What is BCG Matrix? What is it for and how to do it No, we are not talking about some kind of triple vaccine. If you want to know what BCG is, you also need to understand the concept of BCG matrix and its origins.
It all started in the early 70s when Bruce Henderson developed for the renowned consulting firm BCG – Boston Consulting Group – a methodology for graphical analysis of a company’s business or product portfolio.
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This technique is based on the life cycle of the products, their market share and the potential for growth in that market.
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The objective is to determine what actions to take in relation to each of the products or business units, based on the results of the graphical analysis.
Yes, apparently it sounds complicated, but you will clearly see what BCG is and how to apply this matrix in a very intuitive and agile way through our simple and practical explanations.
Let’s start with the BCG matrix concept:
What is BCG?
The BCG Matrix is a graphical methodology that defines and compares different products or business units of a company, based on volume, market share, and market growth, in order to make the most appropriate strategic decisions about each product or business analyzed.
In the end, there can be four decisions, which we will detail later in this article:
- Build: increase market share.
- Maintain: preserve market share.
- Harvest: get the most out of the business and gradually discontinue it.
- Abandon: sell or close the business.
What is the BCG matrix for?
The BCG matrix serves to identify through a graphical analysis which products or services have performed well and must be maintained and which are requiring a lot of effort but are not generating the expected results.
The BCG matrix can be very useful for entrepreneurs who sell different types of products and need to decide which ones should receive more investment and which may no longer be worth receiving resources and effort.
You will see a very simple step-by-step how to make and use a BCG matrix and you will be able to draw your strategic conclusions in the following topics.
But several other decisions are important for a business manager who works with sales and product lines. Having a properly functioning sales process is one of those factors.
How to make a BCG matrix?
If you still have any doubts about what it is and how to make a BCG matrix, this walkthrough will make it even clearer, follow along!
1. List your products or business units
When making this listing, determine the ascending order of sales volume for each so that it can be used correctly in the matrix.
2. Draw a Cartesian graph with two lines, one horizontal and one vertical
Calm down, just make a vertical and a horizontal line, at a right angle (90 0).
The vertical line represents the market growth rate. You can grade it from 0 to 20%. The middle of the vertical line should be marked with 10%.
The horizontal line represents the relative share of your product (line or business unit) in relation to the closest competitor.
For example, if one of your products sells $250,000 and the closest competitor sells $500,000 that means its relative share is 0.5, that is, half the competitor’s share.
For the gradation on the horizontal line, starting from the left side, mark 10x (your company sells 10 times as much as the closest competitor) and end with 0.1x (your company sells a tenth of what the closest competitor sells).
In the middle of this line should be the 1.0x mark.
Cool, the table is ready. Notice that 4 quadrants have appeared. Now let’s put the products on it.
3. Placing your products on the table
Pick the top-selling product and see what your market’s growth rate is. Let’s say it’s 8%. Mark this number on the vertical axis.
Now check his relative position in the market, let’s say he is the leader, selling 50% more than his closest competitor. Then mark the 1.5x point of the horizontal axis.
Intersect these 2 points in the middle of the table and draw a circle there symbolizing this product. Remember: the larger the circle size, the greater the product’s sales volume.
Do this for each of your products or business units.
It sounds complicated, but see this figure and its explanation in step 4:
4. Sorting your products
Stars: Products that are in the upper left quadrant, with high share in a fast-growing market, which means having to spend a lot to defend against competitors.
Question Marks: Products that are in the upper right quadrant and that still have low share but are in a fast-growing market. That’s the question: it will be worth investing a lot of money to grow your share.
Dairy cows: They are in the lower-left corner of the BCG matrix. They are the evolution of Estrela when market growth starts to drop. Therefore, the high investments have already been made and it is time to take advantage of the cash generated while this lasts. Stay tuned for when to leave!
Pineapples or puppies: Lower right quadrant. They are usually the end of a product’s life cycle, with low participation and growth.
5. Defining action strategies
As you’ve seen, the BCG matrix concept is easy to understand and practice:
With the help of the chart (as explained above) classify your products, product lines or business unit in one of 4 categories:
- Question Marks
- Milky cow
- Pineapple (puppy or pet)
The BCG matrix classifies products into Stars, Questions, Dairy Cows or Puppies.
After d, define one of the 4 strategies for each of them, allocating your resources in the most rational and profitable way:
- Build: take advantage of the question marks and invest in them to conquer the market.
- Keep: Good dairy cows that generate consistent profits must be kept to fund the company as a whole.
- Harvesting: In this case, declining dairy cows, pineapples or even extremely dubious question marks will be used to “harvest” a good cash flow in the short term, ignoring the long-term effects. This is done by reducing costs and investments in research, innovation, equipment replacement, etc.
- Abandon: Puppies (pineapples), as well as Question Marks that are very costly for the company, must be sold or discontinued.
Now is it clearer to you what it is and how to use BCG matrix? No mystery, is it?
On the contrary, it is very practical and useful when defining which products should receive more resources, investments and the best sellers.