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BCG matrix explained step by step with a BCG matrix example
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The BCG matrix can be found in almost every textbook on strategy, but there is still some uncertainty about how to use it, especially in small companies.
With this contribution to the BCG matrix, I would like to explain this exciting strategy tool to you step by step.
In this article you will learn
- what the BCG matrix is exactly and what you need it for,
- what the four quadrants the BCG matrix
- how to classify your products in the BCG matrix
- how one Changes over time finds out.
- Which Strategies for each quadrant the BCG matrix should take
- what the Advantages and disadvantages or the pitfalls are at the BCG matrix
- like as a concrete example the BCG matrix in the electrical trade can be applied
- Which Software optimally the BCG matrix supported.
The BCG matrix explained in the podcast
What is the BCG Matrix?
Almost everyone who has dealt with business administration will be familiar with the term BCG matrix have stumbled. At first glance, it looks like a more theoretical construct. In practice, however, it turns out to be an extremely useful tool for strategic planning.
The BCG matrix is called Boston Matrix or Boston-I-Portfolio or Boston-Portfolio. The abbreviation BCG stands for the Boston Consulting Group, a large management consulting company that originally developed this portfolio analysis.
How do I classify the BCG matrix?
The BCG matrix is an instrument from the field of strategic planning and thus belongs to the strategic management. It is used to analyze the company's business units and evaluate them with regard to their future prospects of success in the market. For this purpose, the business units are presented together in an overall portfolio so that they can be compared with one another and strategic decisions for the future can be derived from them. This is how you define the strategic business units.
How does this work?
Specifically, it's about BCG portfolio the question of whether the portfolio mix currently available is sufficient to secure the future of the company and its success.
If this question is answered in the negative after the analysis, the Boston matrix can be used to find out to what extent other, more promising business areas should be promoted. In practice, this means that funds are withdrawn from less promising business areas. These are invested in new or existing hopefuls that can generate the required growth.
Thus, the BCG matrix is an aid to help in the distribution of the resources available to the company correct priorities to be able to set.
The service portfolio of a company is displayed in the BCG matrix based on various conditions:
- Environmental dimension: The ordinate shows the real market growth in the future (market growth).
- Corporate dimension: The abscissa shows the company's relative market share.
- Business areas: The business areas considered are often inserted as circles in the BCG portfolio, although other forms are also possible. The size of the circles allows conclusions to be drawn about the sales in the various business areas.
What do the four quadrants mean?
The BCG matrix consists of four quadrants, also called four fields, which are not only defined differently, but also entail different strategies.
A distinction must be made between the following quadrants:
Question mark: The Question Mark is characterized by the fact that it has so far had a low relative market share in a market that is growing rapidly. The products or services are just being launched or are in the early stages of growth. At this point in time, the future of the business area is still uncertain as it can develop into a success as well as a failure. At this stage everything depends on the funds that can be invested in this project. The business area cannot currently finance itself completely.
Star: A star is a product that combines a high relative market share and high market growth. These are products that are in the growth phase. High investments are required here in order to maintain or increase market share. However, stars are largely self-financed.
Cash cow (dairy cows): Cash cows operate in a mature market where market growth is no longer strong. This part of the portfolio matrix is characterized by the fact that the costs have already decreased. Very little has to be invested in order to continue to generate surpluses.
Therefore, with the cash cow, the surpluses can be withdrawn and invested in other emerging, promising business areas.
Poor Dog: A Poor Dog is a business area in which the company has a low market share. At the same time, the relevant market is growing only slowly or even stagnating. Large investments are required to maintain this small market share. This usually results in a negative cash flow.
Classify products in the BCG matrix
In practice, the self-employed in the skilled trades often find it difficult to correctly classify their own services and offers in a four-field matrix. First of all, it is important that you understand the two most important basic terms of the BCG matrix, the "relative market share" and the "Market growth“, Can quantify. Relative market share is your market share in relation to the market share of your strongest competitor. You calculate this key figure using the formula:
The relative market share enter it on the abscissa of your portfolio matrix, i.e. on the horizontal axis. The values 1.0 and 2.0 are often used here, with 2.0 representing the maximum and 1.0 the center of the axis.Tip! In order to be able to use a BCG matrix in a target-oriented manner, you should deal with your market situation and your competition as a preparatory step. For tips on competitor analysis, see this article.
The Market growth is given as a percentage in the BCG matrix. The units of your axis are of course based on the market growth that is common in your industry. For example, you can place the upper end of the question mark with a market growth of 10 percent and mark the middle with 5 percent. Information on market growth can be found, for example, at the Federal Statistical Office or in reference works such as the industry key figures.
First, determine which products or services you want to look at in the BCG matrix. Then determine the relative market share as well as the market growth in the respective division for each. Then enter the corresponding values on the two axes and mark the point where both lines meet as the product under consideration.
Now comes the third size, the sales, into play. The higher the turnover for the business area in question, the larger the circle should be.
As an example, I have entered a product portfolio with products from A to G. Using the circle sizes, you can see the respective sales contribution of the products. The products that are on or close to a quadrant boundary, such as products D, C or E. In order to be able to assess these products better, one has to observe over time how these products develop.
Recognize changes over time
The BCG portfolio is not the tool of choice for tracking the company's development over the long term. Rather, it is used for analysis and Recording of the current state and their results represent a snapshot.
However, you can use the BCG matrix to a limited extent to observe changes. To do this, you have to collect the numbers mentioned at regular intervals, for example monthly or quarterly.
You can reassign the positions of the individual business areas. Draw the individual business areas in your portfolio matrix and note changes in the level of sales with regard to the size of the circle. It is clearer to record a new matrix, for example on a transparent, stable film.
As old-fashioned as it sounds, this is where old overhead transparencies have a real use!
You can superimpose the older and the newer BCG matrix and identify developments and even read trends.
In my sample portfolio, you can see the following changes within a year:
Products A, C and D are clearly on the decline, with these products you will no longer reap great laurels. Product B is moving towards the star position and has increased sales significantly. Real potential can be seen here.
Product E is completely unchanged, while the market growth for products F and G has slowed. Overall, the products E, F and G are the real sales drivers of our example company.
Strategies for the individual fields
The division into the four squares Question-Mark, Star, Cash-Cow and Poor Dog is not only made for an overview of the company's market situation. It also serves to derive strategies for the future. Each of the four quadrants is assigned a strategy that you should ideally adopt for the assigned business areas:
Selection strategy: The selection strategy is used for questionmarks for which the future development is still uncertain. Here you should select which business areas appear most promising to you. You should also invest in these business areas in order to be able to expand the relative market share. They have the potential to grow into stars or later cash cows. Business areas that are unlikely to develop in this way should be eliminated. You withdraw investments from these areas or remove them from the program entirely.
Investment strategy: Use an investment strategy with stars where you need to get a high market share. Here you increase your investments in order to work out the future cash flow. Strengthen your competitive advantages in this area.
Skimming strategy: With cash cows you can reduce investments to a minimum that is necessary to maintain the market position you have achieved. The rest of the funds generated by the Cash Cows can be used to finance the expansion of Stars and Questionmarks.
Disinvestment strategy: The divestment strategy is used by the poor dogs. You should pull all investments out of the “poor dogs” field to avoid negative cash flow in the future. Investments no longer bring any noticeable improvement here. It is therefore better to put your capacities in other business areas.
If possible, you should pay attention to a balanced service portfolio, with the areas of questionmarks, stars and cash cows being represented in a reasonably balanced manner. If you only have cash cows in your portfolio, you run the risk of falling into one sooner or later due to the stagnating or no longer growing markets negative cash flow to slip off.
A strong focus on stars will initially bring you good cash flow. If you run out of funds or a star develops into a poor dog instead of a cash cow, the faster you fall. Having a lot of question marks can mean a lot of potential for the future, but it carries just as great a risk.
What happened now
Our example company has massively streamlined its portfolio. After the Poor Dogs had been disinvested, the capital released was reinvested in two new, promising products (products H and I).
Massive investments are now being made in these two products, for example through marketing campaigns. The aim is to increase the relative market share or to expand the product features through research and development. In the case of product G, only the profit is skimmed off, whereas in the case of products E and F, investments are still made in expanding sales.
Advantages and disadvantages of the BCG matrix
The main advantages of the BCG matrix are its ease of use. Only a few key figures need to be determined, which is possible in most companies with comparatively little effort.
It is also practical that standard strategies can be derived directly from the positioning of the business areas in the matrix. These were suggested directly by the Boston Consulting Group. The BCG matrix is a clear instrument with which you can present your strategic decisions to others, for example business partners or investors.
However, the disadvantages that you should take into account when using the BCG matrix should not be concealed at this point:
- Overlooked by competitors: In the BCG matrix you look at the relative market share, i.e. your market share compared to the strongest competitor. With this limited perspective, however, one may overlook new competitors on the market who are “cleaning up” the field from behind. Only a regular competition analysis can help here!
- Hide important success factors: The BCG matrix is limited to looking at market share and market growth. However, other factors that can affect success, such as the quality of the products or the expenses for marketing measures, are not taken into account.
- Not clear recommendations: With Stars and Poor Dogs, there is a clear recommendation regarding the strategy to be taken. For the cash cows and the question marks, however, there are no clear recommendations. The user himself has to draw the conclusions from his portfolio matrix.
- Assumption regarding the development of costs: The BCG matrix takes it for granted that the higher the market share, the lower the costs as the company gains experience. In practice, however, a high market share does not automatically mean a high return. Because in order to be able to maintain this market share, above-average expenses often have to be invested in marketing and advertising. Here, the BCG matrix must be supplemented with a product-specific contribution margin calculation! You can find tips and tricks on contribution margin accounting in this article.
- Influencing the growth rate: The BCG matrix assumes that the growth rate is an external factor that cannot be influenced. In practice, however, it is quite possible, for example, to influence market growth through marketing measures.
BCG matrix example from the electrical trade
We would like to bring the topic closer to you using a specific example from the electrical trade. Let us assume that an electrical tradesman offers his customers the following services, among others:
- Advice and sale of electrical appliances
- Repair and customer service for a wide variety of electrical devices
- Electrical installations for new buildings and renovations of old buildings
- Installation of electrical heating (e.g. heat pumps)
- Planning and implementation of photovoltaic systems
We are now taking a closer look at these services in terms of their market share and the associated market growth. Selling electrical appliances is a difficult field today. Online shops are overtaking many stationary shops and take up a large part of the market volume.
Another large share of the overall market is secured by large electrical retail chains that can buy and sell at particularly low prices thanks to large quantities purchased. Therefore, the self-employed in the electrical trade can only secure a low market share in this still growing market. The sale of electrical appliances is classified as a question mark.
The electrician should consider whether he is ready to invest in this sector. Especially since he not only competes against regional competition, but against all national online retailers. He could also spend his time and capital on more promising long-term measures
Repair and customer service for electrical appliances are classified as cash cows. More and more customers are reporting to brick-and-mortar stores, as repairs are difficult to carry out through online retailers. However, with this cash cow it is important to ensure that market growth in this area tends to stagnate. More and more devices are no longer repaired in the event of defects and are instead replaced directly.
Electrical installations for new buildings and renovations of old buildings can be seen as stars. The construction industry is booming and, accordingly, the demand for electrical installations.Targeted measures should be taken to ensure that the order level is maintained over the long term, as this service branch is heavily dependent on the construction industry. The aim here should be to turn the star into a cash cow.
When it comes to the installation of electric heaters, the overall market share measured by the types of heating installed is still relatively small. However, due to the increasing opening of consumers to alternative energies, strong market growth can be predicted for this market. This area is also to be regarded as a question mark.
However, the skilled trades can secure a firm position in the market with appropriate investments and should therefore consider expanding the business area.
The field of photovoltaic systems was one of the stars of the electrical trade some time ago, but has now become more of a poor dog.
After the gradual reduction in subsidies for feeding energy into the public power grid, customer interest in this service has rapidly declined. Many dealers even stayed seated on systems that had already been ordered. Anyone who has already had such experience should think about removing this offer from the service repertoire completely.
Software tool for the BCG matrix
The BCG matrix can be cobbled together relatively easily with Excel or a graphics program. This is how the example graphics were created above.
But you work professionally if you not only present a visually appealing BCG matrix, but can also immediately store additional information on the respective elements.
A program that optimally supports this work is BCG-Matrix mit meineZiele.
You can use it to create the classic BCG matrix.
You can enter a lot more information about each element and link documents, you can even synchronize Outlook appointments with it.
What I like best about my goals in the area of the BCG matrix is the ability to clearly display the portfolio over time and even be able to freely define sectors in the elements. You will fail with conventional graphics programs as well as with Excel.
Of course, MeineZiele provides comprehensive support for many other strategic tasks, e.g. the Ansoff matrix, the Kano model and many more.
Find out more about my goals now and save yourself a lot of nerves with manual “portfolio fiddling”.
At some point I got tired of the manual cobbling together and switched to my goals, which has saved me a lot of time and money since then.
Summary of the Boston Consulting Analysis
Classification into money cows and poor dogs helps every business owner make the right decisions. One does not always strive for high growth, but perhaps wants to mark out more fields. The portfolio makes it easier to analyze a product in one of the categories. With our template in Excel format, we offer our members a quick tool for the tried and tested product analysis tool.
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BCG matrix download template in Excel format
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