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Glossary – BCG Matrix

BCG Matrix

Nikiforov Alexander
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Contents

Introduction to the BCG Matrix

The BCG Matrix (Boston Consulting Group Matrix) is an important tool for strategic planning in marketing. It allows companies to assess the effectiveness of various product categories and business directions, which is a key aspect for successful product portfolio management. Developed by Bruce Henderson in the late 1960s, the BCG Matrix has become the foundation for many strategies, allowing for the identification of areas that require additional investments and those that may need to be reduced or closed. With the help of the matrix, marketers can easily determine which business directions are the most profitable and promising, and which may incur losses.

Schematic representation, the matrix is a graph divided into four sectors: "stars," "question marks," "cash cows," and "dogs." These groups are formed based on two key metrics: market share and growth rate. The horizontal axis reflects market share compared to competitors, while the vertical axis reflects the growth rates of the respective market. Thus, the BCG Matrix helps identify business directions that are at different stages of the life cycle.

Types of Products in the BCG Matrix

It is important to note that the categories in the BCG Matrix are not static. Products and business directions go through various stages of development, from introduction to market exit. For example, "stars" may eventually become "cash cows," and then "dogs." Regularly revisiting the BCG Matrix helps maintain the relevance of data about the company's product line.

  • "Question Marks": Products that have recently entered the market and have high growth potential but are not yet generating significant profit. Investments in such directions can lead to their transformation into "stars."
  • "Stars": These are popular products that generate high revenue but require significant investment to maintain growth.
  • "Cash Cows": Products that hold a significant market share and provide stable income but have low growth rates.
  • "Dogs": Unpromising products that do not generate profit and have low demand.

How to Use the BCG Matrix

To construct the BCG Matrix, it is necessary to gather data on the sales volumes of all the company’s products, as well as the sales of major competitors. Using this data, market share and growth rates can be determined. Typically, the matrix uses relative market share based on sales volume relative to the most successful competitor. However, when possible, it is worth considering the total market volume.

For example, if the company's revenue from the sale of ground coffee increased from 720,000 rubles in 2021 to 957,000 rubles in 2022, the growth rate would be 132.92%. Next, to determine the relative market share, you need to divide your sales volume by the sales volume of the leader in this category. After this, a bubble chart is created, where the X-axis shows market share, and the Y-axis shows growth rates, allowing for a visual identification of which type each product belongs to.

Choosing a Development Strategy

After distributing products across the sectors of the matrix, the next step is to choose a development strategy. There are four main strategies:

  • Profit Maximization: A strategy aimed at generating maximum revenue from "cash cows" until they become "dogs."
  • Increasing Market Share: Shifting investments from successful directions into "question marks" to transform them into "stars."
  • Maintaining Market Share: Directing resources to maintain the status of "stars" and compete with rivals.
  • Exiting the Market: Abandoning directions that do not generate profit, allowing for the reallocation of resources to more promising products.

The choice of strategy depends on many factors, including the industry and growth rates. In rapidly changing sectors, such as FMCG, it is important to focus on maintaining "stars" and abandoning "dogs." Meanwhile, in stable industries, such as B2B, the emphasis should be on maximizing profits from "cash cows" and increasing the market share of "question marks."

Advantages and Disadvantages of the BCG Matrix

Like any other tool, the BCG Matrix has its advantages and disadvantages. Key advantages include:

  • Ease of Construction: Access to sales data and basic proficiency in Excel allow for quick creation of the matrix.
  • Clarity of Results: The graph is easy to interpret, enabling quick communication of information to the team.
  • Objectivity: Based on concrete data, making it a reliable tool for decision-making.

However, there are also drawbacks:

  • Does Not Account for Interdependencies Between Products: Consumers may purchase not individual products but entire ecosystems.
  • Low Accuracy: Using only two factors may not always provide a complete picture.
  • Ambiguity of Conclusions: Products on the border of several sectors may create difficulties in strategy selection.

To achieve the best results, it is recommended to use the BCG Matrix in conjunction with other analysis methods.