During the pandemic, many organizations and businesses have hashed out new and improved business strategies to keep up with the rapidly changing environment. From effectively moving to online events and creating everything from disinfectant booths to vegetable washes, businesses explored new avenues to stay afloat.
But how do organizations make decisions around divestment and investment? One way is to use the BCG matrix. The BCG matrix or the Growth Share Matrix is a portfolio management framework developed in 1968 by Boston Consulting Group’s founder, Bruce Henderson.
Discover how the BCG matrix helps in strategic management and what the BCG matrix is based on.
What Is The BCG Matrix?
Let’s analyze the BCG matrix full form. The BCG matrix stands for the Boston Consulting matrix. Created by BCG, the Growth Share matrix is a helpful tool for businesses to assess their portfolio or products and services. The BCG model helps them make decisions on whether they should invest in new technology, discontinue a product to analyze market share and growth.
Very simply put, the BCG model is a tool to help you build a profitable business.
As we understand from the BCG matrix full form, it has been developed by a consulting group that is well-renowned, respectable and trusted. If you want to analyze your business’s market share and growth prospects, the BCG model is one way to do it.
Essentially, it helps you decide where you should invest based on two factors:
1. Organizational competitiveness
2. Market attractiveness
These two factors are dependent upon market share and growth as drivers. You’ll find it easier to analyze whether a business or sector of your organization is profitable and by how much. This way, if you need to cut something, you can do so based on evidence.
The Boston Consulting Matrix-An Overview
The Boston Consulting matrix is represented by four quadrants—question marks, stars, pets (commonly a dog) and a cash cow. These represent degrees of profitability helping you decide whether you should keep or trash a business. It enables decision-makers to invest their resources and focus their efforts in the right place, that is where they expect highest profits and market share.
Here are four quadrants of the Boston Consulting matrix that showcase a combination of market share and growth:
1. Low Growth, High Share: Organizations ideally invest in these cash cows for higher cash flow to reinvest in future. Cash cows are the goal for any business to sustain competition.
2. High Growth, High Share: Businesses substantially invest in stars because they have high growth potential in the future. Stars are what businesses need to overcome challenges and face setbacks.
3. High Growth, Low Share: Businesses invest in or get rid of these question marks based on whether they have potential for market share or growth. This is where organizations take a chance on slightly unknown, unfamiliar territory, depending on their future potential.
4. Low Share, Low Growth: Organizations decide whether they should sell, divest, or rethink these pets. Pets should ideally be converted into cash cows if they want to be retained. But mostly they’re cut off or discontinued.
If an organization is able to capture a majority of the market share, they’ll likely keep investing in that business. But if the cash cow turns into a pet, they’ll be discontinued so the leadership can refocus their strategy elsewhere. The BCG matrix helps your business make these tough decisions.
What Are Relative Market Share And Market Growth Rate?
The BCG matrix is based on the ‘economies of scale’. Economies of scale refers to advantages obtained based on the cost of production, scale of operation and the output. For instance, if the cost of production is low, the scale of operation will be high. Things like wholesale, bulk buying and lower bank interests help businesses decrease the cost of production and increase the scale of operations.
The BCG model determines the relative market share and market growth rate of a product or service you’re invested in. Let’s learn more about each below:
Relative Market Share – What Does It Mean?
Relative market share refers to the cash generation from a business. This depends largely on how competitive a business’s market standing is. For instance, if you and your competitor have the same market share, your market standing will be the same. But if you’re in a weak position compared to your competition, you might see that in your cash flow and profit statements. Similarly, if your position is stronger than your competitor, you’ll likely have a higher market share, which will lead to higher cash generation.
Organizations rely on market share instead of profit to determine competition because it’s more robust. It factors into future decision-making and strategy management. Whether you want to invest or discontinue can be determined with the help of your relative market share. Experts suggest it can even be used to help establish marketing efforts toward maximizing your market share. This is one way to observe the purpose of the BCG matrix in strategic management.
Market Growth Rate – What Does It Mean For Your Business?
Profitability and cash flows are what the Boston Consulting matrix helps you determine. The Growth Share Matrix is helpful in assessing a business’s strengths and weaknesses, profitability in the present and future cash generation avenues. You can depend on the Boston Consulting matrix because it relies on the market growth rate to help assess demands on investment.
High growth markets mean high growth businesses. This is what organizations want in terms of business success. However, high growth is also dependent on investment that makes profitability low. Significant growth is determined beyond the cut-off point of share of investment. But the market growth rate is critical and significant because it helps you understand your brand positioning. You can analyze your future growth potential, market attractiveness and profitability. Using the BCG matrix in strategic management is even more effective in addition to determining profitability.
But the Growth Share matrix isn’t without its drawbacks. Let’s find out what these are based on reviews by critics and economists.
The Drawbacks Of The BCG Matrix
“To be successful, a company should have a portfolio of products with different growth rates and different market shares,” said Bruce Henderson, the matrix’s developer. “The portfolio composition is a function of the balance between cash flows. High growth products require cash inputs to grow. Low growth products should generate excess cash. Both kinds are needed simultaneously.”
The purpose of the BCG model was to represent how an organization’s portfolio looks in a visual format. It was used to determine the profitability and cash flows of the business. However, over time, the meaning of the model shifted and proponents of the matrix began to oversimplify it to the point of impracticality.
The matrix represents a sort of map or guide to how businesses can divert their cash flow from one quadrant to another, essentially divesting, investing and reinvesting among the four quadrants. But this is a risky interpretation. You may end up discontinuing a product simply because you need funds for another potential growth business. The matrix may give a limiting view of the balance between products and services.
Another drawback of the matrix is that it can only be applied in a few industries where the growth rate is high and predictable.
Even if the matrix has certain drawbacks, who’s to say you can’t use it for small-scale decisions that don’t have that much of an impact. You could even use it for your professional decisions like whether to study abroad or find a new job.
The BCG Matrix To Help You Excel
You don’t only have to use the BCG matrix in strategic management. At a personal level, you may apply the BCG matrix if you want to make decisions about your career, professional growth and everyday decisions. For instance, say you’re thinking of starting your own business. A SWOT (Strengths-Weaknesses-Opportunities-Threats) analysis will help you determine whether you should go ahead with it. You’ll study the market, understand your competition and create a business plan. The Growth Share matrix can also help you determine which aspects of your business can be profitable, what can generate cash and what you should steer clear of. You’ll also find ways to develop marketing strategies and improve your brand positioning.
Think of the matrix as a way to excel in what you’re doing. Weighing your options, conducting a growth analysis and understanding the most profitable way to do business are some benefits of the BCG matrix.
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