BCG Matrix: Examples and How to Use It

Businesses can use the BCG Matrix to make strategic product portfolio decisions. It can help them allocate resources, prioritize investment, and decide which products to invest in and which to divest. However, it’s important to remember that the matrix is just one tool and should be used with other strategic analysis tools.

History

Bruce Henderson, founder of the Boston Consulting Group, developed the BCG Matrix in the 1970s. It was created as a portfolio or corporate planning tool to help companies analyze their product lines and decide which products to invest in and which to divest. Based on four quadrants, the concept classifies a company’s Strategic Business Units (SBU).

According to Bruce Henderson’s model, increasing market share will increase cash generation. Equally, it assumes that establishing a product in a growing market will require continual investment to produce the goods/services and to increase capacity. It’ll undoubtedly consume cash.

Advantages

There are several advantages to using the BCG matrix, including the following:

• The concept is clear and easy to understand.
• This tool assists in efficiently evaluating available opportunities and devising strategies to optimize their potential.
• It helps companies determine how to deploy cash resources best to maximize future growth and profitability.
• This matrix provides a framework for allocating resources across different products and allows a glance comparison of the product portfolio.

Limitations

Despite its many advantages, the BCG Matrix is not without its constraints. Some of its limitations include the following:

• The BCG Matrix employs two dimensions, namely relative market share, and market. growth rate, which doesn’t exclusively indicate profitability, attractiveness, or success
• The synergy between brands is ignored.
• Even businesses with a low market share have the potential to generate profits.
• Obtaining a high market share can come with high costs and doesn’t always result in increased profits.
• Dogs can occasionally provide a competitive edge for businesses or products.
• The model doesn’t account for small competitors with rapidly increasing market shares.

BGC Matrix vs. The Ansoff Growth Matrix

The BCG Matrix and the Ansoff Growth Matrix are popular strategic planning tools businesses use to analyze their product portfolio and identify growth opportunities. However, they differ in their approach and focus.

The BCG Matrix analyzes a company’s existing product portfolio based on market growth rate and market share. The matrix divides products into four categories: stars, cash cows, question marks, and dogs. It helps businesses decide about resource allocation and investment based on the potential for growth and profitability.

On the other hand, the Ansoff Growth Matrix focuses on analyzing a company’s growth opportunities based on two factors: products and markets. The matrix divides growth strategies into four categories: market penetration, market development, product development, and diversification.

The Ansoff Growth Matrix allows businesses to identify potential growth opportunities and make strategic product and market expansion decisions.

Explaining the Four Quadrants of The BCG Matrix

BCG Matrix consists of four quadrants, where products can fall, each with its characteristics and strategic implications. Below is a brief explanation of each:

Question Marks – Construction (High Growth, Low Market Share)

The product group known as the “Question Marks” has a low market share but is experiencing high growth. Although not currently very profitable, these products have the potential for market share growth and can become cash cows and, ultimately, stars with appropriate investments.

However, their low market share leaves them vulnerable to becoming Dogs if investments are not made wisely.

Example

Introducing a new smartwatch to the market may prove challenging, despite the market’s rapid growth. One possible reason is that big corporations have established differentiation strategies and significant marketing budgets.

Stars – Holding (High Growth, High Market Share)

The product group under “Stars” has a significant market share and is experiencing rapid growth. Investing in this group is beneficial in maintaining their market share and further development.

As the market develops over time, certain products become dominant and hold significant market share in a market with limited growth. These cows are milked for funding purposes to support the development of new innovative products.

Example

Apple holds a significant market share in the smartwatch industry, experiencing considerable growth. The Apple Smartwatch serves as an example of this trend.

Cash Cows – Harvesting (Low Growth, High Market Share)

“Cash Cows” have a high market share but minimal growth potential. The reason is that they’re operating in a mature market that lacks innovation and growth. However, they’re profitable and require minimal investment to maintain their position. 

Revenue from these products can be used to invest in Stars or Question Marks.

Example

Rocket ice creams belong to the OLA market, which has a substantial market share despite its low growth. The profits from these ice creams can be reinvested by OLA, possibly into new products like alcoholic ice creams, which have greater market potential.

Dogs – Divestment (Low Growth, Low Market Share)

“Dogs” have a small market share and operate in a slow-growing market. They don’t generate cash and don’t require large amounts of it either. They aren’t a good investment because they have low or negative cash returns and may need significant financial support. Their low market share also puts them at a cost disadvantage.

Example

A pharmaceutical company developing a COVID-19 vaccine may face a competitive market with limited market share and no potential for growth.

BCG Positions Through Product Lifecycle

One way to use the BCG matrix is to analyze the product lifecycle of each product in your portfolio. The product life cycle comprises four stages: introduction, growth, maturity, and decline. By understanding where each product is in its lifecycle, you can determine its appropriate position on the BCG matrix.

In the growth stage, products are typically in the “question mark” position on the BCG matrix. They have a low market share in a high-growth market. These products require significant investment to grow and capture market share, but they have the potential to become stars.

As products mature and gain market share, they move into the “star” position on the BCG matrix. These products have a high market share in a high-growth market. They are generating significant revenue and profits for the business.

Over time, stars may become cash cows. In the cash cow position, products have a high market share in a low-growth market. These products generate significant cash flow for the business but require less investment than question marks or stars.

Finally, products may end their lifecycle and move into the “dog” position on the BCG matrix. These products have a low market share in a low-growth market. They may generate limited revenue and profits and require significant investment to maintain or improve their position.

Examples

Coca-Cola is a globally recognized consumer product company with multiple product lines that can be classified into various categories using the BCG Matrix. An example of this categorization for some of their products is provided below.

Coca-Cola is a globally recognized consumer product company with multiple product lines that can be classified into various categories using the BCG Matrix. An example of this categorization for some of their products is provided below.

• Stars – Dasani, Coca-Cola’s bottled water brand, is currently in the product life cycle in the international market. The company can invest in marketing and advertising to boost market share and growth.
• Cash Cows – The brand “Coca-Cola” has established a strong presence in the carbonated soft drink market and is a significant revenue source.
• Question Marks –There is a potential opportunity in the Fanta and other beverages market, as consumers are becoming more health-conscious. Coca-Cola could either discontinue these products, improve quality, or invest in advertising to increase customer appeal.
• Dogs – Considering its low market share and lack of profitability, Coca-Cola may discontinue its Diet Coke product line, especially since its similar product, Coca-Cola Zero, is more prevalent among consumers.

How To Make A BCG Matrix

Here are the steps to make a BCG matrix:

Step 1: Identify the Strategic Business Unit or Product-Market Fit

The BCG matrix is a helpful tool for analyzing business units, whether individual brands, products, or a firm as a whole. Choosing the particular unit to assess is crucial since the decision impacts the whole process.

Step 2: Define the Market

Accurately defining the market is essential for understanding portfolio position. An incorrect market definition can lead to a misclassification of the product.

For example, when analyzing the Mercedes-Benz brand in the passenger vehicle market, it would be classified as a dog due to its market share below 20%. However, it would be a cash cow in the luxury car market.

Step 3: Calculate the Relative Market Share

Based on revenue or unit volume, market share measures how much of a company’s total market it serves. In the BCG matrix, relative market share is used to compare a product’s sales to those of its main competitor for the same product. 

Here’s how to compute the relative market share:

Relative Market Share = Product’s sales this year/Leading competitor’s sales this year

Relative market share can be calculated by comparing your firm’s brand market share to your competitors in a given industry. For example, if your competitor has a market share of 25% and you have a market share of 10%, your relative market share would be 0.4.

Step 4: Find Out the Market Growth Rate

You can determine the growth rate of an industry by using online resources or by analyzing the average revenue growth of leading companies. The market growth rate is typically presented as a percentage.

The calculation is as follows: 

(Product’s sales this year – Product’s sales last year) / Product’s sales last year

High-growing markets have a large pool of potential customers, creating numerous opportunities for companies to generate revenue.

Step 5: Draw the Circles on a Matrix

Once you have determined each product or business unit’s market share and growth rate, the next step is to draw the circles on a matrix. The BCG matrix is a simple two-by-two grid with a market share on the x-axis and a growth rate on the y-axis.

To draw the circles, you will need to determine the size of each circle based on the market share of the product or business unit. The larger the market share, the larger the circle. You can use software tools or manually create the circles.