BCG Matrix Model

BCG Matrix Model

The BCG matrix or also called BCG model relates to marketing. The BCG model is a well-known portfolio management tool used in product life cycle theory. BCG matrix is often used to prioritize which products within company product mix get more funding and attention. The BCG matrix model is a portfolio planning model developed by Bruce Henderson of the Boston Consulting Group in the early 1970's. The BCG model is based on classification of products (and implicitly also company business units) into four categories based on combinations of market growth and market share relative to the largest competitor. When should I use the BCG matrix model? Each product has its product life cycle, and each stage in product's life-cycle represents a different profile of risk and return. In general, a company should maintain a balanced portfolio of products. Having a balanced product portfolio includes both high-growth products as well as low-growth products. A high-growth product is for example a new one that we are trying to get to some market. It takes some effort and resources to market it, to build distribution channels, and to build sales infrastructure, but it is a product that is expected to bring the gold in the future. An example of this product would be an iPod. A low-growth product is for example an established product known by the market. Characteristics of this product do not change much, customers know what they are getting, and the price does not change much either. This product has only limited budget for marketing. The is the milking cow that brings in the constant flow of cash. An example of this product would be a regular Colgate toothpaste. But the question is, how do we exactly find out what phase our product is in, and how do we classify what we sell? Furthermore, we also ask, where does each of our products fit into our product mix? Should we promote one product more than the other one? The BCG matrix can help with this. The BCG matrix reaches further behind product mix. Knowing what we are selling helps managers to make decisions about what priorities to assign to not only products but also company departments and business units.

What is the BCG matrix and how does the BCG model work? Placing products in the BCG matrix results in 4 categories in a portfolio of a company: BCG STARS (high growth, high market share) - Stars are defined by having high market share in a growing market. - Stars are the leaders in the business but still need a lot of support for promotion a placement. - If market share is kept, Stars are likely to grow into cash cows. BCG QUESTION MARKS (high growth, low market share) - These products are in growing markets but have low market share. - Question marks are essentially new products where buyers have yet to discover them. - The marketing strategy is to get markets to adopt these products. - Question marks have high demands and low returns due to low market share. - These products need to increase their market share quickly or they become dogs. - The best way to handle Question marks is to either invest heavily in them to gain market share or to sell them. BCG CASH COWS (low growth, high market share) - Cash cows are in a position of high market share in a mature market. - If competitive advantage has been achieved, cash cows have high profit margins and generate a lot of cash flow. - Because of the low growth, promotion and placement investments are low. - Investments into supporting infrastructure can improve efficiency and increase cash flow more. - Cash cows are the products that businesses strive for. BCG DOGS (low growth, low market share) - Dogs are in low growth markets and have low market share. - Dogs should be avoided and minimized. - Expensive turn-around plans usually do not help. And now, let's put all this into a picture:

Are there any problems with the BCG matrix model? Some limitations of the BCG matrix model include:

The first problem can be how we define market and how we get data about market share A high market share does not necessarily lead to profitability at all times The model employs only two dimensions market share and product or service growth rate Low share or niche businesses can be profitable too (some Dogs can be more profitable than cash Cows) The model does not reflect growth rates of the overall market The model neglects the effects of synergy between business units Market growth is not the only indicator for attractiveness of a market

There are probably even more aspects that need to be considered in a particular use of the BCG model. Where can I find more information about the BCG matrix model? We recommend reading the following book: Book: Carl W. Stern, George Stalk - Perspectives on Strategy This book was published by the Boston Consulting Group. Are there other models that I might be interested in?

We can recommend reading about the SWOT model, SPACE matrix, and Michael Porter's Five Forces model. The BCG matrix model has some similarities with the Internal-External IE matrix method. What is the next level of strategic management analysis? The BCG matrix can help to find a strategy. But, what if we have 2-3 strategies and need to decide which one is the best one? The Quantitative Strategic Planning Matrix (QSPM) model can be used to compare strategic alternatives. I have questions about the BCG matrix In case you have any questions about the BCG matrix, you might want to submit them at our management discussion forum. You might also be interested in reading about the Balanced Scorecard model and about the Porter's Five Forces model.

BCG Growth-Share MatrixCompanies that are large enough to be organized

into strategic business units face the challenge of allocating resources among those units. In the early 1970's the Boston Consulting Group developed a model for managing a portfolio of different business units (or major product lines). The BCG growth-share matrix displays the various business units on a graph of the market growth rate vs. market share relative to competitors: BCG Growth-Share Matrix

Resources are allocated to business units according to where they are situated on the grid as follows:

Cash Cow - a business unit that has a large market share in a mature, slow growing industry. Cash cows require little investment and generate cash that can be used to invest in other business units. Star - a business unit that has a large market share in a fast growing industry. Stars may generate cash, but because the market is growing rapidly they require investment to maintain their lead. If successful, a star will become a cash cow when its industry matures. Question Mark (or Problem Child) - a business unit that has a small market share in a high growth market. These business units require resources to grow market share, but whether they will succeed and become stars is unknown. Dog - a business unit that has a small market share in a mature industry. A dog may not require substantial cash, but it ties up capital that could better be deployed elsewhere. Unless a dog has some other strategic purpose, it should be liquidated if there is little prospect for it to gain market share.

The BCG matrix provides a framework for allocating resources among different business units and allows one to compare many business units at a glance. However, the approach has received some negative criticism for the following reasons:

The link between market share and profitability is questionable since increasing market share can be very expensive. The approach may overemphasize high growth, since it ignores the potential of declining markets. The model considers market growth rate to be a given. In practice the firm may be able to grow the market.

These issues are addressed by the GE / McKinsey Matrix, which considers market growth rate to be only one of many factors that make an industry attractive, and which considers relative market share to be only one of many factors describing the competitive strength of the business unit
The Product Portfolio - introduces the growth-share matrix and its dynamics, including the success sequence and the disaster sequence. Cash Traps - explains why the majority of products are cash traps. The Star of the Portfolio - and why market share is so important. Anatomy of the Cash Cow - including the buying and selling of market share for cash cows. The Corporate Portfolio - discussing the advantages of diversified companies.

Renaissance of the Portfolio - after the portfolio concept's falling out of favor, this article makes the case for its return.

The 75 articles in Perspectives on Strategy also include the pricing paradox, segment-ofone marketing, time-based competition, and other articles summarizing the insights of Bruce Henderson and other BCG members.

BCG Matrix
Boston Consulting Group (BCG) Matrix is a four celled matrix (a 2 * 2 matrix) developed by BCG, USA. It is the most renowned corporate portfolio analysis tool. It provides a graphic representation for an organization to examine different businesses in its portfolio on the basis of their related market share and industry growth rates. It is a two dimensional analysis on management of SBUs (Strategic Business Units). In other words, it is a comparative analysis of business potential and the evaluation of environment. According to this matrix, business could be classified as high or low according to their industry growth rate and relative market share. Relative Market Share = SBU Sales this year leading competitors sales this year. Market Growth Rate = Industry sales this year - Industry Sales last year. The analysis requires that both measures be calculated for each SBU. The dimension of business strength, relative market share, will measure comparative advantage indicated by market dominance. The key theory underlying this is existence of an experience curve and that market share is achieved due to overall cost leadership. BCG matrix has four cells, with the horizontal axis representing relative market share and the vertical axis denoting market growth rate. The mid-point of relative market share is set at 1.0. if all the SBUs are in same industry, the average growth rate of the industry is used. While, if all the SBUs are located in different industries, then the mid-point is set at the growth rate for the economy. Resources are allocated to the business units according to their situation on the grid. The four cells of this matrix have been called as stars, cash cows, question marks and dogs. Each of these cells represents a particular type of business.

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Figure: BCG Matrix Stars- Stars represent business units having large market share in a fast growing industry. They may generate cash but because of fast growing market, stars require huge investments to maintain their lead. Net cash flow is usually modest. SBUs located in this cell are attractive as they are located in a robust industry and these business units are highly competitive in the industry. If successful, a star will become a cash cow when the industry matures. Cash Cows- Cash Cows represents business units having a large market share in a mature, slow growing industry. Cash cows require little investment and generate cash that can be utilized for investment in other business units. These SBUs are the corporations key source of cash, and are specifically the core business. They are the base of an organization. These businesses usually follow stability strategies. When cash cows loose their appeal and move towards deterioration, then a retrenchment policy may be pursued. Question Marks- Question marks represent business units having low relative market share and located in a high growth industry. They require huge amount of cash to maintain or gain market share. They require attention to determine if the venture can be viable. Question marks are generally new goods and services which have a good commercial prospective. There is no specific strategy which can be adopted. If the firm thinks it has dominant market share, then it can adopt expansion strategy, else retrenchment strategy can be adopted. Most businesses start as question marks as the company tries to enter a high growth market in which there is already a market-share. If ignored, then question marks may become dogs, while if huge investment is made, then they have potential of becoming stars. Dogs- Dogs represent businesses having weak market shares in low-growth markets. They neither generate cash nor require huge amount of cash. Due to low market share, these business units face cost disadvantages. Generally retrenchment strategies are adopted because these firms can gain market share only at the expense of competitors/rival firms. These business firms have weak market share because of high costs, poor quality, ineffective marketing, etc.

Unless a dog has some other strategic aim, it should be liquidated if there is fewer prospects for it to gain market share. Number of dogs should be avoided and minimized in an organization.

Limitations of BCG Matrix

The BCG Matrix produces a framework for allocating resources among different business units and makes it possible to compare many business units at a glance. But BCG Matrix is not free from limitations, such as1. BCG matrix classifies businesses as low and high, but generally businesses can be medium also. Thus, the true nature of business may not be reflected. 2. Market is not clearly defined in this model. 3. High market share does not always leads to high profits. There are high costs also involved with high market share. 4. Growth rate and relative market share are not the only indicators of profitability. This model ignores and overlooks other indicators of profitability. 5. At times, dogs may help other businesses in gaining competitive advantage. They can earn even more than cash cows sometimes. 6. This four-celled approach is considered as to be too simplistic.

Ansoff Matrix
To portray alternative corporate growth strategies, Igor Ansoff presented a matrix that focused on the firm's present and potential products and markets (customers). By considering ways to grow via existing products and new products, and in existing markets and new markets, there are four possible product-market combinations. Ansoff's matrix is shown below:

Ansoff Matrix Existing Products Existing Markets New Products

Market Penetration

Product Development

New Markets

Market Development

Diversification

Ansoff's matrix provides four different growth strategies:

Market Penetration - the firm seeks to achieve growth with existing products in their current market segments, aiming to increase its market share. Market Development - the firm seeks growth by targeting its existing products to new market segments. Product Development - the firms develops new products targeted to its existing market segments. Diversification - the firm grows by diversifying into new businesses by developing new products for new markets.

Selecting a Product-Market Growth Strategy

The market penetration strategy is the least risky since it leverages many of the firm's existing resources and capabilities. In a growing market, simply maintaining market share will result in growth, and there may exist opportunities to increase market share if competitors reach capacity limits. However, market penetration has limits, and once the market approaches saturation another strategy must be pursued if the firm is to continue to grow. Market development options include the pursuit of additional market segments or geographical regions. The development of new markets for the product may be a good strategy if the firm's core competencies are related more to the specific product than to its experience with a specific market segment. Because the firm is expanding into a new market, a market development strategy typically has more risk than a market penetration strategy. A product development strategy may be appropriate if the firm's strengths are related to its specific customers rather than to the specific product itself. In this situation, it can leverage its strengths by developing a new product targeted to its existing customers. Similar to the case of new market development, new product development carries more risk than simply attempting to increase market share. Diversification is the most risky of the four growth strategies since it requires both product and market development and may be outside the core competencies of the firm. In fact, this quadrant of the matrix has been referred to by some as the "suicide cell". However, diversification may be a reasonable choice if the high risk is compensated by the chance of a high rate of return. Other advantages of diversification include the potential to gain a foothold in an attractive industry and the reduction of overall business portfolio risk.

How to Use the Ansoff Matrix to Develop New Products for Your Blog
A few weeks ago Darren wrote a post called Brainstorming Activity: What Could You Sell from Your Blog? In the article he suggested you think of products or services you could one day add to your blog. The post generated a lot of comments and many people agreed on the importance of planning ahead. A few years ago as part of studying an MBA I came across the Ansoff Matrix a tool that helps business owners generate ideas for new products. Its easy to adapt it to the blogging world and use it to brainstorm ideas for products and services you can offer and also how you distribute them. The Ansoff Matrix consists of four quadrants:

Market Penetration Market Development Product Development, and Diversification

Market Penetration is all about selling more of your current products to your existing markets while Market Development looks at selling current products to new markets. Product Development is concerned with selling new products to existing markets while Diversification is about selling new products to totally new markets. Lets look at each of the four areas through the eyes of a blogger, and think of ideas for new products or services.

Market Penetration Current Products / Existing Markets

This involves taking your existing products, and selling more of them to either your existing customers (readers), or new customers who fit your target market. Ideas you can consider include:

Guest posting on other blogs in your niche. Having people guest post on your blog. Article marketing posting blog articles to Ezine articles and other directories. Post more articles on your blog. Joining with other bloggers in joint ventures. Using Facebook or Twitter to promote your blog and find people who could be interested in it. Improving the SEO of your site so you rank highly for relevant keywords. Promoting your blog or product through the email list of another blogger perhaps you can reciprocate?

Allowing affiliates to sell your product.

Market penetration can be the simplest way to increase sales, as it uses the products you already have.

Market Development Existing Products / New Markets

This looks at ways you can increase sales by selling your existing products or services to new markets. Things you could consider include:

Geographical reach if you currently only sell your product in one region, could you increase that area to include more regions? Guest posting on blogs in different niches i.e. if you write about personal finance, guest on blogs that are about other topics, but are read by people in your target audience. Language is it possible to get your e-book translated into foreign languages to increase sales? Is your product suitable for other industries? Say you help realtors with their web marketing. Could you offer the same suite of services to attorneys? Is there a new or different use for your product that makes it attractive to new markets?

Product Development New Products / Present Markets

This is aimed at introducing new products or services to your existing clients / readers. If you understand the needs of your target market, it gives you the opportunity to create products that solve their problems. This is potentially a very lucrative area, if you get it right. Ideas to consider include:

Repackaging your existing product can an e-book become a video or a live workshop? Can that live workshop be recorded and then become a new video or audio product? Can your e-book become a real book, or could you create an audio book from it? Creating add-on products. If youve already written one e-book, is there another subject you could write about that is a natural progression from the first e-book. You could write a new e-book and sell it to all the people who bought the first one. Can you write another e-book about something different? Or update your original one? Can you create a membership site or forum? Can you create an iPhone application or another piece of software that complements your business? If your target market is bloggers, why not create a WordPress theme or plugin? Are there other products that you can sell as an affiliate that your readers would be interested in? In Darrens case, he promotes WordPress Themes, Aweber, Amazon products and other blogging related products.

Is it possible to create a new blog on a topic related to your existing blog? Darren did this when he started TwiTip. A lot of ProBlogger readers were also interested in learning more about Twitter and TwiTip provided this information to them, whilst also finding new readers. Can you create joint ventures with other thought leaders in your niche?

Diversification New Products / New Markets

This is perhaps the toughest one to get right. It involves moving into a totally different line of business selling different products to a different market. Virgin is a good example of a company using a diversification strategy their airline has little in common with their banking company. Ideas here include are unlimited forget what youre currently selling. Is there another opportunity that you consider to be profitable? Again, Darren provides a great example of the diversification strategy when he started ProBlogger a few years after Digital Photography School. The two blogs are in totally different markets, yet are both hugely successful.

Use It!
The aim of this article is to help create a framework you can use to brainstorm new ideas. Reading it is only part of the process using the information to create a plan for your blog is the next part. Plan to spend half an hour in a quiet place where you can think about this concept. Take something with you to capture your thoughts pen and paper, a computer or an audio recorder. Some do this best by themselves, others prefer to do it as a group exercise. Go through each quadrant one by one and brainstorm ideas using the list Ive provided as a starting point. Dont censor yourself at this stage just get your ideas down. Once youve created your lists, work through them and prioritise your ideas. Then get to work! Please leave a comment below and let us know about an idea youve thought of that fits in one of the four quadrants. Together, lets see what ideas we can come up with.