What does business growth rate refer to as used in the BCG matrix?

What is the BCG Matrix?

The Boston Consulting Group (BCG designed its four-celled matrix, the BCG Matrix, to aid in long-term strategic planning. The matrix is used to assess the growth opportunities of different products/brands that an organization has in its portfolio based on relative market share and market growth rates across industries/sectors.

The BCG matrix is used to conduct a two-dimensional analysis of an organization’s product/brand portfolio by looking at market growth and relative market share. The matrix makes it possible to examine the business potential and market environment of different products and brands, which enables the company to decide where to invest, divest, or develop new products.

Key Learning Points

• The BCG matrix is divided into four quadrants and is based on two parameters, relative market share, and market growth rate.
• The BCG Matrix includes four categories: stars, cash cows, question marks, and dogs.
• This matrix can be applied to many different types of businesses. For example, it can help manufacturing companies gauge the market potential of their product portfolios and determine which products should be their focus and which should be discontinued.
• To use the BCG matrix, it’s important that a company assess its products or business units based on certain parameters.
• To calculate the relative market share of a product, divide its market share by the market share of the product’s largest competitor.

BCG Matrix – Key Terminologies

The BCG matrix is divided into four quadrants and is based on two parameters – relative market share and the market growth rate. The horizontal axis of this matrix represents relative market share, while the vertical axis represents the market growth rate. The four cells of this matrix are designated stars, cash cows, question marks, and dogs.

Stars
Stars exhibit high growth and command high market share. Stars are found in the upper left quadrant of the matrix. A company should invest more in stars, as they are well-established products or brands in high-growth markets. They generate significant income and account for a significant percentage of the market share. Stars tend to generate greater ROI than inhabitants of the other three quadrants.

Cash Cow
Cash Cows exhibit low growth but command high market share. They are found in the lower-left portion of the quadrant, and these products/brands typically command a relatively large market share in a mature and slow-growth industry.

Cash cows require little investment and are typically leading, well-established products in mature markets. The cash these products generate can be invested elsewhere, so a company is wise to milk the cash cow as long as possible. Returns on cash cows usually exceed the market growth rate and generate self-sustaining cash flow.

Question Marks
Question Marks show high growth but command low market share and are located in the upper right quadrant. Usually found in a high-growth industry, question marks require significant investment to maintain or increase market share. They’re usually recently introduced products with sound commercial prospects. With sufficient investment, they have the potential to become stars. If neglected, they may become dogs.

Dogs
Dogs are found in the lower right quadrant,  with both low growth and low market share. The dismal performance may be due to high costs, inferior quality, or a lack of effective marketing. Unless there is some hope of gaining market share, a company is wise to dispose of these drains on resources and cash. Dogs are frequently unprofitable.

BCG Matrix – Advantages and Limitations

The BCG matrix is very useful for manufacturing companies since an understanding of a product’s market position is imperative to understanding its growth potential.  The BCG matrix can also be used to assess the market share of a product relative to competing products. The matrix offers a useful framework for allocating resources to particular products.

However, the matrix does have certain limitations. First, markets may be less clearly defined than the matrix suggests. Moreover, it doesn’t offer information about what the competition is doing.  Second,  the market growth rate and relative market share are not the only indicators of profitability. Third, this four-quadrant approach may be overly simplistic considering the dynamic nature of markets and industries/sectors. Finally, a high market share does not always result in strong profits given that high costs may also be involved in maintaining that market share.

BCG Matrix – How to use the BCG Matrix

Using five parameters – the definition of the market, relative market share, market growth rate, cash generation, and usage of cash – a company should allocate its products to the relevant quadrant. Based on this allocation, the company can determine which products to invest in and which to discontinue.

It might be noted that defining the market is the most important step. If a market is incorrectly defined, the product could be incorrectly classified. The relative market share is calculated by dividing the selected product’s market share (or revenue) by the market share or revenue of the largest competitor in the sector. Moreover, it’s also necessary to calculate the market growth rate. This can be estimated by assessing the average revenue growth of the leading companies within the product sector.

Calculating Relative Market Share

The relative market share is used to compare a company’s brand market share with the market share of its largest competitor in the industry.  When we calculate relative market share, the market leader’s market share is used as the benchmark.

Formula:

Relative Market Share = % market share of Company A’s product divided by the market share of the largest competing product.

Below we’ve calculated the hypothetical relative market shares of five products from one company using the market share of the largest competitor in that industry.

Conclusion

The BCG matrix can be usefully deployed to assess a product’s potential growth rate within its industry versus its relative market share to help develop long-term strategic marketing plans that aim to maximize profit.  The matrix can be applied across many industries and is used by some of the world’s most prominent companies, including Coca-Cola, Apple, Samsung, PepsiCo, Nestle, Unilever, Amazon, and KFC. All of these companies have products found in each of the quadrants.

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