BCG Matrix

Overview

This matrix was developed by Mr. Bruce Anderson of Boston Consulting Group (BCG) in 1970’s. Through this matrix, large business groups can take their major decisions on SBUs (Strategic business units) related to growth, diversification & divestment. SBUs are basically business units / organizations which have separate profit centre head and are generally formed with independent missions & objectives. Main purpose of this matrix is to understand the market position of various SBUs on the basis of four combinations obtained from market share & market growth rate. This matrix is most commonly termed as “Growth Share matrix”.

Four combinations are mentioned below:

1. High market share, Low market growth rate – Referred as “Cash Cows”

2. High market share, High market growth rate – Referred as “Stars”

3. Low market share, High market growth rate – Referred as “Question Marks”

4. Low market share, Low market growth rate – Referred as “Dogs”

Relative Market Share: This is calculated as Market share of your SBU (In Revenue) divided by Market Share of largest competitor. Relative market share comes on X-axis and it's top left corner is set at 1 whereas midpoint at 0.5 and top right corner at 0 (see the fig. 1 below).

Market Growth Rate: This figure can be obtained from industry reports published by various journals. It can also be calculated by looking at average revenue growth of the leading industry firms. Special care should be taken while considering the midpoint of Y-axis as this varies from industry to industry and is dependent upon growth rate of particular industry. When doing the analysis you should find out what growth rate is seen as significant (midpoint) to separate cash cows from stars and question marks from dogs.

Fig. 1: Typical BCG Matrix graph, Circles shows sales of particular brands on the market, with current sales mean gray circles, while the clear - the predicted sale.

How to use this tool?

1. Firstly, you need to choose the SBU

2. Identify SBU’s market

3. Calculate relative market share

4. Find growth rate

5. At last, mark your SBU on graph plotted as above to find out the position of your firm / SBU.

After identification of position, appropriate strategies can be made and implemented accordingly. Management will be in better position to plan for future and can act in a wiser way.

To understand in further depth, I have just tried to make this more illustrative by taking example of TATA group (Indian Multinational) through fig. 2, just check it out below. This is based upon my personal opinion, sense of judgement and estimates, it may vary after exact calculation of Market growth rate & Market share.

Advantages of Model

1. It helps the top management in decision making and guides in strategies development. It provides a base for management to decide and plan for future actions.

2. This model is simple and easy to understand.

3. This is highly beneficial for large business houses.

4. Focus areas can be defined / identified through this model.

Limitations of Model

1. High market share & High growth rate doesn’t always mean that company is performing well in the industry. Few companies can have large market share but have very thin margin which ultimately gives limited cash for usage. 

2. Suitability: This matrix is suitable for only large business houses, It Ignores small companies which are growing at very fast rate but market share remains negligible in the overall industry.

3. Sometimes few businesses falling under “Dog” quadrant has huge potential in future and can beat “Cash Cows” as well but that potentiality is ignored based upon few facts and figures of present scenario.