Ananya Upadhyay

While preparing for exams or a competition we often start by segregating subjects that we find easy from the difficult ones We accordingly devote time to each depending on the comfort level with each one For example we would devote the least time to the easy ones more time to the relatively difficult ones and the most time to the very difficult ones This helps in making a feasible timetable that enables the best performance Along similar lines companies assess their product lines regularly to see which product is bringing profits which one is making losses and which ones need some working upon A company can then allocate its resources accordingly in order to function more efficiently What is a BCG matrix The Boston Consulting Group developed a matrix for assessing the product lines of a company called the BCG Matrix BCG matrix also referred to as Growth-Share Matrix is a portfolio planning model which is based on the observation that a company s business units can be classified into four categories Cash Cows Stars Question Marks Dogs nbsp It is based on the combination of market growth and market share relative to the next best competitor Stars High Growth High Market Share Star units are leaders in the category Products located in this quadrant are attractive as they are located in a robust category and these products are highly competitive in the category Question Marks High Growth Low Market Share Like the name suggests the future potential of these products is doubtful Since the growth rate is high here with the right strategies and investments they can become Cash cows and ultimately Stars But they have low market share so wrong investments can downgrade them to Dogs even after lots of investment Cash Cows Low Growth High Market Share These products or services generate interesting profits and cash but need to be replaced because the future growth will be lower If they are profitable they can finance other activities in progress including stars and question marks Dogs Low Growth Low Market Share Dogs hold low market share compared to competitors Neither do they generate cash nor do they require huge cash In general they are not worth investing in because they generate low or negative cash returns and may require large sums of money to support Due to low market share these products face cost disadvantages nbsp A perfect example to demonstrate BCG matrix could be the BCG matrix of Pepsico The company has perfected its product mix over the years according to what s working and what s not Here are the four quadrants of Pepsico s growth-share matrix Cash Cows - With a market share of 58 8 in the US Frito Lay is the biggest cash cow for Pepsico Stars - Even though Pepsi s share in the market has been reduced to 8 4 it s still the star for Pepsico because of its brand equity Other stars are Aquafina biggest selling mineral water brand in the USA Tropicana Gatorade and Mountain Dew Question Marks - Since it s a mystery whether the diet food and soda industry will boom in the future and will Pepsico s products will find their place or not Diet Pepsi Pepsi Max Quaker etc fall in the question marks section of the Pepsico s BCG matrix Dogs - As of now there isn t any product line that falls in the dogs section of the Pepsico s BCG matrix However seasonal and experimental products like Pepsi Real Sugar Mtn Merry Mash-up can be inserted in this section nbsp How To Make A BCG matrix So far we know products are classified into four types Now we will see on what basis and how is that classification done We shall understand the five processes of making a BCG matrix better by making one for L Or al in the sections to follow Step 1 Choose the product BCG matrix can be used to analyse Business Units separate brands products or a firm as a unit itself The choice of the unit impacts the whole analysis Therefore defining the unit is necessary Step 2 Define the market An incorrectly defined market can lead to a poor classification of products For example if we would do the analysis for the Daimler s Mercedes-Benz car brand in the passenger vehicle market it would end up as a dog it holds less than 20 relative market share but it would be a cash cow in the luxury car market Defining the market accurately is therefore an important pre-requisite for better understanding the portfolio position Step 3 Calculate the relative market share Market share is the percentage of the total market that is being catered to by your company measured either in revenue terms or unit volume terms We use Relative Market Share in a BCG matrix comparing our product sales with the leading rival s sales for the same product Relative Market Share Product s sales this year Leading rival s sales this year For example if your competitor s market share in the automobile industry was 25 and your firm s brand market share was 10 in the same year your relative market share would be only 0 4 Relative market share is given on the x-axis Step 4 Find out the market growth rate The industry growth rate can be easily found through free online sources It can also be calculated by determining the average revenue growth of the leading firms Market growth rate is measured in percentage terms Market growth rate is usually given by Product s sales this year Product s sales last year Product s sales last year Markets with high growth are ones where the total market share available is expanding so there s a lot of opportunities for all companies to make money Step 5 Draw the circles on a matrix Having calculated above measures now you need to just plot the brands on the matrix The x-axis shows the relative market share and the y-axis shows the industry growth rate You can plot a circle for each unit brand product the size of which should ideally correspond to the proportion of revenue generated by it BCG Matrix Example Let us consider the BCG matrix of L Or al for example For simpler understanding we look at L Oreal s business segments and overall growth Step 1 Choose the product firm brand We choose the firm L Oreal for analysis nbsp Step 2 Identify Market The chosen market is the Cosmetics Industry which includes primarily- Skincare Makeup Haircare Hair colour and Fragrances Step 3 Calculate Relative Market Share Tabulated below L OREAL CATEGORY MARKET SHARE 1 LEADING RIVAL RIVAL S MARKET SHARE 2 RELATIVE MARKET SHARE 1 2 CATEGORY GROWTH RATE Skincare 31 6 bn Unilever 24 bn 129 6 5 Make- Up 27 1 bn P amp G 27 5 bn 98 5 7 14 Hair Care 3 Unilever 8 84 33 9 3 1 Hair Colour 9 Henkel 6 150 8 Fragrances 4 1 Chanel 4 5 91 2 5 Step 4 Find out Market Growth rate Overall Growth rate in Cosmetics Industry as of 2018 4 8 Step 5 Draw the circles on a matrix How To Use A BCG Matrix Now that we have segregated the brands under four categories let us see what strategies the company should use for each Stars Products located in this quadrant are attractive as they are located in a robust category and these products are highly competitive in the category There is huge potential for high revenue growth since they have a high market share and a high growth rate They may have been expensive to develop but are worth spending money on for promotion given the long extent of their Product Life Cycle If successful a star will become a cash cow when the category matures assuming they maintain their relative market share Yet not all stars become cash flows This happens mainly in continuously changing industries where even innovative products can be displaced by new technological advancements so a star becomes a dog instead of a cash cow Strategic choices Vertical integration horizontal integration market penetration market development product development Question Marks Most businesses start off as question marks These require huge investments to capture or protect market share Question marks have the potential to become stars and eventually cash cows but can also become dogs or exit Investments should be high for question marks otherwise may produce negative cash flow Like stars Question marks too may not always succeed and if even after large investment they aren t able to gain market share they become dogs Hence very careful consideration is required before making investment decisions in this category Strategic choices Market penetration market development product development divestiture Cash Cows They generate profits by investing as little cash as possible low-cost support and need to be managed for continued profits amp cash flow These are large corporates or SBUs that are efficient in innovation and have the potential to become stars Cash cows need to maintain a strong market position and defend your market share The company should take advantage of sales volume and leverage the size of operations Cash cows can also be used to support other businesses Strategic choices Product development diversification Dogs Due to low market share these products face cost disadvantages so they may generate enough cash to break-even but they are rarely if ever worth investing in Unless a dog has some other strategic aim it should be liquidated if there are fewer prospects for it to gain market share there is Low scale of economies so difficult to make a profit These are situated at a declining stage of the Product Life Cycle therefore the number of dogs in the company should be minimized A company should optimize its current operations It should get rid of all non-value added activities and features It must then reposition the offering to generate positive cash flow or sell this business Strategic choices Retrenchment divestiture liquidation Let us now see some advantages and limitations of using the BCG Matrix Advantages of BCG Matrix It is simple and easy to understand It helps you to quickly and simply screen the opportunities open to you and helps you think about how you can make the most of them It is used to identify how corporate cash resources can best be used to maximize a company s future growth and profitability The BCG Matrix produces a framework for allocating resources among different products and makes it possible to compare the product portfolio at a glance Limitations of BCG Matrix BCG Matrix uses only two dimensions relative market share and market growth rate These are not the only indicators of profitability attractiveness or success It neglects the effects of synergy between brands Business with low market share can be profitable too High market share does not always lead to high profits since there is also a high cost that goes into getting a high market share At times dogs may help the business or other products in gaining competitive advantage The model neglects small competitors that have fast-growing market shares Go On Tell Us What You Think Did we miss something Come on Tell us what you think about our article on BCG Matrix in the comments section