The BCG matrix is a strategic planning tool in the field of management, Its main objective is to help company managers better understand the position of their own products or services in the market. This in turn makes it easier to make decisions about where to direct the company's resources. We will discuss everything in more detail in the following article.
The BCG matrix evaluates products or services according to two main criteria: market growth rate and market share size. The matrix is often used in practice because of its clarity and practicality, allowing managers to quickly and clearly assess the current situation and plan future strategies. Proper preparation, use and calculation of the BCG matrix can have a significant impact on the future of the entire organization. According to the BCG matrix, strategic business units (SBUs - which are self-managed divisions or units of a company that develop their own business strategy and have their own customers) are divided into four segments. These segments are called:
Based on the placement of the product in these segments, the company makes the corresponding decision. A problem may arise if the company judges the growth rate as only upward or downward and the market share as large or small. It is important to provide a specific measure on both axes of the matrix - the y-axis for market growth rate and the x-axis for market share - and to quantify it accurately.
The growth rate of a business is displayed on the vertical axis of the BCG matrix, which shows how fast the revenue from a given product is increasing. Products with higher market growth rates are located in the top two quadrants of the matrix. On the other hand, relative market share is represented by the horizontal axis - the ratio of the product's sales compared to those of its competitors. Products with higher market share are located in the right two quadrants of the matrix.
The products in the BCG matrix are not placed directly on the axes, but in one of the four quadrants based on their performance on the two dimensions: growth rate and relative market share.
Rapid market growth and low market share - these are products that are introduced to the market, which will then determine whether they become cash cows or are phased out. Experience shows that we can make a quick buck on the Question Mark, but also lose a lot.
Stars, products with rapid growth and high market share, are key to achieving superior business results and require considerable attention. Although they generate significant revenues, they also require high investment in marketing and development to maintain their position. The goal is to transform Stars into cash cows, high share products in a low-growth market that bring in more money than they require in investment. This transformation process requires strategic planning and management, focused on maintaining market share and effectively managing costs and investments as the market slows.
A low growth, high market share market - these products do not require significant investment and although they do not generate large profits, they are the best in their category. They do not need investment in innovation (improvement), only in maintaining a strong market position.
A low growth, low market share market - these are the "on the way out" products or services that have been created from poor management decisions or cash cows. They have not been properly taken care of by the company and their activity needs to be curtailed and eliminated. The length of time they remain on the market depends on the strategic decision of the company. It should be taken into account that although they do not bring profit, they can be a good marketing tool (brand awareness, positive association with the product, etc.).
The product lifecycle in the BCG matrix is illustrated by the movement of a product between the four quadrants, from Question Mark to Star, then to Cash Cow, and finally to Miserable Dog - as the product's popularity and market share changes. For example, when a company launches a new product, it may be categorized as a Question Mark. As the product gains popularity, it becomes a Star. Once it achieves significant revenue, it changes to a cash cow. Finally, if interest in the product declines, it becomes a Wretched Dog. We will discuss this issue more below:
Although the BCG matrix has long been an accepted decision-making tool in product portfolio management, it has some limitations that may make it not always fully accurate or useful. These limitations may be particularly significant in light of the changing market conditions and complex business environment in which many companies now operate. We elaborate on some of the main points below:
For these reasons, it is important that companies use the BCG matrix with some caution and include other tools and methods in their strategic decision-making process. The goal is to have the most complete and realistic view of their business environment and the potential challenges they may face. This could be the McKinsey matrix, SWOT analysis, Blue Ocean Strategy or Porter's Five Forces Analysis, for example.
The use of the BCG matrix can be illustrated by the examples of large companies such as Coca-Cola, Apple and McDonald's, which have used the BCG model to strategically analyse their product and service portfolios.
Apple Inc. is an American multinational company specializing in consumer electronics, computer software and online services. It is the largest technology company in the world by revenue.
Who doesn't know Coca-Cola? It is a large beverage company that has been around for more than a century. It all started on May 8, 1886, when Dr. John Pemberton sold Coca-Cola in Jacobs' Pharmacy in downtown Atlanta. At the time, it was more of a painkiller that was sold in the pharmacy. From that humble beginning, Coca-Cola has grown from a small company to a multinational with a global reach. Among other things, it has changed its formula.
McDonald's is described as the largest restaurant chain in the world with annual sales of $23.223 billion.
Together, these components help McDonald's identify what products are most profitable for the company and where it should invest more resources. The sale of some of the less successful products and their possible withdrawal from sale is also under consideration.
In the following section, we present the conceptual design of the BCG matrix for a fictitious IT company. Suppose this IT company "XY" is a reputed global company that specializes in providing comprehensive networking, cloud and cyber security solutions. Below, we will show what a BCG matrix for company "XY" might look like:
In the context of this fictitious BCG matrix, it appears that firm "XY" has products and services at different stages of the life cycle and market development. While Cloud Solutions represent Stars with high market share and growth rates, Enterprise Systems, IT Outsourcing and ServiceDesk can be described as cash cows that generate stable revenue at lower growth rates. On the other hand, Cybersecurity and Custom Development as Question Marks represent areas with potential but also with uncertainty about future developments and investments. And the Wretched Dogs like legacy networking products and perhaps training and certification may require a review of strategy to minimize costs and optimize resources.
Tip: Try reading our article Hackers are attacking more and more often: Why not underestimate cybersecurity?
The BCG matrix is therefore a valued strategic planning method that enables businesses to better understand and manage their portfolio of products and services in a dynamic market environment. Real-world examples reveal how companies such as Apple, Coca-Cola, and McDonald's have used the BCG Matrix to identify their Stars, Cash Cows, Question Marks, and Wretched Dogs, helping them to effectively allocate resources and navigate development in strategic directions. We then used an analysis of a fictitious IT company to illustrate other applications of this method.
Still, it is important to keep in mind that the BCG matrix has its limitations and companies should use other tools and methods for comprehensive strategic analysis. One useful tool that enterprises can use is a CRM system from which a BCG report can be compiled. Segmentation is most often done from data that you have access to in the CRM system, which is also possible in SugarCRM. Would you like to learn more interesting facts? Visit the pages of our blog, where there are a number of interesting topics.