The two-dimensional matrix developed by the Boston Advisory Group has received wide application in the practice of strategic choice. Therefore, this matrix is better known as the Boston Consulting Group matrix, or the BCG matrix. This matrix allows a business to categorize products by their market share relative to major competitors and annual growth rates in the industry.
The matrix makes it possible to determine which product of the enterprise occupies a leading position compared to competitors, what is the dynamics of its markets, and allows for a preliminary distribution of strategic financial resources between products. The matrix is built on a well-known premise - the greater the share of the product on the market (the greater the volume of production), the lower the unit costs per unit of output and the higher the profit as a result of relative economies of production volumes.
The BCG matrix is compiled for the entire portfolio, and for each product the following information should be available:
The volume of sales in value terms, it is presented on the matrix of the area of the circle;
Product market share relative to the largest competitor, which determines the horizontal position of the circle in the matrix;
The growth rate of the market in which the enterprise operates with its products determines the vertical component of the circle in the matrix.
From the BCG matrices, if they are performed for different periods of time, it is possible to build a kind of dynamic series that will give (a visual representation of the patterns of movement in the market of each product, the directions and rates of promotion of goods on the market. When constructing the BCG matrix, the growth rate of sales of goods is divided into "high" and "low" by a conditional line at the level of 10%. The relative market share is also divided into "high" and "low", and the border between them is 1.0. A coefficient of 1.0 indicates that the company is close to leadership.
The interpretation of the BCG matrix is based on the following provisions:
First, the gross profit and total revenues of the enterprise increase in proportion to the growth of the market share of the enterprise;
Secondly, if an enterprise wants to maintain market share, then the need for additional funds grows in proportion to the growth rate of the market;
Thirdly, since the growth of each market eventually declines as soon as the product approaches its maturity stage in its life cycle, therefore, in order not to lose the position won earlier in the market, the profits made should be channeled or distributed among products that have growth trends.
Based on the foregoing, the matrix suggests the following classification of product types in the respective strategic areas, depending on the characteristics of profit distribution: "stars", "cash cows", "wild cats" (or "question mark"), "dogs". This classification is shown in fig. 6.2.
"Stars" are products that occupy a leading position in a rapidly developing industry. They generate significant profits, but at the same time require significant amounts of resources to finance continued growth, as well as tight management control over these resources. In other words, they should be protected and strengthened in order to maintain rapid growth.
Rice. 6.2. BCG matrix
Cash cows are products that lead a relatively stable or declining industry. Since sales are relatively stable at no additional cost, this product generates more profit than is required to maintain its market share. Thus, the production of this type of product is a kind of cash generator for the entire enterprise, that is, to provide financial support for developing products.
“Dogs” are limited-sell products in an established or declining industry. For a long time on the market, these products failed to win the sympathy of consumers, and they are significantly inferior to competitors in all respects (market share, size and cost structure, product image, etc.), in other words, they do not produce and do not need significant amounts of funds. An organization with such products may try to temporarily increase profits by penetrating special markets and reducing the provision of services, or withdraw from the market.
Problem Children (Question Mark, Wild Cats) are products that have little market impact (low market share) in an emerging industry. As a rule, they are characterized by weak customer support and unclear competitive advantages. Competitors dominate the market. Because low market share usually means little profit and limited revenue, these products in high-growth markets require a lot of money to maintain market share and, of course, even more money to increase that share further.
On fig. 6.2, the dashed line shows that "wild cats" under certain conditions can become "stars", and "stars" with the advent of inevitable maturity will first turn into "cash cows" and then into "dogs". The solid line shows the reallocation of resources from cash cows.
Thus, within the framework of the BCG matrix, the following options can be distinguished for the choice of strategies:
- growth and increase in market share- the transformation of the "question mark" into a "star";
- maintaining market share- a strategy for "cash cows", whose income is important for growing types of products and financial innovations;
- "harvesting", i.e. getting a short-term profit share as much as possible, even at the expense of market share- a strategy for weak "cows", deprived of the future, unfortunate "question marks" and "dogs";
- business liquidation or abandonment and using the resulting funds in other industries is a strategy for "dogs" and "question marks" who have no more opportunities to invest to improve their positions.
The BCG matrix can be used:
To determine interrelated conclusions about the position of the products (or business units) that make up the enterprise and their strategic prospects;
To conduct negotiations between top managers and managers at the business unit level and make decisions on the amount of investment (capital investment) in a particular business unit.
For example, "question marks" operating in fast-growing industries, as a rule, urgently need a constant inflow of funds to expand their business and strengthen their positions, and "money bags" with limited growth opportunities often have a cash surplus. In other words, using the BCG matrix, an enterprise forms the composition of its portfolio (that is, it determines the combination of capital investments in various industries, various business units).
The BCG model is considered to be the first model of corporate strategic management. The emergence of the BCG model was the logical conclusion of the research work carried out by the specialists of the consulting company Boston Consulting Group. The decisions that the BCG model suggests depend on the position of the particular type of business of the organization in the strategic space formed by the two coordinate axes.
Along the y-axis - the importance of market growth rates . The high growth rate allows the company to achieve an increase in the relative share by accelerating its own pace of business growth. In addition, a growing market implies a quick return on investment. The x-axis is considered relative competitive position organizations in the form of the ratio of the sales volume of the organization in the SBA to the sales volume of the main competitor in this SBA.
SZH on the matrix are represented by circles with centers at the intersection of the coordinates formed by the market growth rate and the relative share of the organization in the corresponding market. The size of the circle is proportional to the total size of the market. In the original version of the model, the boundary between high and low growth rates is a 10% increase in volume per year (Fig. 12.2).
12.2. BCG Matrix
Consider each of the quadrants of the matrix.
Stars are highly competitive businesses in fast-growing markets, which is an ideal position. The main problem of the stars has to do with finding the right balance between income and investment. cash cows- it is a highly competitive business in mature markets. SZH data is a source of cash for the company: « Cash Cows are former stars who are currently generating sufficient profits for the organization. The cash flow in these positions is balanced, since investment in SBAs requires the bare minimum. Difficult children(question marks, wildcats) are SBAs that compete in growing markets but hold a relatively small market share, resulting in the need for increased investment to protect market share and ensure survival. Thus, SBAs are consumers of cash until their market share changes. Dogs are a combination of weak competitive positions with markets that are in a state of stagnation. Cash flow in business areas is usually very low, and more often even negative.
The analytical value of the BCG model lies in the fact that it can be used not only to determine the strategic position of each SBA organization, but also to give recommendations on the balance of cash flow from the perspective of the SBA. The main recommendations for the BCG matrix:
1. Surplus funds from "cash cows" should be used to develop "difficult children" and strengthen the position of "stars".
2. Difficult children with unclear prospects should be removed from the portfolio to reduce the demand for financial resources.
3. The company must exit the SZH industries - "dogs".
4. If a company lacks cash cows, stars or problem children, then measures must be taken to balance the portfolio: the portfolio must contain "stars" and "difficult children" in quantities sufficient to ensure healthy growth of the company , and "cash cows" - to provide investments for "stars" and "difficult children".
Based on this, there are the following strategy options:
1) growth and increase in market share (for a “difficult child”);
2) maintaining market share (for "cash cows");
3) getting short-term profits even at the expense of market share reduction (for weak "cash cows", "difficult children" and "dogs");
4) liquidation of business or abandonment of it (for "dogs" and "difficult children").
The BCG matrix is refined by Jean-Jacques Lambin (Figure 12.3).
Rice. 12.3. SZH Development Trajectories
On fig. 12.3. SBA development trajectories are presented, which can be observed in the dynamic portfolio analysis.
The main advantages of the matrix are:
Possibility to study the relationship between SZH;
Ability to analyze the stages of development of SZH;
Focusing on financial flows;
Simplicity and accessibility for understanding the organization's portfolio.
However, the BCG matrix has a number of significant drawbacks. :
Criteria are evaluated only as "low-high";
Not always SZH can be described using four groups;
The model is static, which does not allow tracking trends;
Market growth is not the only factor that determines the attractiveness of SBAs.
The Boston Consulting Group (BCG) matrix is considered the first successful attempt to apply a strategic approach to the analysis and formation of an enterprise's product and competitive strategy. It was first introduced in the late 1960s by BCG founder Bruce Henderson as a tool for analyzing the market position of a company's products. From the whole variety of factors characterizing it, only two main ones were chosen to build the matrix: sales growth (profitability) of the product and its market share relative to the main competitors.
The BCG matrix (eng. Boston Consulting Group, BCG) is a tool for strategic analysis and planning in marketing.
The appearance of the BCG model (matrix) was the logical conclusion of one research work, created by the founder of the Boston Consulting Group (Boston Consulting Group) Bruce D. Hendersen.
The BCG matrix is based on two hypotheses:
The first hypothesis is based on the experience effect and assumes that a significant market share means the presence of a competitive advantage associated with the level of production costs. From this hypothesis it follows that the largest competitor has the highest profitability when selling at market prices and for him the financial flows are maximum.
The second hypothesis is based on a product life cycle model and assumes that presence in a growing market means an increased need for financial resources for updating and expanding production, conducting intensive advertising, etc. If the market growth rate is low (mature market), then the product does not need significant financing.
The Boston Matrix, or growth/market share matrix, is based on a product life cycle model, according to which a product goes through four stages in its development:
1. entering the market (product - "problem"),
2. growth (product - "star"),
3. maturity (product - "cash cow")
4. recession (product - "dog").
At the same time, the cash flows and profits of the enterprise also change: negative profit is replaced by its growth and then a gradual decrease.
Rice. 1 BCG matrix
To build the BCG matrix, we fix the values of the relative market share along the horizontal axis, and the market growth rates along the vertical axis.
Further, dividing this plane into four parts, we obtain the required matrix. The value of the variable ODR (relative market share), equal to one, separates products - market leaders - from followers. As for the second variable, industry growth rates of 10% or more are generally regarded as high. Petrov A.N. Strategic Management: Textbook for High Schools (GRIF). - St. Petersburg: Peter, 2007. - 496 p.
It can be recommended to use as a baseline separating markets with high and low growth rates, the growth rate of the gross national product in physical terms, or the weighted average of the growth rates of various segments of the industry market in which the company operates.
It is believed that each of the squares of the matrix describes significantly different situations that require a different approach in terms of financing and marketing.
1. "Stars" are market leaders who are, as a rule, at the peak of their product cycle. They bring significant profits, but at the same time require significant amounts of resources to finance continued growth, as well as tight management control over these resources. The star strategy aims to increase or maintain market share. The main task of the company is to maintain the distinctive features of its products in the face of growing competition. Markova V.D., Kuznetsova S.A. Strategic management: a course of lectures (neck). - M.: INFRA-M, 2006. - 288 p.
You can maintain (increase) your market share by:
through price reduction;
through a slight change in product parameters;
through a wider distribution.
Companies (business units) with high relative market share in high-growth industries are named stars in the BCG table because they promise the greatest profits and growth prospects. The general condition of the economic portfolio of the corporation depends on such companies. Having taken a dominant position in a fast-growing market, star companies usually need significant investments to expand production capabilities and increase working capital. But they also generate significant cash inflows themselves due to low cost levels through economies of scale and accumulated manufacturing experience. Zinoviev V.N. Management [Text]: Textbook. - M.: Dashkov i K, 2007. - 376 p.
Star companies differ in their investment needs. Some of them may cover their investment needs from the income from their own activities; others need financial support from the parent company in order to keep up with the industry's high growth rate.
Business units that are at the forefront of industries where growth is starting to slow cannot survive on their own inflows of funds, and therefore begin to feed from the resources of the parent company.
Young star companies, however, usually require substantial investments beyond what they earn themselves, and thus are resource grabbers. Ivanov L.N., Ivanov A.L. Decision-making methods [Text] - M.: Prior-izdat, 2004. - 193 p.
As the pace of development slows down, the "star" turns into a "cash cow"
2. "Cash cows" - occupy a leading position in the market with a low growth rate. They are attractive because they do not require large investments and provide significant positive cash flows based on the experience curve.
Such business units not only pay for themselves, but also provide funds for investing in new projects on which the future growth of the enterprise depends. Markova V.D., Kuznetsova S.A. Strategic management: (neck). - M.: INFRA-M, 2006. - 288 p.
In order for the phenomenon of goods - "cash cows" to be fully used in the investment policy of the enterprise, it is necessary to competently manage products, especially in the field of marketing. Competition in stagnant industries is very tough.
Therefore, constant efforts are needed to maintain market share and search for new market niches.
Cash cow companies earn more than their reinvestment needs. There are two reasons why a business in this quadrant becomes a cash cow.
Due to the fact that the relative market share of this business unit is large and it occupies a leading position in the industry, its sales volumes and good reputation allow it to generate significant income. Meskon, M.Kh. Fundamentals of Management / M.Kh. Mescon. - M. Albert, F. Hedouri. - M., 2001, p. 332
Because the industry is growing at a slow pace, the company is generating more cash from current operations than it needs to maintain its market leadership and capital reinvestment. Fatkhutdinov R.A. Strategic Management: Textbook. - 7th ed., Rev. and additional M: Delo, 2005. - 448 p.
Many of the cash cows are yesterday's stars, descending into the lower right quadrant of the matrix as industry demand matures. Although less attractive in terms of growth prospects, cash cows are very valuable business units.
The additional cash flow from them can be used to pay dividends, fund acquisitions, and secure investments in emerging stars and problem children who can grow into future stars. Yurlov F.F., K.B. Galkin T.A., Malova D.A., Kornilov Features and possibilities of using portfolio analysis in strategic planning and management at an enterprise M. 2010 p. 11
All efforts of the corporation should be aimed at maintaining dairy cows in a prosperous state in order to use their capabilities in generating an influx of financial resources for as long as possible. The goal should be to strengthen and protect the market position of dairy cows during the entire period when they are able to earn funds that will be directed to the development of other units.
However, weakening dairy cows that move to the lower left corner of the dairy cow quadrant may become candidates for harvesting and a gradual “downsizing” if fierce competition or increased capital investment (caused by new technology) causes the additional cash flow to dry up. or, in the worst case, become negative. Markova V.D., Kuznetsova S.A. Strategic management: a course of lectures (neck). - M.: INFRA-M, 2006. - 288 p.
The strategy is to protect your position at no significant cost.
3. "Dogs" are products that have low market share and no growth opportunities because they are in unattractive industries (in particular, an industry may be attractive due to high levels of competition).
The net cash of such business units is zero or negative. Unless there are special circumstances (for example, a given product is complementary to a cash cow or star product), then these business units should be disposed of.
However, sometimes corporations retain such products in their nomenclature if they belong to "mature" industries. Large markets in "mature" industries are to some extent protected from sudden fluctuations in demand and major innovations that fundamentally change consumer preferences, which allows products to remain competitive even in a small market share (for example, the market for razor blades).
Companies (business units) with low relative market share in slow-growth industries are called dogs because of their weak growth prospects, underperforming market positions, and the fact that being behind the leaders on the experience curve limits their profit margins.
Weaker dogs (located in the lower left corner of the dog quadrant) are often unable to earn significant amounts of money in the long run. Shifrin M.B. Strategic management. Short course: Textbook (neck). - St. Petersburg: Peter, 2007. - 240 p.
Sometimes these funds are not enough even to support a rearguard strategy of strengthening and protecting, especially if the market is fiercely competitive and profit margins are chronically low.
Therefore, except in special cases, for weakening dogs, the BCG recommends that a strategy of harvesting, reduction or elimination be applied, whichever option can bring the greatest benefits.
Since there is often a situation where "dogs" have a fairly high profitability, the reduction strategy is applied to strategic business units (SBUs) that fall into the lower left triangle of the "dogs" quadrant. For the upper triangle, the "milking" strategy is applied - as for "cash cows".
5. "Problem" ("Problem children", "wild cat") - new products appear more often in growing industries and have the status of a product - "problems". Such products may prove to be very promising. But they need significant financial support from the center. As long as these products are associated with large negative financial flows, the danger remains that they will fail to become "star" commodities.
The main strategic question, which presents a certain difficulty, is when to stop financing these products and exclude them from the corporate portfolio? If this is done too early, then you can lose a potential product - the "star".
Thus, the desired sequence of product development is as follows:
"Problem" - "Star" - "Cash Cow" (and if unavoidable) - "Dog".
The implementation of such a sequence depends on efforts aimed at achieving a balanced portfolio, which involves, among other things, a decisive rejection of unpromising products. Ideally, a balanced nomenclature portfolio of an enterprise should include 2 - 3 goods - "cows", 1 - 2 "stars", a few "problems" as a reserve for the future and, possibly, a small number of goods - "dogs".
The BCG scheme includes two cases with a tragic outcome for companies:
1) when the position of the star weakens, it becomes a difficult child and, as the growth of the industry slows down, it turns into a dog.
2) when a cash cow loses its position as a leader in the market to the point where it becomes a weakening dog.
Other strategic mistakes include:
overinvestment in stable dairy cows;
not investing in question marks, which causes them to fall into the category of dogs instead of becoming stars;
A typical unbalanced portfolio has, as a rule, one product - "cow", many "dogs", several "problems", but no "star" products that can take the place of "dogs".
An excess of aging goods ("dogs") indicates the danger of a downturn, even if the current performance of the enterprise is relatively good. An excess of new products can lead to financial hardship. http: //well. omsk4u.ru/
An example of the application of the BCG matrix
As an example, consider the BCG representation of the strategic positions of Randy's hypothetical organization in a number of business areas in the tea market.
A study of the organization's business showed that it actually competes in 10 areas of the tea market (see Appendix 1).
The BCG model for the considered business areas of Randy's organization is as follows:
The resulting model suggests that Randy's organization places undeserved importance on the US private label tea business area.
This area is classified as "dogs" and although the growth rate of this market segment is quite high (12%), Randy has a very strong competitor in the form of Cheapco, whose market share in this market is 1.4 times greater. Therefore, the rate of profit in this area will not be high. http://www.pandia.ru
If with regard to the future of such a business area as "U.S. private label tea", one can still think about whether to continue to invest here to maintain its market share or not, then in relation to "varietal tea from Europe", "varietal tea from Canada" and "varietal tea from the USA" everything turns out to be very clear.
We need to get rid of this kind of business and as soon as possible. The investments that Randy's organization makes to maintain this business do not lead to an increase in market share or an increase in profits. In addition, the market for these types of tea itself shows a clear trend towards fading.
It is clear that Randy's organization is clearly oblivious to the prospects associated with the development of the US fruit tea and US herbal tea market. These areas of business are clear "stars". Investments in the development of a share in this market in the near future may result in significant income. http: //maxi-karta.ru
The Boston Consulting Group Matrix is one of the earliest comprehensive models of a company's strategic performance. It is based on the systematization of information about the company's position in the market and the prospects for its further development. The BCG matrix has a great influence on all marketing in general. Using it, you can predict the further development of an economic entity and decide on the feasibility of an economic project. The matrix is based on the concept of a strategic economic unit, the study of which is the basis of the analysis.
SHE or strategic economic unit
The BCG matrix is based on a separate SCHE or strategic economic unit. Each such unit is an integral part of the general portfolio of a corporation or a separate economic entity. Each entity operates independently of the corporation's other SCHEs, but must take into account its general policies. A set of individual economic units forms a single corporate portfolio, for which the BCG matrix was created. A corporation can create 2 types of portfolios:
Balanced portfolio- provides for a cautious type of investment with a minimum level of risk.
Growth Portfolio– aggressive investments with a high level of risk.
Depending on the selected type of corporate portfolio, each SCHE is analyzed and its fate is determined. If an individual business unit fits into the overall strategy of the portfolio, then it can continue to expect additional resources for development and support from the corporation. An asset that does not fit into the overall strategy of the company, as a rule, is expected to be sold or liquidated. The analysis of each SCHE is based on the study of its position in relation to the entire market and the analysis of market growth.
BCG matrix and its components
The BCG matrix includes two indicators that determine the company's place in the system. The first factor is share SHE on the market. It shows not only the position of an economic unit in the market, but also its ability to influence the market as a whole. This is the strategic advantage of CXE, which occupy a dominant position in the market. In order to determine this position, several methods are used. The simplest one is that if a company occupies more than 20% of the market, then it is considered that it occupies a significant market share, therefore it appears on the right side of the matrix. Companies with a share of less than 20% are on the left side.
To assess the SHE on the vertical axis, analyze the overall state of the market. If the market experiences growth of more than 10% per year, then the growth rate is considered high. Companies that are in a fast growing market are placed at the top of the matrix. Companies with market growth of less than 10% per year are placed at the bottom of the matrix. Such markets are considered unpromising, but more stable and predictable than high growth markets.
Based on the determining factors, each SCHE is given its own place. There are 4 possible positions in the matrix of the Boston Consulting Group:
"Stars" or leading companies dominate the high growth market.
"Cash Cows" occupy a large share in stable markets
"Difficult Children" or "dark horses"– play a non-key role in emerging markets
"Dogs"– small companies in stable markets.
Each position on the BCG matrix implies a choice of a separate strategy in relation to the SCE. This strategy depends on the profit generated by the company in specific market conditions and the need to spend additional resources on its development.
Types of companies in the BCG matrix
"Stars" or companies with a leading position in high-growth markets. Such companies receive the maximum profit in the market, due to which they are the most valuable asset in the overall portfolio of the corporation. The main problem for "star" companies is the determination of the optimal investment policy. If in the current conditions it is usually optimal, then in the future, due to a lack of investment, the “stars” may lose a significant market share and move to the level of “difficult children”. Another strategic problem is that if the market stops growing at a rapid pace, then stars can become cash cows and become uninteresting for growth portfolios.
"Difficult Children" or "dark horses" are one of the most common types of SHE. In this case, the companies are either just starting out on the market or have been pushed out by more successful players. Difficult children are the most promising asset in an investment portfolio, the right investments and resource spending can lead such players to star positions. However, in the absence of a high-quality development strategy and investment, “difficult children” can move into the “dog” stage or are eliminated. Such companies often make up a significant portion of high-risk growth portfolios, but they are not attractive enough for stable portfolios.
"Cash Cows" is the most predictable player in the BCG matrix. Such a company has been operating in an established market for many years. As a rule, "cash cows" do not require large investments, however, it is necessary to carefully analyze market conditions. Despite the leading position in the market, the “cash cow” cannot influence the overall demand, therefore, in case of its decrease, it can move to the position of the dog. The main goal of the corporation is to get the maximum profit from the cash cow. Such an asset is appropriate for both growth and balanced portfolios.
"Dog" is one of the most common types of SHE. Such a company is characterized by high competition and lack of large investments. As a rule, this type of company can bring a small profit, but in general it is unpromising. "Dogs" rarely move to another level, but in markets with cyclical demand, a transition to a "problem child" is possible. These companies may form part of a balanced portfolio, but due to the fact that they require a large amount of resources, they can be liquidated.
Table 1. BCG matrix
Using the BCG Matrix in Marketing
The BCG matrix can play a big role not only for strategic management, but also for company marketing. Depending on the type of SHE, a marketing strategy is chosen. It depends on both market share and market type. Using the BCG matrix, you can determine the place of the company in the market and, depending on this, build the entire further marketing strategy. At the same time, if in strategic management this model determines the expediency of one or another SCHE in the portfolio of corporations, then in marketing the BCG model determines the company's place in the market and its plan for further actions.
The BCG matrix shows the objective place of the company in market conditions. This is especially important in highly competitive markets where even minor details play a big role. Knowing the place of the company in the current conditions, it is possible to predict its behavior in the future. The basis, as a rule, is the achievement of certain numerical indicators: total income, profit volume. A more complex model involves the construction of a BCG matrix depending on market volumes. As a rule, such a matrix is made in the form of a table with further determination of the place of each company in the market. Table 1 shows a simplified construction model (assuming market growth of 20% per year).
Table 2. Construction of the BCG matrix
After building the matrix, the optimal marketing strategy of the company is selected. In the presented table, we can see that a separate behavior model will be chosen for each company. If Avangard is to increase its market share, then Beta must strive to become the leader. And if for the first two the strategy of increasing income will be optimal (for example, by 50,000 or 30%), then for the company "Vid" the strategy of maintaining leadership will be most appropriate. The ability to see the real place of the company in the market is one of the main features of the BCG matrix. Its use allows you to analyze the situation of the company and develop measures to improve it.
In more detail, you can get acquainted with the BCG matrix on the official website of the Boston Consulting Group.
Growth-Market Share Matrix, or BCG Matrix- one of the most common, classic tools, and in particular portfolio analysis of company strategies. The matrix gained fame and name thanks to the work of the Boston Consulting Group (BCG, or, in Russian, the Boston Consulting Group, BCG) and the founder of this group, B. Henderson.
In the 1970s BCG developed an original method for classifying products, which helped to optimize cash flows by position, the place that a product or service occupies in the matrix field. The BCG matrix allows you to classify goods or services produced by an enterprise (organization), depending on or depending on the dynamics of consumer preferences for a particular product. Thus, the model directly reflects the preferences of consumers regarding a particular product.
The BCG matrix uses two criteria to classify a company's current and potential product strategies:
- growth rates of the target market segment as a characteristic of its attractiveness;
- market share relative to the most dangerous (largest) competitor as a characteristic of competitiveness.
For each criterion, the score is determined by the binary system: high/low market growth rates and large/small relative market share. The result is a matrix with four quadrants, almost each of which has received a number of names (see figure).
In this matrix, the middle horizontal line along the “Market Growth Rate” axis, separating “stars” and “wild cats” from “cash cows” and “dogs”, corresponds to the average growth rate of the gross product in the market under consideration, the weighted average of the growth rates of various segments, in which the firm operates, or another indicator of the comparative attractiveness of market segments.
The median vertical line running along the “Relative market share” axis and separating “stars” and “cash cows” from “wild cats” and “dogs” corresponds to one in the ratio between the market share of this firm and the share of the leading competitor in a particular market segment by specific product.
In other cases, the absolute values of these indicators are also used.
It is possible to use a logarithmic scale for the market share indicator. Relativity means dividing the scores for specific products by their highest scores for their own or competitors' products. Thus, the range of change in relative indicators lies in the range from 0 to 1. For the market share indicator, in this case, an inverse scale is used, i.e. in the matrix it ranges from 1 to 0, although in some cases a straight scale may also be used. The growth rate of the market is determined for some time interval, say, for a year.
There is also a modified version of the matrix, in which each of the estimates has three possible values: below the market average, at the level of the average and above the market average. The number of quadrants is thus increased to nine (3 x 3). Usually, when using the BCG matrix, the third indicator is used, the value of which determines the radius of the circle drawn around the point characterizing the position of the product in the matrix, or the area of the circle. In most cases, or is used as such an indicator, the participation of goods in coverage and profit.
The BCG matrix is built both for individual markets and for the total market. In addition to the level of individual products, it is applied at the level of strategic economic units (SHU) and the organization as a whole.
The BCG matrix is based on two basic hypotheses, assumptions:
- The larger the market share, the stronger the position of the organization in the competition. A significant market share reflects cost savings due to , while a small share reflects increased costs. It follows that the largest competitor has the highest and most favorable financial flows.
- The faster the growth rate, the greater the development opportunities. Presence in growing markets means an increased need for, and in low-growing markets - a correspondingly small need for them.
It is easy to see that the four quadrants reflect different stages of the product life cycle and each requires special strategic decisions that involve special competitive strategies, the combination of which makes up one or another portfolio strategy.
If the products are characterized by high values of both indicators, then they are called "stars" they should be supported and strengthened. True, the “stars” have one drawback: since the market is developing at a high pace, the “stars” require high prices, thus “eating up” the money they have earned.
If products are characterized by high X and low Y, they are called "milk cows" and are the generators of the organization's cash, since it is not required to invest in product and market development (the market does not grow or grows slightly), but there is no future behind them.
When X is low and Y is high, products are called "wild cats" ("difficult children"), they must be specially studied in order to establish whether they can not turn into "stars" with certain investments.
When both indicators, X and Y, have low values, then the products are called "losers" ("dogs", "dogs") bringing either small profits or losses. They should be disposed of whenever possible, if there are no good reasons for their preservation (possible renewal of demand, social significance of the product, etc.).
Successful products tend to start out as wildcats in the marketplace, then become stars, become cash cows as demand fills up, and end their market life as dogs. More specifically, it looks like this.
Cash Cows (Slow Growth/High Share): Products that can, in principle, make more money than is required to maintain their market share. For one reason or another, most often related to the maturity and saturation of the market, the growth rate of the market and sales of this product in this quadrant can be zero. The main role of "cows": they are a source of funds for the development of diversification or research, to support other categories of goods from other quadrants. The priority strategic goal is "harvesting".
"Dogs" ("slow growth/low share"): the most unpleasant position in the market. They are usually at a cost disadvantage and therefore have little hope of gaining market share, especially since the market struggle is largely over. Sometimes such products are saved out of stubbornness, in the fruitless hope of miraculously turning back into a "kidney", sometimes to fill a niche so as not to tempt competitors. A priority strategy is, in any case, a modest existence.
Wild Cats (fast growth/low share): This group of products requires significant funds to sustain growth. This most "troublesome" part of the nomenclature includes goods, the share of which is relatively low, but the growth rates are high. Although they are in a less advantageous position than the leader, they have a chance of success as the market expands. “Question marks” cannot stay in their quadrant for a long time. If these products are not financially supported to move into the “star” category, they will evolve to “dogs” as the nature of market dynamics changes to less attractive values, so there is an alternative: increase market share or deinvest.
"Stars" ("fast growth/high share"): leading products in a fast-growing market. They also require significant funds to maintain growth. However, due to their competitiveness, they are able to provide significant profits; as the market matures, they replace previous cash cows. If you do not invest enough money in strengthening and protecting these positions, the "star" can quickly turn not only into a "cow", but also into a "dog".
The scale of the business in this matrix can be indicated by a circle with a surface area proportional to sales or revenue, and even more correctly, proportional to the share of covering fixed costs and profits, since any product must cover variable costs a priori.
The analysis should be carried out in a dynamic mode, tracing the development of each business over time. The nature of development can be reflected by a vector directed towards one or another quadrant of the matrix, as well as a dotted image of a circle with a new diameter (reflecting the future profitability of the product).
One of the main achievements of the BCG matrix was that it established a strong link between strategic positioning and financial performance. But it also has its limitations:
- the applicability of the matrix is limited to industries with mass production, where the effect of economies of scale is convex;
- the matrix most often does not reflect the so-called external competitive advantages obtained with a successful choice of the segment and adequate product differentiation;
- a strictly analytical approach to the application of the matrix requires a lot of data, incl. about competitors, both in the past and in the future tense (the latter is especially difficult);
- the conclusions drawn from the matrix often remain general and vague.
It should be noted that the BCG matrix gives a static picture of the position of SCHEs, types of business in the market, on the basis of which it is impossible to make predictive assessments such as: “Where will the products under study be located in the matrix in a year?” This shortcoming can be compensated by carrying out repeated measurements at certain time intervals and fixing the directions of movement along the field of the matrix of individual products. Such information already has a certain predictive value.
Among the fundamental shortcomings of the BCG matrix is the inability to take into account the interdependence () of individual types of business. If such a dependence exists, this matrix gives distorted results.
It should be noted that assessing the attractiveness of the market only in terms of the rate of change in sales volume, and the strength of the business position only in terms of market share, is a strong simplification. For each area, a multi-criteria assessment should be carried out, which is done when using the company matrix.
