Complete Guide
to the BCG Matrix: Growth Share Matrix
Do you know that many companies fail because of common problems like tough competition, financial mismanagement, poor product quality, bad leadership, and changing market trends? For example, about 20-25% of startups fail due to competition, and around 30% fail because of money issues.
Here’s a helpful tool called the BCG Matrix that can assist companies in overcoming these challenges. It divides products into four categories: Stars (highly successful), Question Marks (potentially successful but uncertain), Cash Cows (steady income generators), and Dogs (struggling products).
By using the BCG Matrix, companies can see which products are worth investing in and which might need improvement or removal. This helps them make better decisions, manage resources wisely, and adapt to market changes, improving their chances of success and reducing the risk of failure.
What is BCG Matrix?
The BCG Matrix, created by the Boston Consulting Group hence, also known as the Boston Consulting Group Matrix, is a strategic tool used for portfolio analysis to evaluate a company's business units (or products) based on their market growth rate and relative market share. Developed by Bruce Henderson in the 1970s, it helps businesses allocate resources, prioritize investments, and manage their portfolio of products or services effectively.
Understanding the BCG Matrix
It is a strategic tool used to evaluate a company’s product portfolio by categorizing products into four groups: Stars, Question Marks, Cash Cows, and Dogs, each representing a different category based on two key dimensions:
Market Growth Rate
This dimension indicates the attractiveness of the market in which a product or business unit operates. High growth rates suggest a dynamic and expanding market, while low growth rates indicate a mature or declining market.
Relative Market Share
This dimension measures a product's or business unit's market share relative to its largest competitor. A high market share implies strong competitive positioning, while a low market share suggests weaker positioning.
The combination of these two dimensions results in four quadrants
1. Stars: High Market Growth Rate and High Relative Market Share.
Stars are leaders in the high-growth market. They generate significant revenue and have potential for further growth. However, they often require substantial investment to maintain their position and capitalize on their growth potential.
Strategy
Invest for Growth
Stars require significant investment to maintain their leading position and to support continued growth. This investment can be in marketing, R&D, infrastructure, or expanding distribution channels.
Enhance Competitive Edge
Invest in differentiating the product or service further to sustain the competitive advantage.
Scale Up
As the market grows, expanding operations and scaling up production can help meet increasing demand and strengthen market position.
Prepare for Transition
Develop strategies to transition Stars into Cash Cows once the market growth slows down, ensuring they are well-positioned to generate steady revenue in the future.
2. Question Marks (or Problem Children): High Market Growth Rate and Low Relative Market Share.
These products or units have low market share but operate in high-growth markets. They present opportunities but require substantial investment to increase their market share. The challenge is determining whether they can become Stars or will eventually become Dogs.
Strategy
Evaluate Potential
Carefully assess whether the business unit can gain market share and become a Star. Consider factors like market dynamics, competitive landscape, and internal capabilities.
Decide on Investment
If the potential is high, invest heavily to increase market share. This may involve aggressive marketing, product development, or scaling operations.
Monitor Performance
Regularly review the performance and adjust strategies based on market feedback and competitive actions.
Consider Divestment
If the unit shows little promise of gaining significant market share or if the cost of investment outweighs potential benefits, consider divesting or discontinuing the unit.
3. Cash Cows: Low Market Growth Rate and High Relative Market Share.
These entities have high market share in a low-growth market. They generate more cash than they consume, making them valuable for funding other areas of the business. They typically require less investment and provide stable revenue.
Strategy
Optimize Efficiency
Focus on maximizing profitability and operational efficiency. Cost management and process improvements can enhance margins.
Extract Cash
Use the cash flow generated by Cash Cows to fund other business units, particularly Stars and promising Question Marks.
Maintain Position
Implement strategies to defend and maintain market share. This might involve incremental improvements, customer retention programs, or leveraging brand strength.
Manage Decline
Prepare for eventual market decline by considering options like product modifications, niche marketing, or exploring new market opportunities.
4. Dogs: Low Market Growth Rate and Low Relative Market Share.
These products or units have low market share and operate in low-growth markets. They do not generate significant cash flow and may drain resources. Strategic options often include divesting or discontinuing these products.
Strategy
Minimize Losses
Focus on cost control and operational efficiencies to reduce losses. Avoid significant investments that do not offer substantial returns.
Consider Divestment
Evaluate the potential for divestment or discontinuation. If the unit does not align with the company’s strategic goals or cannot be turned around, it may be best to sell or shut it down.
Repositioning
If there is some strategic value, explore options to reposition the unit. This could involve finding niche markets, diversifying product lines, or leveraging existing assets in a different way.
Utilize Synergies
Look for opportunities where the unit can provide complementary value to other parts of the business, perhaps through cost-sharing or bundling with more successful products.
Benefits of BCG Matrix
1. Simplified Portfolio Analysis
The BCG Matrix provides a clear and straightforward framework for analyzing a company’s portfolio of products or business units. By categorizing them into four distinct categories—Stars, Question Marks, Cash Cows, and Dogs—it simplifies the process of evaluating their performance and strategic value.
A company with a diverse range of products can quickly see which ones are performing well and which are not, making it easier to decide where to allocate resources.
2. Effective Resource Allocation
The BCG Matrix helps businesses allocate resources more effectively by identifying which products or business units need investment and which should be phased out or divested.
Resources can be directed towards Stars to fuel their growth, while funds from Cash Cows can be used to support high-potential Question Marks.
3. Strategic Focus and Planning
The matrix aids in developing targeted strategies for different categories of products or business units. This focused approach helps companies create strategies that align with the growth potential and market position of each unit.
For a product categorized as a Star, the strategy might involve aggressive marketing and investment in innovation, whereas a Dog might be subject to cost-cutting measures or divestment.
4. Identification of Growth Opportunities
By highlighting which products or business units are in high-growth markets, the BCG Matrix helps companies identify potential areas for expansion and growth.
Products classified as Question Marks are in growing markets but have low market share. Identifying them as growth opportunities can lead to strategies aimed at increasing their market share.
5. Performance Evaluation
The matrix provides a visual representation of how well different products or business units are performing relative to each other. This helps in assessing their relative strength and market position.
A company can see at a glance which products are strong performers (Stars) and which are lagging (Dogs), facilitating performance reviews and strategic adjustments.
6. Strategic Alignment
It aligns product strategies with overall corporate strategy by ensuring that investments and efforts are directed toward areas that will enhance the company’s competitive position and financial performance.
A company might use the matrix to align its R&D efforts with its business units' needs, focusing innovation resources on Stars and promising Question Marks.
7. Identifying Trends
Regularly updating the BCG Matrix allows companies to identify emerging trends and shifts in market dynamics, which can inform strategic adjustments.
If a product that was previously a Cash Cow starts showing signs of declining performance, it can be reclassified and strategies can be adjusted accordingly.
How to Implement BCG Matrix
Step 1: Identify and List Products or Business Units
Create a comprehensive and accurate list of all products or business units for analysis.
Compile a List
-
Inventory: List all products, services, or business units within your organization.
-
Details: For each product or unit, note down essential details such as product name, category, and business unit.
Ensure Clarity
-
Define Clearly: Make sure each product or business unit is clearly defined. This means understanding the specific market or customer segment it serves.
-
Consistency: Use consistent naming conventions and categories to avoid confusion.
Example:
Products: iPhone, MacBook, Apple Watch, Apple TV
Business Units: iOS division, Mac division, Wearables division
Step 2: Gather Data on Market Growth Rate
Assess the growth rate of the market for each product or business unit to understand the market dynamics.
Research Market Growth
-
Market Reports: Use industry reports, market research studies, and financial analysts' reports to get data on market growth rates.
-
Internal Data: Analyze your own sales data and growth trends to gauge market expansion or contraction.
Quantify Growth Rates
-
Determine Growth Trends: Identify whether the market is experiencing high growth, moderate growth, or is in decline.
-
Measure: Calculate the percentage growth of the market over a specific period (e.g., annual growth rate).
Example:
If the wearable technology market is expanding at 15% annually, this indicates high market growth. Conversely, if the market for traditional MP3 players is shrinking by 5% annually, this shows a declining market.
Step 3: Calculate Relative Market Share
Determine the relative market share of each product or business unit to understand its competitive position.
Calculate Market Share
Formula:
-
Market Share of Product = (Sales of Product / Total Sales in Market) × 100
Example:
-
If your product’s sales are $10 million and the total market sales are $100 million, the market share is 10%.
Find Largest Competitor’s Market Share
-
Identify: Determine the market share of the largest competitor in the same segment.
-
Example: If the largest competitor’s market share is 25%, this will be used in the relative market share calculation.
Calculate Relative Market Share
Formula:
-
Relative Market Share = Market Share of Product / Market Share of Largest Competitor
Example Calculation:
-
Your Product’s Market Share: 10%
-
Largest Competitor’s Market Share: 25%
-
Relative Market Share: 10% / 25% = 0.4
Interpretation: A relative market share of 0.4 means your product has 40% of the market share of the leading competitor.
Step 4: Plot Products on the BCG Matrix
Create a 2x2 matrix with market growth rate on the vertical axis (high to low) and relative market share on the horizontal axis (low to high).
Place each product or business unit into one of the following quadrants based on their market growth rate and relative market share:
Stars: High market share in high-growth markets.
Cash Cows: High market share in low-growth or mature markets.
Question Marks (Problem Child): Low market share in high-growth markets.
Dogs: Low market share in low-growth markets.
Step 5: Analyze Each Quadrant:
Stars
Invest resources to maintain or increase market share and capitalize on growth opportunities. Develop strategies for continued growth and leadership.
Cash Cows
Manage for profitability and cash flow. Consider reinvesting some profits into other areas of the business or maintaining market position.
Question Marks
Decide whether to invest for growth to increase market share or consider divestment if growth prospects are limited.
Dogs
Evaluate options for restructuring, divestment, or exiting the market to reallocate resources to more promising areas.
Applying the BCG Matrix to Apple’s Product Portfolio
Stars
iPhone 14:
The iPhone 14 series, launched in September 2022, continues to be a Star product for Apple. As of early 2023, Apple held approximately 57% of the U.S. smartphone market share. The iPhone 14 has introduced features like improved camera technology and satellite connectivity, driving strong sales and maintaining high demand.
Cash Cows
MacBook Air (M1 and M2):
The MacBook Air, particularly the M1 and M2 models, serves as a Cash Cow for Apple. The Mac segment generated $10.4 billion in revenue in Q4 2022, reflecting strong demand in the premium laptop market. While growth in the overall laptop market is moderate, the MacBook Air continues to be a top choice for consumers, providing steady profits for Apple.
Question Marks
Apple TV+:
Launched in November 2019, Apple TV+ is still considered a Question Mark. While it has gained critical acclaim and a growing subscriber base, it competes in a crowded streaming market dominated by established players like Netflix and Disney+. As of early 2023, Apple TV+ had around 20 million subscribers, indicating potential for growth but still requiring significant investment in content to increase market share.
Dogs
iPod Touch:
The iPod Touch has transitioned into the Dogs quadrant. Once a leader in portable music players, its relevance has diminished significantly with the rise of smartphones and streaming services. In May 2022, Apple announced the discontinuation of the iPod Touch, reflecting its low market share and growth potential.
