What is the BCG Matrix?
According to Abbreviationfinder, the BCG matrix developed by the Boston Consulting Group is a portfolio analysis tool. It is used to evaluate strategic business units with regard to their “cash generation” (operationalized as relative market share ) and their “cash use” (operationalized as percentage market growth). There are four categories in the Matrix: the Poor Dogs, Stars, Question Marks, and Cash Cows.
The BCG Matrix is used by companies to determine their strategic planning by examining their portfolio . This checks which products are well positioned on the market , in which one should invest more or less, or whether a product must even be abolished.
The BCG Matrix is a decision-making aid that can be used to develop the right strategy for every product in a company . If all products are arranged in the matrix, the company has a simple but meaningful overview of its offer .
The BCG matrix is built up in a coordinate system with two axes and four quadrants. The X-axis denotes the relative market share , while the Y-axis shows the percentage market growth.
There are categories in the four quadrants
- Poor dogs
- Question marks
- Cash cows
What does market growth mean?
Market growth describes the increase or decrease in market volume within a certain period of time in a (sub) market . The market growth can be negative or positive. The growth can be calculated by comparing the market volume of a defined period of time with the market volume of another period of time.
For example, if the market grew by CHF 5 million last year and this year by CHF 7 million, the market will grow by 40 percent.
What is a market share?
In terms of market share, a distinction can be made between relative and total market share. The total market share is calculated by calculating your own sales as a percentage of the total sales of the store.
In order to calculate the relative market share that is relevant for the BCG matrix, the market share of the largest competitor must be included. If the largest competitor has sales of CHF 500,000 and our company CHF 800,000, the relative market share of our product is 60 percent.
Why are these values used in the BCG matrix?
With the market share and market growth, it is now possible to analyze which products are in which quadrant in the company’s portfolio. Do you have to invest a lot in order to increase the market share or is the product already the front runner? Market growth, in turn, is an indicator of whether buyers still have a need for the product.
Definition of cash flow
The cash flow, in German cash flow or cash flow, is a company key figure. The name already reveals its definition: The cash flow is used to analyze how much liquid funds (money) flow into or out of the company. In order to calculate the cash flow, the difference between the monetary inflows and the monetary outflows is calculated. If a company has more cash inflows, the cash flow is positive; conversely, the cash flow would be negative. A company’s cash flow is always calculated over a certain period of time.
What are Poor Dogs?
Poor dogs are products that have a low relative market share and, at the same time, low market growth. With such products, the company has to consider whether to stop investing in the product or even take it off the market, as there is virtually no need for the product. The cash flow is neutral or negative in this case, so the company does not make a big profit on these products.
What should I do? Disinvestment strategy – invest less money to avoid losses.
What are stars?
The stars are products that have a high relative market share and high market growth. It is worth investing here so that the product can maintain this position. The demand for this product is high, so Stars provide positive cash flow and profitability for the company.
What should I do? Investment strategy – keep investing money to increase profit.
What are question marks?
Question Marks are products that are experiencing high market growth but have a low relative market share. This category can either become a star or be downgraded to a poor dog. The company has to decide whether to invest more money in the product with no guarantee that it will become a star. These products are, for example, new releases on the market that have not yet established themselves. Question marks, before investing in them, often provide negative cash flow.
Conclusion: selection strategy – decide whether to disinvest or provide monetary replenishment.
What are cash cows?
Products known as cash cow have a high relative market share, but market growth is low. The low growth here does not mean that the product is no longer needed, but that the demand is constant. This can be the case with household appliances, for example. The company benefits from constant income and should, to put it nicely, “milk” the product for every penny. The cash cows generate a positive cash flow and can maintain their position in the market without having to invest heavily in them.
Conclusion: skimming strategy – benefit from constant profit
Product examples for the four quadrants
- Tube screens
- Samsung Galaxy smartphones
- Apple TV
- Aspirin (headache pills)
Advantages and disadvantages of the BCG matrix
- Simple and easy to understand
- Provides first impressions for positioning
- Strategic approaches can be launched
- Cannot present complex issues
- Depending on the division into the market, the proportion is different
- Facts and dependencies are outside
The BCG Matrix is a helpful model to get an overview of the products and to classify them. Based on the matrix, it can be decided which strategy should be used with which product . Due to its two-dimensionality, however, no more in-depth knowledge can be drawn from it.