Expansion is one of the most important business objectives in modern times. Companies don’t rely on selling just one product. Expansion can be a product line expansion or brand expansion. Moreover, companies may expand horizontally or vertically. However, the question is, “is that new product in the portfolio profitable or not”?
When a company launches multiple products, it is not necessary that every product will have the same success ratio. One product may make huge profits while the other may get you losses. This is where the management should be very careful about making amendments and redefine their marketing goals.
There are several ways to analyze the performance of every product in your portfolio. However, Boston Consultant Group developed a model- BCG Matrix, which is accepted universally.
What exactly is BCG Matrix? How can companies use the BCG Matrix? Let’s find out in detail.
What Is BCG Matrix in Marketing?
BCG matrix is a corporate-level planning model that analyzes and classifies different products/business units/brands in a portfolio. The analysis focuses on two important things:
- Product’s relative market share
- Product Growth
The matrix classifies the products or business units into four categories/quadrants:
- Question Marks
- Stars
- Dogs
- Cash Cows
| Question Marks High Growth Cash Absorbing Low Market Share | Stars High Growth Cash Neutral High Market Share |
| Dogs Low Growth Cash Neutral or Consuming Low Market Share | Cash Cows Low Growth Cash Generating High Market Share |
Example of BCG Model in Marketing—Nestle India
Let’s understand the BCG model in marketing with the example of Nestle India.
1- Question Marks
These are the products with a low market share, but their growth rate is on the higher side. That means these products have the potential to grow, but there are uncertainties.
However, if the management makes the right and timely decisions, it is possible to convert them into cash cows and stars. Similarly, a faulty marketing strategy can backfire, and the investment can be at stake.
How to Use BCG Matrix Question Marks
As question marks are basically the “problematic child,” management needs to monitor them regularly. Proper and effective marketing tactics can covert question marks in stars and, ultimately, cash cows.
Here are the recommended strategic options management can use for question marks:
- Product development
- Market development
- Market penetration
In short, management can either go for divestment or intensive marketing strategies.
When we talk about Nestle in India, there are products including Nestle Slim, Nestle milkmaid, Nestle Everyday, and Nestlé’s milk-related products that fall in this category.
These products from Nestle are in the development phase, so they need investment. As India is the second-largest population, Nestle will need massive investment with a pinpoint marketing strategy.
2- Stars
These products or business units have high growth and market share. That means star products are the industry leaders because they,
- Generate huge revenues due to high market share.
- Have a massive potential for growth as well, which means a further influx of cash.
However, every rise has to face a demise. Stars will ultimately convert into cash cows as there will be a market saturation point (no further growth). A company can generate cash from these products and reinvest it into potential stars.
How to Use BCG Matrix Stars
Stars have the potential for market growth, and that is why management needs to invest strategically in this quadrant. However, highly innovative products need better marketing strategies because they can suffer due to market fluctuation.
Management can consider the following options for star product:
- Market penetration
- Joint ventures
- Product development
- Integration (horizontal, backward, and forward)
- Market development
Currently, Nestle’s Nescafe coffee and Nestle’s mineral water are Nestle’s star products in India. The consumer has been more health-conscious than before, which is why these products can grow in the market and yield higher ROI.
3- Dogs/Poor Dogs
These products are like a “lost cause” as their market growth and share are low. Poor dogs do not generate enough cash, and investing in them is not a cost-effective option either. That said, a company will have to invest hefty resources to support them, which isn’t a wise marketing strategy by any means.
How to Use BCG Matrix Dogs
As mentioned earlier, dogs are actually cash-consumers. Therefore, it is better to diversify away from these products unless they can support or boost the performance of other business units in the portfolio.
Following are some strategic options for dogs:
- Liquidation
- Retrenchment (go for it only if you believe that revitalization is possible)
- Divestment
Nestle launched Nestle Milo and Koko Crunch in India, but the products failed to grab considerable market share. Nestle needs to take timely action and come up with better strategies or different products.
4- Cash Cows
Cash cows are just like an old man’s pension. It keeps bringing enough cash, but there isn’t much room for growth. These products have great ROI, but the growth potential is negligible. However, they need less investment and generate more revenue. Moreover, cash cows provide financial resources for investments in stars and question marks.
How to Use BCG Matrix Cash Cows
Cash cows generate a regular and handsome inflow of cash. However, they don’t have significant potential for growth. Management can invest that cash in stars or even question marks and may consider the following strategic options for cash cows:
- Concentric diversification
- Product development
- Retrenchment or divestment (if the product starts losing its market share)
Nestle is milking its cash cows in India, including Nescafe, Maggi noodles, and several chocolates such as KitKat and Munch. In fact, Maggie has a market monopoly covering almost 85 percent market share.
You can also read about BCG matrix analysis of Nestle.
How to Make a BCG Matrix
Creating a BCG matrix for a product or a business unit involves five steps. Let’s have a thorough look at each one of them:
1- Product selection
Businesses can use the BCG matrix for the analysis of business units, products, different brands, or the company as a single unit. The selection of units for analysis is crucial, so it must be defined clearly.
2- Defining the Market
It is equally important to define the market correctly. A product in one market may be a “poor dog” but a “star” in another market. For instance, Rolls Royce may be a “poor dog” in the general automobile industry but a “star” in the luxury car market. If you analyze Rolls Royce according to the general market, it will be a faulty analysis.
3- Relative Market share calculation
Market share means how much proportion of the market you are serving with your product(s). Generally, the measurement is based on revenue or unit volume. The company analyzing its product or business unit in the BCG matrix compares its product’s sales volume with the sales volume of its competitor’s same product.
Here is how you can calculate your relative market share
Relative Market Share= Your Products Sales In A Specific Year / Your Top Rival’s Sales In The Same Year
4- Calculating market growth rate
Businesses can easily find out the growth rate with the help of free online sources. Apart from that, they can also calculate it with the help of this equation:
Market Growth Rate= (Product Sales In Current Year – Product Sales In Previous Year) / Product Sales In Previous Year
5- Draw Circles on the matrix
This is the last step of the process where you have to plot the products or business units on the matrix. The X and Y-axis will show two different elements.
- The X-axis represents a product’s relative market share.
- Y-axis represents a product’s market growth rate.
Then, you will draw a circle for every product or business unit in such as way that it should correspond to the percentage of revenue generated by that specific product.
Read about BCG matrix analysis of Apple Inc.
BCG Matrix and the Product Life Cycle
A product’s life cycle and BCG matrix have a strong correlation with each other.
Here is the product life cycle of a product and its similarity with four quadrants of the BCG matrix
1- Introduction stage and Question Marks
When a company launches a product, there are two possible scenarios:
- The product will grow in the market and capture market share
- Failure
The same goes with question marks, and they have the potential for growth, but there is always a risk.
2- Growth phase and Stars
The product’s growth phase includes increasing sales and growing market share as well, just like the “stars” in the BCG matrix.
3- Maturity and cash cows
Cash cows are actually the maturity phase of a product. There is a decreasing growth rate but a regular influx of cash.
4- Decline and Dogs
After the saturation in the market, sales start decreasing just like BCG matrix Dogs. At this stage, companies mostly start divesting.
Benefits of BCG Matrix
- BCG matrix is a simple corporate model and is easily understandable as well.
- It helps firms to analyze the position of their products in the market and identify the weak spots in their product portfolio.
- BCG matrix helps you understand which product needs further investment and which one needs divestment.
- This corporate model also helps firms in identifying their cash resources and how they can use those resources for growth and development.
- BCG matrix is a great tool to analyze new opportunities and how to utilize them effectively.
Limitations of BCG Matrix
- This model is only based on two factors (market growth and market share). However, there are other indicators of success and profitability.
- This model does not account for the rapid growth rate of competitors.
- A product with a low market share doesn’t necessarily mean it is not profitable.
- This model doesn’t consider synergy effects among brands.
- Sometimes, high market shares do not guarantee high profits as well.