BCG matrix: evaluation and portfolio approach to products and services - explanation and practical examples

BCG matrix: evaluation and portfolio approach to products and services - explanation and practical examples
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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.

Practical application of the BCG matrix in strategic product evaluation 

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:  

  • Question marks,  
  • Stars,  
  • Milking cows  
  • and Wretched Dogs.  

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. 

Vertical and horizontal view of market development 

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

1) Question marks 

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. 

2) Stars 

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. 

3) Cash cows 

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. 

4) Wretched Dogs 

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.). 

What about the product life cycle in the BCG matrix? 

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:  

  1. Question mark: products in the question mark phase have a low market share and are characterised by risk and uncertainty. Their future in the market is unclear and therefore they require considerable attention and possibly investment to improve their market position. An example is the development and production of hoverboards, where a company invests in development, production and testing without it being clear whether the product generates a sustainable profit. 
  2. Star: If the Question Mark manages to gain market share and becomes popular, it may move into the Star phase. Stars are characterised by high profits and require further investment in production and advertising to maintain their market position. As an example, consider Tesla, a company that produces electric cars. They are expensive to produce, but if people buy these vehicles regularly, they can become the company's most profitable product. 
  3. Cash cow: When Star becomes an established product with high market share and low market growth, it becomes a cash cow. These products are profitable and bring the company a steady and large income. An example is Fudgey Pudding Pops, which is popular and generates a large income for the company, while being relatively inexpensive to produce. It is a popular product that people often buy as a snack or dessert. 
  4. The Miserable Dog: When public interest in the Milch Cow declines, the product may enter the Miserable Dog phase. It has a low market share and low growth, the cost of production is high and it does not bring in a steady income. At this point we can mention the DVD/BD. Times are changing, consumers prefer to move to streaming services.  

Shortcomings of the BCG matrix in strategic decision making  

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: 

  • Cost of gaining market share: Increasing market share is one of the main goals of many companies, but the BCG matrix may not adequately reflect the costs associated with this goal. In some cases, the cost of gaining a higher market share may outweigh the additional revenue from new sales, which may lead to financial losses even if the market share is higher. 
  • Contingency Planning: Product development can be a long-term process during which unexpected changes may occur that have the potential to significantly affect its market success. The BCG matrix does not necessarily reflect such events, which may lead to a strategy that is solely based on this method being insufficient. 
  • Classification of businesses: the BCG matrix classifies businesses only as 'small and large', leaving medium-sized businesses without adequate representation. Medium-sized enterprises make up a significant part of the market and their omission may cause the BCG analysis not to accurately reflect the real business environment.  

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.  

Product strategies of the three giants: a view through the BCG matrix 

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: A world leader in the technology industry 

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. 

  • Question marks: These are products that have potential but have not yet fully achieved it. An example is Apple TV - if the company could fix some of the ecosystem issues, the product could dominate the TV business. Apple TV is making some money but not reaching its true potential. If Apple solved a few ecosystem issues, it could really dominate the TV space (e.g., if it solves compatibility with other services and devices). 
  • Stars: the iPhone and Apple Watch are undoubtedly Apple's stars. With each of their new launches, the company achieves new sales records. Apple Watch is also fast becoming a cash cow. 
  • Cash cows: In Apple's BCG matrix, products like Apple MacBooks and iMacs fall under the cash cow category. 
  • Wretched Dogs: Apple's iPods and iTunes were considered a big hit when they were launched, but ultimately failed to hold up due to stiff competition and low customer demand. 

Coca-Cola: The story of the drink that changed the world 

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.  

  • Question marks: new flavours or brand extensions, such as Coca-Cola Vanilla or Coca-Cola Cherry, which have a low market share and need to consider whether to invest in them in the future.  
  • Stars: Sprite and Fanta, which have a high market share but are not that far away compared to flagship products.  
  • Cash cows: Classic and Diet Coca-Cola, which are flagship products with high market share. 
  • Wretched Dogs: Some already discontinued or less popular products. 

Challenges and successes in McDonald's product strategy 

McDonald's is described as the largest restaurant chain in the world with annual sales of $23.223 billion. 

  • Question marks: in the McDonald's BCG matrix, we could list McDonald's Ice Cream, Cone as a question mark. This product has the lowest market share but the highest growth. If the company invests enough money in this particular product, it can become a Star. If the company fails to do so, it would be better to withdraw this product from sale, as it would negatively affect the company's entire product life cycle. 
  • Star: McFlurry is the company's star product that generates profit. It is a dairy-free ice cream with no toppings that has a high market share and maximum growth, especially in the UK. However, this is not the case in the United States and Germany. In order for the product to grow at its maximum rate, more money needs to be invested in it. 
  • Dairy cows: The main products in this category are McChicken and French fries. These products represent the company's cash cows because they have a high market share and customers are willing to pay reasonable prices for them. 
  • Wretched Dog: McDonald's coffee has a low market share and a low market growth rate compared to other products. 

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.  

Application of the BCG matrix to a fictitious IT company  

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:  

  • Stars: Cloud Solutions - Given the current trend of digitization and moving data and services to the cloud, cloud storage and related services can be considered Stars. These services have a high market share and are growing rapidly. 
  • Cash cows: Examples are enterprise systems (ERP, CRM), which are the foundation for many organizations. This can be an area with a high market share but slower growth. It is also IT Outsourcing and ServiceDesk. These services are often essential for running IT operations in companies and can generate steady revenue. 
  • Question marks: cyber security (phishing and penetration testing, security auditing) can be considered a low market share product with a high growth rate. These services have huge potential but may require further investment due to high competition and a rapidly changing market. Furthermore, bespoke development could also require further investment and strategic decisions due to the variability of the market and specific client requirements. 
  • Wretched dogs: The products with low market share and low growth rates are definitely the older versions of networking products, as they are no longer on the cutting edge of technological development. We can include security training and certifications here. While important, they may not be a major source of revenue or growth for a company and may require constant investment in updating courses and materials. 

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

Integrating the BCG matrix and other tools 

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.

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