BCG Matrix: What it is and how to use it to optimize your company's investments
Updated: Nov 28, 2022
Have you ever heard of the BCG Matrix, but don't understand how it can help your business? Or do you know the purpose, but not well aware of the differences in each of the quadrants? In this post, we will answer these questions.
The BCG Matrix is a framework created in 1970 by Bruce Henderson, founder of the Boston Consulting Group, one of the largest strategic consulting firms in the world. The matrix is used to evaluate the performance of products and services, being very useful for companies with a large number of SKUs. Through this framework we are able to have greater clarity of which products have great potential, have stable performance and also which can be discontinued.
The BCG Matrix is composed of two large blocks:
Market Share: It is the percentage that a product represents of the market. For example, a drug company sells a pain product. If this company wanted to calculate the Market Share for that product, it would need to know the total revenue generated by the pain relievers market. Then you would just have to make the relationship between the product's revenue and that of the market:
Market Share = Product Revenue / (Revenue from all market products)
Market Growth: It is the growth in the value sold by all products on the market in the period analyzed. For example, if a certain market sold products worth BRL 500 million in 2020 and BRL 750 million in 2021, the market growth would be 50%.
Growth Market = (Final TMR - Initial TMR) / Initial TMR
Initial TMR: Total Market Revenue in First Period
Final TMR: Total Market Revenue in Last Period
Each of these large blocks are divided into two, high values and low values, thus forming four quadrants:
Star: In the star quadrant are located products with large market growth that are part of and that have a large market share. The company must seek to maintain market share to increase its revenues as the market continues to grow, but the required investments are often high due to high competition. The trend is for market growth to slow down at some point and for this Estrela product to become a Dairy Cow.
Cash cown: Cash cown products have low market growth, but large market share. These are consolidated products, which bring good returns to companies with lower investments.
Pineapple: Pineapple products have low market growth and market share, indicating the possibility of being discontinued. The amount that is not spent on these discontinued products can be used to maintain the market share of Estrela or Vacas Leiteiras products, which bring much greater return to the organization.
Question Mark: These products have great market growth, but low market share, so they are usually recently launched products. In this situation, there is less certainty as to whether we should invest in promoting the product, because we do not know if the market will continue to grow and if it is possible to reach a good market share in the expected time. If the market is dominated by a product from a well-established player, it will be difficult to increase market share and turn this product in question into an Estrela or Vaca Leiteira product. On the other hand, if there are products in the same quadrant, but with uncompetitive markets, it can be a great opportunity.