How to Use the BCG Matrix Model for Your Organization or Business?
The ‘Boston Consulting group’s ‘abbreviation is the BCG matrix. This BCG matrix is designed to help long-term strategic planning for the benefit of the business and its growth opportunities by means of a review of its product portfolio to decide on the most suitable investment to obtain maximum Return on Investment. This also determines about discontinuing as well as developing products. It is also named 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: Draw 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
- Stars
- Question Marks
- Dogs
It is necessary to conceptualise better the above four processes related to the BCG matrix by making one for L’Oréal in the following sections.
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 counting the reputed companies’ average growth rate of revenue. Usually, the Market growth rate is represented in percentage terms.
The market growth rate is usually estimated by the formula stated below:
(Product’s sales in the current year – Product’s sales of the previous year)/Product sales last year
High growth-rated markets are the ones where the total market share gained is expanding; this results in many 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 company’s growth rate. A similar circle can be plotted for each unit, brand, and Product, and the size of which must correspond ideally to the company’s revenue.
What do 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 increase, 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 the BCG market, we can review the strategies of the company by using each category as discussed below:
Stars: The location of the products in this quadrant is highly attractive as they are located in a robust category, and these products are highly competitive. A huge potential has been found in this category for high revenue growth. This is due to its high market share and high growth rate. It is expensive to develop but is worth investment for promotion to the long extent of its 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 as question marks. Huge investments are necessary to achieve or protect market share. The question mark sector has the potential to become stars category and ultimately cash cows but can also become dogs or exits. It requires high Investments for question marks; otherwise, this category may result in negative cash flow.
Like stars, the category of Question also does not always succeed; if, after a large investment, they cannot fetch profit and gain market share, they become the dog category. Therefore, careful observation and review are necessary before investing 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 investing 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 and 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 its operations. It can support other businesses too.
Strategic Choices: Product Development, Diversification
Dogs: Low market share makes 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 gaining market share. This is 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 indicator of the profitability of a business, attractiveness or success.
- It does not care for the effects of synergy from brand to brand.
- A company which has a minimum market share can become profitable as well.
- It has been observed that a 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 a competitive advantage.
- It does not care for small competitors with a fast-growing market share component.
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