The BCG matrix, also known as the Boston Consulting Group matrix or Growth-Share matrix, is a tool that can be very useful for you and your startup as it allows you to evaluate the company’s product portfolio based on its Relative Market Share and industry growth.
Get comfortable because you are about to discover all the secrets.
What is the BCG Matrix and why it is critical
The BCG Matrix-as already mentioned-is named for the Boston Consulting Group, the multinational corporation that theorized it in the 1960s.
It is a strategic planning tool for the classification of a company’s portfolio analysis and product life cycle study. Its main purpose is to identify business areas on which to focus investment. It allows, therefore, to make data-driven and, therefore, more effective strategic investment (or divestment) decisions.
The BCG matrix focuses on analyzing the so-called Relative Market Share, that is, the share that the firm has in relation to its main competitor in the relevant industry.
Knowing Market Share is important because through it you can understand how much strength your company has in the market and what the distance is between it and your main competitor. With this information you can then make better strategic decisions, both in terms of investment and the development of new business ideas.
From a graphical point of view, the BCG matrix involves the intersection of two variables on the Cartesian plane: the Growth Rate in the market (on the vertical axis), which measures the attractiveness of the market itself, and precisely the Relative Market Share (on the horizontal axis), which measures-as mentioned above-the firm’s strength in relation to its main competitor.
If the value originated from the comparison of these two variables is greater than 1, it means that the enterprise is “top of mind” in the market, that is, it is the first one that comes to consumers’ minds.
By combining the two variables, based on value, it is possible to identify the four quadrants that make up the BCG matrix and correspond to business areas, product categories, and business strategies.
Question Marks: invest or abandon?
In the upper left quadrant are products and business areas referred to as “Question Marks“. They are distinguished by high market growth (they are expanding rapidly) and low Market Share (high and risky investments are required).
In this quadrant are products or services that have recently been brought to market and which, precisely because of this, are considered a question mark. Generally, the strategy adopted is to invest in the development of the product/service and the market, while paying close attention to their performance, so that investments can be divested and focused on others in the event of negative returns. The main investments in this area are in innovation and advertising.
Stars: Tomorrow’s Opportunities
In the upper right quadrant are the “Stars“: these products/services have a high Growth Rate (they register a high ROI – Return on Investment -) and also a high Market Share (the company is very competitive).
A famous phrase by Sun Tzu reads:
“Who occupies the high ground has the advantage in the battle.”
Well, in the BCG Matrix the “Stars” represent this high ground. Indeed, markets with high Growth Rate and high Market Share offer strategic advantages. To take advantage of them, the best strategy is to invest with horizontal and vertical integrations, so that the leadership position gained can be maintained.
Cash Cows: the stability of the present
In the lower right quadrant are the so-called “Cash Cows“: these are products/services that are in a stagnant growth market but are offered by a leading firm. The Growth Rate, therefore, is low but the Market Share high.
Since they generate great liquidity without the need for large investments, the goal here is to make the most out of them and then reinvest in other areas.
Dogs: when to reduce losses
In the last quadrant, the lower left quadrant, are “Dogs” (or “Pets” in the original version): these products/services have low Growth Rate and low Market Share.
Generally we tend to disinvest because they often do not generate sufficient profits, but in some cases it might be useful to keep the “Dogs” in view to continue to preside over that market, even in the absence of particular profits.
How to apply the BCG Matrix in your business
There are three basic steps that define the BCG Matrix application process and that you absolutely must know if you want to make the most of this tool for your business.
Assess Relative Market Share
The first step in successfully applying the BCG Matrix to your startup or company is to conduct a market analysis to assess your Relative Market Share, which is the market share held by your enterprise relative to that of your main competitor. In practical terms, it translates, for example, into the ratio of sales in the year of your enterprise to those of your competitor.
This data is important because it allows you to know the actual market competitiveness of your company. On its own, however, this information is not enough.
Analyze the Growth Rate of the Industry
In addition to Relative Market Share, it is also necessary for you to consider the Growth Rate of the sector in which your company operates. This is, of course, a figure that is used to measure the attractiveness of the market: those that are growing rapidly are very attractive to companies, since they are able to generate excellent ROI in the long term.
Allocate resources strategically
Once you are in possession of the information we have discussed in the previous two paragraphs you can better plan the future activities of your startup or company, best allocating resources according to needs and “promised” opportunities.
The BCG Matrix for Startups
With regard to the specific case of startups, the BCG Matrix has two specific purposes: to identify Key Products useful for ensuring growth and to understand how best to take advantage of emerging and innovative markets.
Identify Key Products to Grow
To identify Key Products for Growth remember, first of all, that the BCG Matrix has a strong connection with the life cycle of products or services: the “Question Marks” are products or services (or business areas) being launched in the market. It may be worthwhile to invest in “Question Marks,” characterized by high Growth Rate and high Market Share, but only by carefully monitoring their performance.
The “Stars” of the business portfolio are those products/services that are going through a growth phase. By providing a lot of resources and studying new ideas around them, it is possible to ensure continuity in growth and, in some cases, to turn them into “Cash Cows,” or “milking cows,” reflecting the maturity stage (sales close to maximum but growth rate slowing down due to a saturated market). Investing in “Dogs,” on the other hand, is useful only in case there is a need to continue to preside over a market: these products/services are now in the decline stage, at the end of the cycle.
How to take advantage of emerging and innovative markets
There is a dual strategy to take advantage of emerging and innovative markets.
With “Question Marks” products/services, i.e., those that have recently come to market and have high market growth (they are booming), it is useful-as just mentioned-to invest by carefully monitoring the performance so that you can turn around in case of negative returns.
As for the “Stars,” which have both a high Growth Rate and a high Relative Market Share, on the other hand, you have to deploy significant resources and continuously investigate new ideas to continue to grow and maintain the leadership position you have acquired. Obviously, again you need to pay attention to the performance of these products/services so that you can intervene if growth slows down or stops.
Practical example of using the BCG Matrix
To help you understand how to use the BCG Matrix, it may be helpful to resort to a practical example, considering the typical case of Apple.
The “Stars” of Apple’s portfolio can be considered the iPhones, which from the earliest stages have been the brand’s flagship product, with demand immediately very high. The growth trend, however, is uncertain, due to the dense competition in this particular segment.
The “Cash Cows” are the MacBooks, produced in large quantities and with a high selling price compared to competitors because of their universally recognized quality.
Apple’s “Question Mark” is the Apple TV, which has low profitability and pays duty in comparison with direct competitors. The potential for growth, however, is large.
Finally, the “Dogs” can be considered the iPads, which remain a benchmark in the tablet market but whose pace of growth has dropped considerably from the boom of a few years ago.
Advantages and limitations of the BCG Matrix
You cannot have a clear and complete idea about the BCG Matrix without analyzing its pros and cons.
Among the main advantages of this tool is the fact that it is easy to understand. The BCG Matrix, in its simplicity, helps managers set the right priorities and resources to achieve maximum returns without taking too much risk.
This tool, however, also has limitations: one of the biggest lies precisely in its simplicity, which we mentioned earlier as an advantage. The fact that the BCG Matrix takes into account only two variables makes it easy to understand, but it makes this approach far too simplistic, excluding other important profitability indicators and making the classification of many products or business areas complicated.
Even the indicators considered by the BCG Matrix have limitations: The Market Growth Rate, as much as it can be analyzed and studied, is a random figure on which several factors intervene. That a high Relative Market Share translates into a competitive advantage, then, is not a rule applicable in all markets.
Integrating the Matrix with other strategic models
In light of the analysis just made of the advantages and limitations of the BCG Matrix, you will not be surprised to learn that nowadays this tool has lost some of the centrality it had in its early years.
In this regard you should know that, at the height of its success, it is estimated that the BCG matrix was used by about half of the companies that made up the so-called “Fortune 500.” Nowadays, however, although it is still taught in business schools dealing with corporate strategy, it is less widely used and, more importantly, it is used together with other tools, strategic models and analysis and monitoring techniques. In this regard it will be useful for you to know, for example, that there is a tool that is somewhat more complex but serves the same function as the BCG Matrix: it is called the GE Mckinsey Matrix.
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