Summary
The matrix can determine the key elements that categorize whether a product is profitable. It also provides a thorough analysis of how products perform.
Despite its usefulness, the BCG matrix is a simple framework that might overlook some of a firm’s deeper components. Employing the BCG matrix has the disadvantage that it only considers market share and growth. Thus, it will only partially explain the reasons behind your things’ success or failure.
Do you ever wonder why your business is not growing? No matter how products you add and the tools you use? It can be stressful and draining. But at times like this, you should try to think deeply instead of being angry and feeling hopeless about the situation.
Ask yourself, are all your product sales high? What products sell the most? What and why are they not? You can also employ a BCG matrix to analyze your business product portfolio effectively. But how do you do it?
That’s what we’re going to tackle in this article. I prepared examples and how to guide regarding the BCG matrix to help you use it for your business. Keep reading to learn more!
BCG Matrix Overview
The BCG matrix model evaluates a company’s product line to assist in long-term strategic planning. The matrix assists in identifying new growth opportunities and formulating plans to ensure future investment success.
Although most businesses sell a variety of goods, not all of them are equally profitable. The BCG matrix can be useful since it offers a framework for evaluating each product’s performance, helping the business decide which items to invest more money in and which to drop.
Benefits of Using BCG Matrix
The BCG Matrix offers multiple benefits to businesses, especially in strategic planning and portfolio management. With the help of the BCG matrix, businesses are able to effectively allocate their resources, allowing them to concentrate on highly growing products while selling off or managing low-growth products.
It also helps identify potential areas for investment and growth, which enables businesses to make intelligent decisions about product development, marketing plans, and resource allocation.
Drawbacks of BCG Matrix
Despite its usefulness, the BCG matrix is a simple framework that might overlook some of a firm’s deeper components. Employing the BCG matrix has the disadvantage that it only considers market share and growth. Thus, it will only partially explain the reasons behind your things’ success or failure.
The BCG matrix is an excellent place to start, but it is insufficient to direct a company’s future. It won’t give you enough details to deal with difficult business issues in many circumstances.
How To Create A BCG Matrix?
Now that you’re familiar with the BGC’s benefits and drawbacks, let’s talk about how to build up a BCG matrix. The first thing you will need is data on the market share and growth rate of the products or services you offer.
Second, you must assess your competitors fairly and consider the future three years when assessing market growth. One effective framework for this kind of evaluation is Porter’s Five Forces. But you may also use absolute market share if your industry is highly fragmented.
The next step is to create a BCG matrix by hand or using a web-based template program. Some are offered for free, while others require a subscription or come with another charting tool.
Market share is displayed along the horizontal axis (low left to high right), and growth rate is displayed along the vertical axis (low bottom to high top) of this four-quadrant BCG matrix template. Upper left is “Stars,” upper right is “Questions,” lower left is “Cash Cows,” and lower right is “Dogs.”
According to their market share and projected growth, categorize your products accordingly. The positioning of the quadrant boundaries is determined by how your business stands up against the competition. Each quadrant of the BCG matrix is discussed in detail below.
Stars Quadrant
Stars are the most profitable divisions or products in terms of market share and earnings. The term is often used to describe monopolies and first-to-market products.
They have a high growth rate, yet stars have high monetary consumption. This usually has the same monetary effect on income and expenditure.
Stars can mature into Cash Cows if they maintain their success until the market soothes down from its rapid growth. Investing in Stars is an essential part of a BCG growth plan.
Cash Cows Quadrant
A cash cow’s capacity to offer a reliable and continuous income source is one of its main advantages. They require less investment to preserve their position and have high market growth rates, allowing the business to focus its resources on other products or services.
Additionally, cash cows offer a financial safety net that allows businesses to endure market downturns. To guarantee they keep their competitive advantages, you must continue to monitor and manage cash cows.
Dogs Quadrant
The quadrant labeled “dogs” shows goods and services with a small market share and market growth. Dogs frequently appear in markets that are mature or in decline, where they have to deal with fierce competition which makes it difficult to make big profits.
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They are frequently difficult for businesses to manage since they demand continual expenditures with uncertain results. Dogs might still have some value for a business despite their modest financial contribution. They could cater to specific markets or enjoy an engaged base of customers who value their unique characteristics.
Question Marks Quadrant
These areas of business have substantial growth potential but little market share. They spend a lot of money but produce nothing in return.
The corporation loses money because of question marks. However, because these business units are rapidly expanding, they can become Stars in a high-growth industry.
Businesses are urged to buy Question Marks if their products show potential for expansion and to sell from them otherwise.
How to Use the BCG Matrix?
Once you understand where each item fits within the BCG matrix, you can now look into it and prepare for the success of your business’s growth.
So how can you use the BCG matrix? Below are the four approaches you can use to apply the BCG matrix effectively in your business strategy:
1. Increase the amount you invest in Stars and Question Marks if your objective is to focus on development. By investing more in something, you can turn a Question Mark into a Star and then, subsequently, a Cash Cow.
2. Keep an item within the same sector and only do something with it if you can invest more money. A Cash Cow has the benefit of being an established product that requires less work to maintain.
3. Take out the greatest cash flow from a product while lowering your investment and raising profitability. Use this tactic most effectively with Cash Cows.
4. Transfer the money used to purchase a product to another project. Dogs respond well to this tactic.
5. It is impossible to forecast the long-term growth of any item because customer needs are continually changing. You should often update and improve your BCG matrix as economic conditions change.
The objective is to build a varied portfolio, not to thrive in one sector. To maintain an adequate cash flow and provide products to safeguard your business’s future, you must have products in each of the four quadrants of your BCG matrix.
What is the Role of Cash Flow in the BCG Matrix?
Cash flow is important in the BCG Matrix because it provides useful insights about the monetary health of products or business units. While the matrix takes into account market growth rate and market share, cash flow gives a deeper understanding of the company’s profitability and long-term viability.
Companies can examine the real inflows and outflows of cash by assessing cash flow. Aside from that, it helps to identify cash cows, which create considerable cash inflows, hence supporting the business’s stability and growth.
A Real-Life Example of BCG Matrix
Reviewing a real-world BCG matrix example can be helpful to ensure proper analysis comprehension. The Nestle company is often used to illustrate the BCG matrix because it owns various product brands and its trademark.
Nescafé: These items might eventually result in a greater return on investment. To gain a stronger presence in this market, the Nescafé brand might need to make significant expenditures, but once they do, these products might quickly turn into moneymakers.
KitKat: This product has a huge consumer following, notably in Asia. They require a small financial investment. They can be found in every nook and cranny. And the majority of us adore them.
Nestea, others: Products in this category don’t have many remarkable benefits. As a result, the company considers future investments a waste of money. They may one day result in items in the “Dilemma” or “Star” categories.
Nesquik: Dilemma items include certain Nestlé dairy products. This area needs more spending because it is part of the strategy development process. Furthermore, investing money in it carries a high level of risk.
There are instances that a product can sometimes fit into multiple quadrants. So, when creating your BCG matrix, don’t panic when most of your products are positioned in one or two quadrants.
Some Alternative Matrix Models
1. McKinsey/General Electric Matrix
The Business Strength-Industry Attractiveness Matrix, developed by McKinsey and GE, evaluates company units or products according to their competitiveness and industry appeal. It considers several elements, including market size, competitive intensity, technical advancements, and profitability.
2. Product Life Cycle Matrix
The Product Life Cycle Matrix is a structure for assessing products or business units according to the stage of their lifespan cycle. The four stages are typically introduction, growth, maturity, and decline. This matrix makes comprehending the dynamics and tactics needed at various product life cycle stages easier.
3. Directional Policy Matrix
Using two criteria—market appeal and competitive position—the Directional Policy Matrix (DPM), a planning and strategy tool, assesses goods or business units. By considering the varying attractiveness of markets and the company’s standing within those markets, it offers recommendations on tactical choices such as investments, divestment, or allocation of resources.
4. ADL Matrix
The Arthur D. Little (ADL) Matrix ranks business units or goods according to competitiveness and market appeal. It helps recognize possible strategic alternatives for each company unit, including harvest, invest, divest, or build.
5. Shell Matrix
The Shell Matrix, the Scenario Matrix, is a scenario planning tool. It evaluates several future scenarios according to two main variables or parameters. It assists organizations in analyzing the probable impact of various events and developing plans accordingly.
Apply BGC Matrix to Your Business!
Ultimately, the BCG matrix can be utilized for assessing a product portfolio. However, it should be combined with other tools for strategic management and a thorough grasp of the particular company’s context.
With the help of BCG matrix, businesses may make decisions with greater knowledge and effectively go through the complex terrain of their marketplaces since, through the matrix, you can understand your business edge and constraints.
Applying a BCG matrix is simple. You just have to think logically and be careful in positioning a product or service. When you master this, you can effectively assess your business product portfolio.
Did you like this article? If you do and you want to learn more about the BCG matrix and another matrix that you can use to strategize your business, you can do so by reading my blogs below:
- Top 5 Business Process Management Software (BPMS)
- What Is Product Development Process And How To Do It
- How To Be Super Productive: Killer Productivity Tips 2023
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