In order to understand how to use BCG Matrix correctly, lets take a look at the axis. BCG Matrix places businesses/products in its matrix by the merit of Market Growth (x-axis) and Market Share (y-axis).
I would like to invite you to look beyond merely describing what cash cow is etc, but to get an idea of how organizations actually analyze and 'calculate' to get business/products into the matrix.
Market Share (y-axis)
Market Share is the % of the total market that is being serviced by your product category in terms of revenue or the volume of the ACTUAL observed market for a stipulated time period.
Equation - Market Share in unit volume = (unit volume sold by you) / (total unit sold in stipulated time period)
Market share are usually a forecast if you were to use it to gauge the share for the next working year, but you can also use it to calculate share from the previous year and use them as an estimate. The higher the share, the better, of course.
Market Growth Rate (x-axis)
Market growth rate used to assess the state and performance of a market, usually in terms of sales.
Equation - Market Growth Rate = (sales in year 2011 - sales in year 2010) / sales in year 2010
Market growth rate will tell you if the market is attractive enough to continue/discontinue in the product category.
Market share are usually a forecast if you were to use it to gauge the share for the next working year, but you can also use it to calculate share from the previous year and use them as an estimate. The higher the share, the better, of course.
Market Growth Rate (x-axis)
Market growth rate used to assess the state and performance of a market, usually in terms of sales.
Equation - Market Growth Rate = (sales in year 2011 - sales in year 2010) / sales in year 2010
Market growth rate will tell you if the market is attractive enough to continue/discontinue in the product category.
Let's now look at the 4 quadrant respectively. A company's business.products can fall into any four categories in BCG Matrix in the form of : Stars, Question mark, Cash cows and Dog.
Stars
- Star category represents high growth and high market share
- High investments needed to maintain the share
- High cash flow outward movement in this category to maintain status
- Usually in the end of the 'Growth' Product Life Cycle stage
- Represents emerging and good business for the company, though they need alot of attention and priority
Cash Cow
- Represents low growth, high market share
- This is the best quadrant of the portfolio as the company basically enjoy the 'milk' of success
- This is where the revenue stream flows inwards
- Usually in the matured stage in Product Life Cycle
Dog
- Represents low growth, low market share
- No potential to be valuable to organization anymore
- Opportunity cost in the effort to maintain this business/products as they can channel effort to other place
- Usually in the declining stage in Product Life Cycle
- Line pruning or divested after awhile in real organizations
Question marks
- Represents high growth, low market share
- They are usually new product category or new products/business for the organization
- They have the potential, but it is not clear which direction will the business go next
- Usually requires huge investments
- Usually in the introduction stage in Product Life Cycle
Rationals for using BCG Matrix
Macro Perspective:
- Maximize the organization's use of money and investments to achieve desired ROI
- Allow a company to assess their multiple businesses on hand and manage the multiple businesses in portfolio
- Visuals on where the money is coming in and out; Resource allocation and fund movements.
- Achieve the entire organization objectives
Micro Perspectives:
- In the micro level, users usually look at where the business/products is in, and try to implement strategies to shift it around in the portfolio
- Ability to do simple calculations to see where the business/product lies in the BCG matrix
-Allow marketers to develop strategies for the business/product in the particular quadrants as they display similar characteristics in the quadrant
Conclusion
BCG matrix is used by large organizations with alot of different businesses and products in the marketplace. They can measure the growth rate and market share of each and put them all together in a table form(portfolio). It allows for clear understanding on how the company is performing, where each businesses lies in the matrix, and how to develop strategies to do something about them, in order to achieve the organization's overall goals and objectives.
For brand managers or small business owners, it is useful to gauge your market share and growth in relation to your market to see how your product is doing. When you get a sense of which quadrant you product is in, then develop necessary strategies to achieve your desired outcome.
Having said that, BCG Matrix is not without it's critics, but suffice to say this matrix is a good tool for portfolio analysis.
Stars
- Star category represents high growth and high market share
- High investments needed to maintain the share
- High cash flow outward movement in this category to maintain status
- Usually in the end of the 'Growth' Product Life Cycle stage
- Represents emerging and good business for the company, though they need alot of attention and priority
Cash Cow
- Represents low growth, high market share
- This is the best quadrant of the portfolio as the company basically enjoy the 'milk' of success
- This is where the revenue stream flows inwards
- Usually in the matured stage in Product Life Cycle
Dog
- Represents low growth, low market share
- No potential to be valuable to organization anymore
- Opportunity cost in the effort to maintain this business/products as they can channel effort to other place
- Usually in the declining stage in Product Life Cycle
- Line pruning or divested after awhile in real organizations
Question marks
- Represents high growth, low market share
- They are usually new product category or new products/business for the organization
- They have the potential, but it is not clear which direction will the business go next
- Usually requires huge investments
- Usually in the introduction stage in Product Life Cycle
Rationals for using BCG Matrix
Macro Perspective:
- Maximize the organization's use of money and investments to achieve desired ROI
- Allow a company to assess their multiple businesses on hand and manage the multiple businesses in portfolio
- Visuals on where the money is coming in and out; Resource allocation and fund movements.
- Achieve the entire organization objectives
Micro Perspectives:
- In the micro level, users usually look at where the business/products is in, and try to implement strategies to shift it around in the portfolio
- Ability to do simple calculations to see where the business/product lies in the BCG matrix
-Allow marketers to develop strategies for the business/product in the particular quadrants as they display similar characteristics in the quadrant
Conclusion
BCG matrix is used by large organizations with alot of different businesses and products in the marketplace. They can measure the growth rate and market share of each and put them all together in a table form(portfolio). It allows for clear understanding on how the company is performing, where each businesses lies in the matrix, and how to develop strategies to do something about them, in order to achieve the organization's overall goals and objectives.
For brand managers or small business owners, it is useful to gauge your market share and growth in relation to your market to see how your product is doing. When you get a sense of which quadrant you product is in, then develop necessary strategies to achieve your desired outcome.
Having said that, BCG Matrix is not without it's critics, but suffice to say this matrix is a good tool for portfolio analysis.
