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HowtoApplyBCGMatrixtoYourCompany

HowtoApplyBCGMatrixtoYourCompany
Inthisarticle,wewilllookat1)whatistheBCGMatrix,2)understandingtheBCGMatrix,3)how
toapplyBCGMatrixtoyourcompany,and4)someexamples.

WHATISTHEBCGMATRIX?
TheBCGmatrixwascreatedbyBruceD.HendersonfortheBostonConsultingGroupin1970.This
chartwascreatedwiththepurposeofhelpingcompaniesanalyzetheirdifferentbusinessunitsor
productlines.Theanalysishelpsthesecompaniestoallocateresourceswheretheyaremost
appropriateaswellastousetheresultsinbrandmarketing,productmanagement,strategic
management,andportfolioanalyses.
Thechartisagraphicalplanningtool,wherethecompanysproductsandservicescanbeplottedto
helpmakekeybusinessdecisions.Thesedecisionsincludewhethertokeepaparticularbusiness
unit,sellitortoinvestmoreinit.Theyaxisofthegraphrepresentsrateofmarketgrowthwhilethe
xaxisrepresentsmarketshare.
Thematrixhelpsaddinputtothedecisionmakingprocessbutdoesnottakeintoaccountallpossible
factorsthatacompanymayface.Thetoolisnotpredictiveandalsodoesnttakeintoaccountany
newordisruptiveproductsthatmayenterandchangethemarket,nordoesitaccountforshiftsin
consumerdemand.

UNDERSTANDINGTHEMATRIX
Thechartorgraphisdividedintofourcategories.Thesearethecows,thedogs,thestarsandthe
unknowns.Aproductlineofabusinessunitisplottedbasedonitsrelativemarketshareandrateof
growthinthemarketandfallswithinoneofthesecategories.

1)TheCashCows
Theproductlinesthatfallwithinthiscategoryenjoyalargeshareofthemarketinaslowgrowing
industry.Thismeansthattheyareabletogeneraterevenuesingreateramountsthantheinvestment
requiredtomaintaintheirbusiness.Theproductlinemaybeconsideredboringandsettledina
maturemarket,withthecompanyholdingittocontinuetogeneraterevenues.Thecompanywill
attempttomilktheseasmuchaspossiblewithaslittleinvestmentaspossible.

2)TheDogs
Thedogsarethoseproductlinesorbusinessunitsthathaveasmallermarketshareinamatureand
slowgrowingindustry.Usually,theseproductlinesmanagetoearnwhatisputintothem,breaking
evenandmaintainingthemarketshare.Generallythisunitislargelyworthlesstothecompanyin
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termsofearningpotentialbutmayaffordotherbenefitstothecompanysuchasthecreationofjobs
aswellassynergiesthatassistotherbusinessunits.Thesebenefitsmaybeenoughforthecompany
tokeepthisbusinessunitactivedespiteitslessthanexcitingposition.However,dogscannegatively
affecthowinvestorsjudgethemanagementofacompanyanditissuggestedthattheseproduct
linesbesoldoff.

3)TheStars
Asthenamemakesclear,starsarethosebusinessunitsthathavealargemarketshareinafast
growingindustry.Theseproductlineshaveaclearlyvisiblemarketornicheleadingpathandrequire
largeamountsoffundingtoensurethattheycanfightofcompetitorsandmaintaintheirgrowthrate.
Companiesaimtoturnstarsintotheirnextcashcowswiththeinevitabledeclineinthegrowthofthe
industry.Thiscanhappenpotentiallyiftheyareabletomaintaintheirpositionasamarketleader.If
thisdoesnothappen,thenstarscanturnintodogs.

4)TheUnknowns
Theunknowns(alsocalledquestionmarksorproblemchildren)arethosebusinessunitsthathavea
smallermarketshareinahighgrowthmarket.Thisiswheremostbusinesseswillstartfromandat
thispointthebusinessunithasthepotentialtogrowmarketshareandturnintoastarorlosefurther
markershareandturnintodogswhenthegrowthofthemarketitselfdeclines.Carefulstudyand
analysisisrequiredforbusinessunitsinthiscategorytoassesstheirpotentialandworth.Ifany
potentialisseenthenfurtherinvestmentcanbemadeintothem.
Thenaturalcycleformostproductsinthattheybegintheirlifeasquestionmarksandturnintostars
astheirpositionclarifies.Whenthemarketgrowthslowsdown,theyturnintocashcowsandatthe
endofthecycle,thecashcowturnsintoadog.AccordingtotheBostonConsultingGroup,a
diversifiedcompanywithabalancedportfolioisintheidealpositiontouseitsstrengthstocapitalize
onitsgrowthopportunitiesandpotential.Abalancedportfolioisonewhichhas:
Starstoassurefuturesuccess
Cashcowstobringinfundsforfuturegrowth
Questionmarksthatcanbeturnedintothenextstarswithsomeattentionandinvestment

TheAxes
Oneithersideofthegridisanindicatormarkedontheaxis.Theideathatpromptedthisgridasa
whilewastheneedtomanagecashflows.Themodelassumesthatoneofthemainindicatorsfor
cashgenerationisrelativemarketshareandtheoneforcashusagewasthemarketgrowthrate.
RelativeMarketShareAhighermarketsharemeanshighercashreturn.Thereasonbehindthe
selectionofthismetricisbasedonitsrelationshipwiththeexperiencecurve.Thebeliefisthat
whenthecompanyproducesmoreproducts,itbenefitsfromhighereconomiesofscaleandthe
experiencecurvewhichinturnresultinhigherprofits.Themarketshareismeasuredrelativetoits
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largestcompetitor.Anotherreasonfortheselectionisthatthisindicatorcarriesmoreinformation
thanjustcashflowsasisthecaseinprofits.Itshowsthebrandspositioninrelationtomajor
competitorsandalikelyindicationforthefuture.
MarketGrowthRateAhighermarketgrowthratemeansmoreearningsandoftenprofits.On
theotherhand,italsomeansahigherconsumptionofcashasinvestmenttostimulatefuture
growth.Thisinvestmentismadeintothoseproductswhichshowagoodpotentialforcontinued
growthandsuccessandareexpectedtoprovideareturnoninvestment.Thismatrixassumesthat
ahighergrowthrateisanindicatorofaccompanyingdemandsforinvestment.Themarketgrowth
rateprovidesmoreinformationaboutthebrandpositionthanjustthecashflowandisagood
indicatorofthestrengthofthemarketanditsfuturepotentialaswellasattractivenesstomore
competitors.

History
TheBCGMatrixisnamedaftertheBostonConsultingGroup,aglobalmanagementconsultingfirm.
Thecompanyhas81officesin45countriesandisoneoftheBigThreemanagementconsulting
firms.ThecompanywasfoundedbyBruceDHenderson,analumnusofVanderbiltUniversityand
HarvardBusinessSchool.HewasrecruitedbyMcKinseyanditisherethathefoundedtheBoston
ConsultingGroup.HendersondevelopedthefamousBCGmatrixin1968.AccordingtotheBCG,
Hendersontoldclientsthefollowing:
Thepayoffforleadership[inmarketshare]isveryhighindeed,ifitisachievedearlyandmaintained
untilgrowthslows.Investmentinmarketshareduringthegrowthphasecanbeveryattractive,ifyou
havethecash.Growthinmarketiscompoundedbygrowthinshare.Increasesinshareincreasethe
profitmargin.Thereturnininvestmentisenormous.

Limitations
Therearesomelimitationstotheuseofthispopularmatrixaswell.Theselimitationsmeanadecline
intheonceextensiveuseofthistool.Theseinclude:
Marketgrowthisoneofmanyfactorsthatdetermineindustryattractivenessandrelativemarket
shareisonlyoneofmanyfactorsthatdeterminecompetitiveadvantage.Thismatrixdoesnottake
intoaccountanyotherfactorsthatmayhaveabearingonbothindustryattractivenessand
competitiveadvantage.
Thereisanunderlyingassumptionthatthebusinessunitsareoperatinginisolationinrelationto
eachother.Inreality,adogmaybehelpinganotherunitgainacompetitiveadvantagefor
example.
Thedefinitionofamarketistakeninthebroadsense.Thisfailstotakeintoaccountdifferent
situationssuchasabusinessunitthatisdominatinganichebutisoveralllessdominantinthe
largerindustry.Thewayamarketisdefinedinsuchaninstancemaychangeitsdefinitionfroma
dogtoacashcow.
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HOWTOAPPLYBCGMATRIXTOYOURBUSINESS
Tobesuccessful,acompanyshouldhaveaportfolioofproductswithdifferentgrowthratesand
differentmarketshares.Theportfoliocompositionisafunctionofthebalancebetweencashflows.
Highgrowthproductsrequirecashinputstogrow.Lowgrowthproductsshouldgenerateexcess
cash.Bothkindsareneededsimultaneously.BruceHenderson

PracticalUseTips
TheBCGmatrixcanbeusefultocompaniesifappliedusingthefollowinggeneralsteps.
Step1ChoosetheUnit.StrategicBusinessUnits,individualbrands,productlinesorthefirmasa
wholeareallareasthatcanbeanalyzedusingtheBCGmatrix.Thechosenunitdrivestheentire
analysisandkeydefinitions.Themarket,industry,competitorsandpositionwillallbebasedonthe
chosenunit.
Step2DefinetheMarket.Followingthechoiceoftheunitorareatobeanalyzed,themost
importantstagefortherestofthematrixisthedefinitionofthemarket.Anincorrectlydefinedmarket
willleadtoanincorrectclassificationoftheunit.AMercedesBenzanalyzedinapassengervehicle
marketwillbeadogwithasmallmarketshare.However,analyzedwithinaluxurycarmarket,itwill
beacashcow.
Step3CalculateRelativeMarketShare.Atthisstage,therelativemarketshareforthechosen
unitneedstobecalculated.Thiscanbedoneintermsorrevenuesormarkershare.Theformula
usedhereusadivisionoftheselectedbrandsmarketshareorrevenuesbythemarketshareor
revenuesofthebiggestcompetitorintheindustry.Theresultinplottedonthexaxis.
Step4CalculateMarketGrowthRate.Onlineindustryreportscanbeusedtofindtherateof
growthfortheindustry.Ifthisisnotpossible,thenitcanbeestimatedbylookingattheaverage
revenuegrowthoftheleadingfirmsintheindustry.Thismeasurementisapercentageandisplotted
ontheyaxis.
Step5DrawCirclesontheMatrix.Onceallthemeasuresarecalculated,theycanbeputonto
thematrix.Thiscanbedonebydrawingacircleforeachbrandwithinaunit,orallthebrandsina
company.Thesizeofeachcircleshouldcorrespondtobusinessrevenuegeneratedbythebrand.

EXAMPLES
Nestle
Accordingtoananalysispostedhere,theBCGmatrixanalysisforNestlerevealssomeinteresting
perspectives.Aglobalmultinationalinthefoodandbeverageindustry,theSwisscompanyisthe69th
highestrevenueproducerintheworld.Over8000brandsfallwithinitsumbrellaandareas
widespreadasbottledwaterandpetfood.Thecompanyannouncedplanstoselloffunder
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performingbrandswhichwereconsistentlyshowingpoorsales.Thisanalysisusedthe2002annual
reportforitsfigureswhichcanbefoundhere.
QuestionMarksHere,thequestionmarkshavealowmarketsharewithinahighgrowth
market.Theproductmentionedhererequiresaninfluxofinvestmenttocapitalizeonpotential
segments.Thisinvestmentishowever,notlikelytoyieldtoomuchreturninvestment.
StarsThesebrandshaveahighshareinahighgrowthmarket.Nestlesvariedmineralwateris
inthisquadrant.Thebrandsinthisarerequireinvestmenttomaintaintheirpositionand
differentiationinbothmatureandemergingmarkets.
DogsTheNestleproductsinthiscategoryhavealowermarketshareinalowgrowthmarket.
Anexampleofthisisaleancuisineunitandweightlossmanagementbrandswhichdidnottake
offoutsidetheUS.AsportsperformanceandnutritionbrandcalledPowerBarisalsoconfirmedto
bedivestedbythecompanymostlikelyduetopoorsalesinasaturatedmarket.Theseproducts
generateenoughrevenuetosustainthemselvesbutarenotexcitingnotmajorsourcesof
revenues.
CashCowsThesebrandsareimportantbecauseoftheircashgeneratingpotential.Thismeans
thattheyhaveahighermarketshareinaslowgrowthindustry.Verylittleinvestmentisneededby
thesebrandsandfundsgeneratedfromthemareusedtofuelStarsorQuestionMarks.

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