What Is the BCG Growth Matrix? Overview For Businesses
Product range decisions not only determine a company's immediate profitability but also its future success. If businesses only consider the current demand in the market, they risk becoming obsolete once temporary trends fade. Therefore, organizations must consider the market share and growth rate of their inventory to estimate their profits.
The BCG growth matrix is a comprehensive tool that gauges a product's current market performance to predict longevity and competitiveness.
What is the BCG Matrix?
The Boston Consulting Group (BCG) Matrix, also known as the growth-share matrix, was created in 1968 by Bruce Henderson and was initially used by Fortune 500 companies to itemize products and services based on market growth and share. Now, many businesses use the BCG matrix to prioritize their inventory and determine where to allocate resources to generate the biggest return on investment (ROI).
Businesses also use the growth matrix in planning their product portfolio and diversifying products.
The matrix itself is a relatively simple mechanism that relies on the relationship between market share and growth. However, it assumes that businesses that lead in market share or growth generate consistent returns, giving them a significant cost advantage over competitors.
The BCG matrix forces companies to consider competition and market attractiveness when
- Analyzing their current performance
- Forecasting their future performance
- Developing new products
- Innovating existing product lines
This helps organizations predict their profitability and improve decision-making overall.
How to Use the BCG Growth Matrix
First and foremost, businesses need to collect market data on their products to determine their share and potential growth. Once this information is available, managers can begin categorizing them using the BCG matrix.
The BCG matrix consists of four quadrants that reside somewhere on the X and Y-axis. The X-axis is the market share, while the Y-axis is the market growth rate. Depending on where each quadrant is located on each axis, the respective products may have high or low profitability.
The dog, also known as pets, quadrant represents products with low market growth and share. These items typically break even because any profit they generate is reinvested to maintain sales.
This means that businesses with an extensive dog product range have restricted cash flow, as they get little to nothing in return. Without more lucrative products, these companies slowly lose their profitability and become obsolete.
Therefore, all inventory from a declining organization will eventually transition into the dog quadrant before the end of its lifecycle. The only true value that comes from dog products is through liquidation.
Question Mark Products
The question mark quadrant consists of products with low market share but high growth and have the potential to become a star or dog product. However, these items often require significant funding to boost them up to the star quadrant.
The biggest challenge presented by the question mark quadrant is that products have very low ROI compared to the amount of money needed to generate income. As these items grow, it leads to lost profit. However, if the growth rate increases enough, they can become star products.
Businesses must closely monitor the performance of their question mark group to determine whether they should invest in or sell the products.
The star quadrant represents products with high market share and growth. Therefore, these items generate the most income and often consist of monopolies or products that were the first of their kind.
However, companies must invest large amounts of cash to maintain star products, which usually means all generated income is reinvested, leaving no profits. If star items maintain their success over a long period of time until market growth slows, they can eventually become cash cows.
Companies focusing on market growth need to invest in star products, as they make up a large portion of the inventory on the market and can generate significant income.
Cash Cow Products
The cash cow quadrant holds the most lucrative products that have high market share and low growth potential. Companies want cash cows because they generate far more cash than they require. These profits are typically invested in star and question mark products to boost their return.
Cash cows are more often than not established products that have had time to mature on the market. Therefore, they are not threatened by new products and passing fads.
Organizations should invest in cash cows to maintain their success and leadership in the current market.
BCG Matrix Limitations
The use of the BCG Matrix has slowly faded over the years as more accurate and adaptable models have developed. Some of the biggest limitations of the growth-share matrix include
- Market growth and share are only two factors that contribute to a product's competitiveness and attractiveness. Thus, the matrix disregards any other element that impacts profitability.
- The matrix assumes that each product is independent of the others. However, some dog products are actually used to help items in other quadrants increase their growth and share.
- The matrix relies on a specific market and its definition of high growth and share. Therefore, a product that has succeeded in a small market may sink in a larger industry.
Using the BCG Matrix to Develop Strategies
Now that businesses understand the performance of their current products and the limitations of the BCG matrix, they can evaluate the results of their matrix exercise to
- Adjust product investments to increase profits and ROI.
- Stop investing in profit-draining products and release tied up cash flow.
- Hold products in their respective quadrants until there is money to invest.
By accurately using the information from the matrix analysis, companies can optimize their profitability, market activity, and stability.
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