How to Use the BCG Matrix Model to Your Organization or Business?
Abbreviation of ‘Boston Consulting group’s ‘is known as the BCG matrix. This BCG matrix is designed for the purpose of helping long-term planning of strategy, for the benefit of the business and its growth opportunities by means of a review of its product portfolio for the purpose of deciding most suitable investment to obtain maximum Return on Investment. This also decides about discontinue as well as develop products. It is also named as the Growth Share Matrix.
How Do You Prepare a BCG Matrix?
BCG matrix is prepared by executing the following steps:
Step 1: Selection of the Product:
BCG matrix is utilised for this purpose by:
- Analysis of Business Units,
- Separation of brands, products or considering an organisation as a unit
Step 2: By defining and market study
Step 3: By comparison and by calculation of the relative market share
Step 4: a study of the market growth rate.
Step 5: by drawing the circles on a matrix.
What Are the Four Categories of BCG MATRIX?
It is primarily based on planning in a portfolio dependent study and observation. So, a company’s business units can be classified into four categories:
- Cash Cows
- Question Marks
It is necessary to conceptualise the above four processes related to BCG matrix in a better way by making one for L’Oréal in the sections to follow.
How Do You Find a BCG MATRIX?
By following the steps indicated below, you can find a BCG matrix.
Step 1: Induction of BCG Matrix.
Step 2: Reach the Ribbon > Insert > Other Charts and click Bubble Chart.
Step 3: Change X-axis values.
Step 4: Click Edit to change the source of data.
Step 5: Change series X values.
Step 6: Selection of Relative Market Share values.
Step 7: Your BCG Matrix chart is a bit changed.
How to Find Market Growth Rate?
The growth rate of industries can be easily estimated using free online resources. Alternatively, it can be calculated by estimating the average rate of growth of revenue of the reputed companies. Usually, the Market growth rate is represented in percentage terms.
The market growth rate is usually estimated by the formula as stated below:
(Product’s sales in the current year – Product’s sales of the previous year)/Product’s sales last year
High growth rated markets are the ones where the total market share gained is expanding; this results in a lot of advantages for all companies in gaining monetary profit.
Step 5: Drawing the Circles over a Matrix
After the above calculation, it needs only to plot the brands on the matrix. The x-axis represents or shows the relative market share, and the y-axis indicates the growth rate of the company. The similar circle can be plotted for each unit, brand, Product, and the size of which must correspond ideally to the proportion of revenue generated by the company.
What the Question Marks Signify In the BCG Matrix?
The feature of question marks represents a business to have high growth prospects but a low share in the market. They consume a significant amount of cash but with little return. Ultimately, ‘question marks ‘lose money. However, as these business units grow rapidly, they have the potentiality to upgrade into stars by entering a higher growth-oriented market.
How to Use a BCG Matrix?
After defining four categories of BCG market, we can review the strategies of the company by using each category as discussed below:
Stars: Location of the products in this quadrant is highly attractive in nature as they are located in a robust category, and these products are highly competitive in nature. The huge potential has been found in this category for high revenue growth. This is due to its high market share and a high growth rate. It is expensive to develop but are worth for investment for promotion to the long extent of their Product Life Cycle. In the event of its success, a star may be a cash cow in the event of maturity, assuming they keep the same market share unchanged.
Strategic Choices, As Indicated Below:
- Vertical Integration,
- Horizontal Integration,
- Market Penetration,
- Market Development, And
- Product Development
Question Marks: Most businesses start off as question marks. Huge investments are necessary to achieve or protect market share. Question mark sector has the potential to become stars category and ultimately cash cows but can also become dogs or exit. It requires high Investments for question marks; otherwise, this category may result in negative cash flow.
Similar to stars, the category of Question also marks not always gets success, and if despite after large investment, they cannot fetch profit and gain market share, they become dogs category. Therefore, very careful observation and review are necessary before making investment decisions in this category.
Strategic Choices Are The Follows:
- Market Penetration,
- Market Development,
- Product Development,
- Process of Investment.
Cash Cows: In this category, cash generates profits by the investment of as little cash as possible. It needs low-cost support and needs to be managed for continued profits & cash flow. Large corporate or SBUs are considered efficient, innovative and should have the potential to become stars. It requires maintaining a healthy market status and should defend the market share of the business house or investors. The company should take advantage of sales volume and leverage the size of operations. It can support other business too.
Strategic Choices: Product Development, Diversification
Dogs: Low market share, make it a face of cost disadvantages, so they need enough cash to reach break-even, but they are rarely, if ever, worth investing. This Dog sector should be liquidated if there are fewer prospects for it to gaining market share. This is rested at a declining stage of the Product Life Cycle, requiring a minimum number of dogs in the company.
Advantages of BCG Matrix
- It is simple and easily understood
- It can quickly and merely show the opportunities open to you,
- This can identify how corporate cash resources can be invested suitably to maximize a company’s growth and profitability.
- BCG Matrix can prepare a framework for allocating resources among different products
Limitations of BCG Matrix
This type of matrix has two-dimensional applications as given below:
- Relative market share and
- Market growth rate
Limitations are indicated below:
- BCG matrix is not the only indicators of profitability of a business, attractiveness or success.
- It does not care for the effects of synergy from brand to brand.
- The company which has a minimum market share can become profitable as well.
- It has been observed that High market share does not always produce high profits, since there is also a high cost in obtaining a high market share.
- It has been observed that dogs may benefit the business or other products in achieving and gaining competitive advantage.
- It does not care for small competitors that have a fast-growing component of market shares.
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