BCG matrix, also known as the Boston Consulting Group Matrix, is a management tool that classifies companies on the basis of their market share and growth rates.
The BCG matrix is often used by business people to make strategic decisions about their firm’s product portfolio, which lines of businesses to invest in for growth, and whether or not to sell off businesses with low prospects.
Origins of BCG Matrix
The BCG matrix is a powerful tool for businesses. It was first developed in 1968 by Bruce Henderson and his colleagues to help multinational companies place various products or services on a 2 x 2 chart based on their market growth and relative share of their industry.
The BCG Matrix is based on two factors:
- Market growth: Market growth is the rate at which the market for a product or service is growing.
- Market share: Market share is the percentage of the total market that a company has.
Companies use the BCG Matrix to decide which products or services to invest in. Products or services that are in high-growth markets and have a high market share are considered to be “stars.” These are products or services that a company should invest in because they have the potential to generate a lot of revenue.
Products or services that are in low-growth markets and have a low market share are considered to be “dogs.” These are products or services that a company should not invest in because they are not likely to generate much revenue.
The BCG Matrix is still used by businesses today because it is a simple, easy-to-understand tool that can help companies make decisions about which products or services to invest in.
How is the BCG Matrix Done?
The BCG matrix is a tool that helps businesses to understand how different products or services contribute to their overall growth. The matrix is divided into four quadrants: stars, cash cows, question marks, and dogs.
- Stars are products or services that are growing quickly and generating a lot of revenue for the company.
- Cash cows are products or services that are not growing as quickly but are still generating a lot of revenue.
- Question marks are products or services that have potential for growth but are not yet generating much revenue.
- Dogs are products or services that are not growing and are not generating much revenue.
The BCG matrix can help businesses to understand where they should focus their resources in order to achieve growth.
For example, if a company has a lot of question mark products, it may want to invest more resources in these products in order to make them into stars. Alternatively, if a company has a lot of dog products, it may want to consider discontinuing these products altogether.
7 Reasons Why The BCG Matrix Is Still Useful For Businesses
The BCG Matrix is still a valuable tool and useful for businesses for a number of reasons:
- Framework to Analyze Product Portfolio:
The BCG matrix is a reasonably good framework for analyzing product portfolio of a business and determining which businesses are most likely to generate growth.
- Helps Understand the Different Types of Marketing Strategies:
The four cells of the BCG Matrix helps in understanding the different types of marketing strategies that can be employed by businesses i.e. strategies like market penetration, market skimming, market development and product development respectively.
- Useful Tool to Compete Against Rivals:
The BCG Matrix helps in understanding how a business should compete against rivals (either new or existing). A strategy that helps the business to beat its rivals using superior growth rate is considered as winner strategy and is placed in cell ‘A’; while inferior growth rate strategy, which fails to beat its rival business is placed in cell ‘D’. A strategy that falls in the ‘B’ and ‘C’ cells is considered as dog strategies and is avoided.
- Clear Picture of Product Profitability:
If a business has several products or services, using BCG Matrix helps in understanding the product profitability at a glance. The cell in which a product falls gives an idea about the product’s growth potential and its profit level.
- Helps in Understanding Business Situation:
Using the BCG Matrix helps to understand the current business situation by comparing it with other businesses operating in similar field (i.e., companies competing for same customers and resources).
- Helps in Setting Strategies:
It helps in setting strategies of a long-term as well as short-term nature by understanding the current position of business unit (i.e., company).
- Decides Which Business Unit Should Be Divested or Acquired:
It is also used for deciding which business unit should be divested and which one should be acquired for further growth by looking at its market share, relative market size and its earning ability.
Best Practices for using the BCG matrix to do an analysis
There are four main best practices for using the BCG matrix to do an analysis.
- The first best practice is to use data that is as up to date as possible. This will ensure that the analysis is accurate and reliable.
- The second best practice is to use a variety of data sources. This will help to ensure that the analysis is comprehensive and objective.
- The third best practice is to use a variety of analytical tools. This will help to ensure that the analysis is thorough and robust.
- The fourth best practice is to communicate the results of the analysis clearly and concisely. This will help stakeholders understand the implications of the findings and make informed decisions.
Overall, the BCG matrix is still a useful tool for businesses when it comes to allocating resources and making strategic decisions.
While it may have some limitations, the framework provides a solid starting point for companies to understand where they should be investing their time and money.
With a little bit of tweaking, the BCG matrix can still be an incredibly valuable asset for businesses large and small.