates predictions. Each cash cow is an example of a market leader that generates significant profit. In contrast to stars, a cash cow does not need such enormous spending. Having a relatively high number of cash cows in a company portfolio should be the primary aim of most companies. Cash cows generate a high amount of cash like Stars, but firms spend low money investing in cash cows due to low growth rates. They provide more stability and reduce company risk.

 

Question marks

Question marks are famous for venture or start-ups. They are products that have a high potential. Investing in question marks involves a large amount of money — they are marked by far more cash consumption than cash generation. For this reason, every question mark investment should be analyzed precisely. Companies should determine company vision and decide whether they want to risk a lot of money on question marks or to have a more balanced portfolio. When Question marks have rapid growth, they become market leaders – Stars. In another scenario, they may not be successful and become Dogs as a result. Question marks are typical for start-ups when the company’s mission is to invest more than product generate and have massive growth in a short period.

 

Pets

Pets are products with low growth and small potential. They also have a common market share. For this reason, they hardly ever experience investor interest. Pets involve small amounts of spending but weakly generate enough cash to keep the market share. The company’s mission is to invest some money in products with more potential and minimize or liquidate pets in the portfolio.

 

How to use it and build a perfect portfolio?

Bruce Henderson said many years ago: “Only a diversified company with a balanced portfolio can use its strengths to capitalize on its growth potential truly,” and it holds today.

The first step before creating a portfolio is to understand your company’s goals. Next, the firm should define the company’s mission and vision statement. It is essential to make your company vision transparent. Your employees should understand and support your idea. Be thinking forward when creating it, consider your industry trends, how your industry’s landscape will change in the next few years.

 

It is crucial to choose the best marketing strategy which matches the company’s vision. There are different approaches to investing in stars depending on our aim. We can select a defensive method in a situation when we want to maintain our current market position. On the other hand, we can apply an aggressive strategy, focusing on increasing company market shares.

However, there are universal rules that apply regardless of the chosen strategy. Every firm should have in their portfolio products in which to invest money — Question Marks and Starts. To invest money in these products, we need wallet components that generate large amounts of cash — Cash Cows. Moreover, every product should have the potential to profit in the future. Otherwise, it isn’t beneficial and should be removed from your wallet.

 

Strengths and weaknesses of BCG matrix

The BCG matrix has many advantages, and it is not without reason that this method has been on the market for so many years. The most important benefits are suggestibility, readability, and simplicity. After applying this method, we can easily change its strategy and, consequently, improve its financial situation in the long term. In addition, it allows indicating the competitive position and defining the company’s market situation, opportunities, and strategic threats.

 

Despite its many advantages, the Growth-Share matrix is ​​not without drawbacks and cannot be applied to every market and every situation. It involves accurate estimates of the position of the company’s products, the pace of market development, and the analysis of the degree of connections between the sales volume of individual products and their markets. In addition, the BCG matrix is ​​mainly used in traditional markets with a classic product life cycle model. For this reason, it may be inadequate in some cases, such for example in new technology markets.

 

For other business tools, check out our article on how to conduct a market analysis?

Błażej Makowski

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