When a company evolves in a competitive market, it must constantly adapt to changes in the market and its competitors. This adaptation requires continuous monitoring in order to follow the evolution of the market and adapt its positioning accordingly.
To ensure the sustainability of a company, it must have a balanced portfolio of products or activities. The management of this product portfolio is reflected in the budget that a company has for its various products.
The given budget therefore implies a decision to be made in this respect. Tools are needed to visualise the entire market with the positioning of competing offers and one’s own products in order to decide how much money to commit to a particular product. There is a tool for this, the BCG matrix.
The history of the BCG matrix
Created in the late 1960s, the BCG matrix, Boston Consulting Group, is a strategic tool invented by Bruce Henderson. The BCG matrix has had a long career and wide recognition. It was originally developed for industries to prioritise volume over differentiation. It was also created to justify investment choices between different activities in a diversified company.
It is a graphical representation on two axes, the market growth rate on the y-axis from lowest to highest, and the relative market share on the x-axis from highest to lowest. The attractiveness of the market and the competitive position of each of the company’s products are thus represented in 4 categories:
- Stars: These are not always the most profitable but are destined to become cash cows. This translates into high market penetration and growth rates.
- Cash cows: They represent the most profitable products of the company and have a strong competitive position. With high market penetration and low market growth.
- Dilemmas: They have low penetration in a high growth market. They are challenged by strong competition in a promising market, they cannot differentiate themselves from others.
- The deadweights: They are defined by a low penetration in a low-growth market. They represent the least profitable products and SBAs.
This representation makes it possible to justify the allocation of resources to different products or SBAs and to redirect the strategy to balance the portfolio and improve performance. The matrix represents the positioning of a company’s offerings in relation to those of its competitors and the attractiveness of the market.
How to make a BCG matrix
Before setting up an analysis, it is first necessary to construct the matrix, which consists of 3 major steps:
- Firstly, it is necessary to evaluate each activity of the company and possibly those of the competitors according to the relative market share (PMR), it is calculated by the market share of the company divided by the average market share of the main competitors. The evaluation also includes the market growth rate.
- After the evaluation of the company’s activities, the different activities studied should be placed on the graph with the growth rates on the y-axis and the relative market share on the x-axis as seen previously. When the activities are placed on the matrix, each axis will be delimited in two parts in the middle. Four sectors appear, which allow the activities to be positioned on the graph as a cash cow, deadweight, dilemma and star.
- Finally, in order to make a good analysis, it is necessary to take into account the actual or expected volume of activity, the product life cycle, the level of profitability, the contribution of the products to the brand, and the level of competition. These criteria can be illustrated on the graph in different ways, with circles of different sizes representing the turnover, colours giving information on the life cycle of the product or signs indicating the level of competition.
Once the products and/or activities have been mapped on the matrix, the analysis phase can begin.
Analyse the results highlighted by the matrix
The matrix is made up of 4 parts in which activities and/or products have different characteristics. This is why they are not positioned in the same way. The analysis comes into play to understand what the market is like and what it is made up of.
- The activities located in the “cash cows” part of the graph correspond to the company’s activities located in a low-growth and/or mature market. The company then has a strong competitive position. Cash-cow products require little investment to maintain themselves and ensure the company’s immediate profit. They are profitable and generate cash that can be used to finance the development of other projects.
- “Star” activities correspond to leading activities in a growth market. This is a relevant situation, but requires continued investment to ensure their growth and prominence over competitors. Star activities are not always very profitable because of the constant investment. If the company’s strategy is efficient, the “stars” will become “cash cows” once the market matures.
- “Dilemmas” are businesses in a growth market that are not among the leaders. They do not have strong competition, so the company can take advantage of market growth to improve its commercial presence, but this requires investment to do so. Dilemmas” are risky activities because they need to acquire market share to be profitable, but this is an uncertain case.
- “Deadweight” activities are those located in a low-growth market, which means that it is mature and declining. The company is then in a weak position as it cannot improve its profitability. Their profitability is very low or non-existent. It makes more sense for the company to divest itself of the “dead weight”, or even remove it from their offer.
The BCG matrix allows companies to analyse both their market position and the positioning of their products or services with a simple tool that is easy to use and understand. It provides the company’s stakeholders with a basis for thinking about their strategic choices in a relevant way. It allows them to identify the least competitive products and therefore to divest them by investing in products with a strong future.
Another important point about the matrix is that it takes into account the relative market share of the company in the business and the growth rate of the business. And so it is possible to determine priority lines of action on established facts in order to increase its penetration and diversification in the target market.
It can be associated with other tools that will complete the elements of reflection that it provides, such as the market study, the Pestle analysis or the SWOT.
However, this tool has its limitations, as the graph lacks some new dimensions and is becoming obsolete. The market has evolved considerably and has become more and more complex, and the matrix does not take all factors into account.
Significant market shares are being taken on online platforms and globalisation brings a new complexity that did not exist when this matrix was created. Also new players and new technologies require more precise actions.
Some companies do not necessarily want to diversify, so in this situation the BCG matrix is not very useful and other tools are better suited.
The BCG matrix is a good tool for companies to map their strategic business areas and products against their main competitor. It is worth combining it with other tools to deepen your analysis. The BCG matrix is easy to use and understand, however it is starting to get old and less suitable for some sectors that have developed recently.
Image credit: Deemak Daksina