BCG Matrix is mainly used by companies to analyse the performance of their multiple products and for decision making. Companies with very large product portfolios have one major issue – Which product to put money in and which product to take money out of? This question is answered by the BCG Matrix.
Definition of BCG Matrix
The BCG matrix is a matrix designed by the Boston Consulting group back in 1970’s. It is a Matrix which helps in decision making and investments. It divides a market on the basis of its relative growth rate and market share and comes up with 4 Quadrants – Cash cow, Stars, Question marks and Dogs. Products may be categorized in any one of the quadrants and the strategies for these products are decided accordingly.
This analysis actually helps you in deciding which entities in your business portfolio are actually profitable, which are duds, which you should concentrate on and which gives you a competitive advantage over others.
Once you know which businesses stand where in your business portfolio, you also come to know which businesses need investments, which needs harvesting (making money), which needs divesting (reducing investment) and which needs to be completely taken out of the business portfolio.
For a major organization like HUL, ITC etc which have multiple categories and within the categories, they have multiple lines of products, the BCG analysis becomes very important. At a holistic level, they get to make a decision on which product to continue and which product to be divested. Which product can give new returns with good investment, and which products are reaching the apex of market share.
Building the BCG Matrix
The BCG growth-share matrix was developed by Henderson of the BCG group in 1970s. There are two axis in the BCG matrix. The X-axis which is the relative market share and the Y-axis which is the Market growth rate.
- X-Axis – Relative Market Share – The market share of the business / SBU / Product in the market as compared to its competitors and overall product/category.
- Y-Axis – Market growth rate – The growth rate of the industry as a whole is taken into consideration from which the growth rate of the product is extrapolated. This growth rate is then pitched on the graph.
Thus by having 2 basic but at the same time very important factors on X axis and Y axis, the BCG matrix makes sure that the classifications are concrete.
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Calculating the Market growth rate comprises of both industry growth and product growth rate thereby giving a fair knowledge of where the product / SBU stands in comparison to the Industry.
The market share, on the other hand, comprises of the competition and the product potential in the market. Thus when we consider growth rate and market share together, it automatically gives us an overview of the competition and the industry standards as well as an idea of what the future might bring for the product.
BCG Matrix Quadrants
Once the businesses have been classified, they are placed into four different quadrants divided into:
- Cash Cows – High market share but low growth rate (most profitable).
- Stars – High market share and High growth rate (high competition).
- Question marks – Low market share and high growth rate (uncertainty).
- Dogs – Low market share and low growth rate (less profitable or may even be negative profitability)
On the basis of this classification, strategies are decided for each SBU / Product. Let’s discuss the characteristics and strategies of each quadrant in detail.
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