How to Identify Growth Strategies with the BCG Matrix

Introduction

The Boston Consulting Group (BCG) Matrix is a well-known and widely used tool used by organizations to identify various strategies of growth. The matrix is based on four main quadrants – Stars, Cash Cows, Dogs and Question Marks – which provide a visual representation of the relative market share and growth rate. By analyzing the four quadrants, organizations can identify growth strategies that can be implemented to drive the desired business goals.

Definition of the BCG Matrix

The BCG Matrix works by helping organizations analyze the potential of their products, services and brands with respect to the market. It takes into account the relative market share and growth rate, and assigns each product, service or brand a category: Star, Cash Cow, Dog, or Question Mark.

• Stars have high market share and high growth rate.
• Cash Cows have high market share but low growth rate.
• Dogs have low market share and low growth rate.
• Question Marks have low market, but high growth rate.

Overview of how to use the matrix

Using the BCG Matrix, organizations can better identify their growth strategies. By analyzing the four quadrants, organizations can focus their resources and initiatives on products and services that have the most potential and focus less resources on those with low potential. By analyzing the growth rate and market share, organizations can identify which products or services have the highest growth potential, and focus their efforts on driving these products or services.

Identifying Business Segments

Identifying business segments is a critical step in creating a BCG Matrix. The primary measure used to determine the position of a business segment in the BCG Matrix is relative market share. Other measures, such as revenue and profitability, may indicate the potential for future growth and should be taken into consideration. Companies that are competing in narrower markets tend to benefit from improvement in market share.

Establishing Market Share

Market share is a measure of a company’s success relative to their competition. It is expressed as a percentage between 0 and 100% based on the company’s sales compared to the sales of all competing products within that market. A company with a higher share than competitors can be considered to have a better competitive position. Knowing the market share of each business segment allows a company to identify which segments are doing well and which segments are lagging behind.

Determining Growth Rate of the Market

In addition to market share, it is important to consider the rate of growth of a market segment. For business segments with high growth rates, it is likely that investment should be made in order to capitalize on that growth potential. On the other hand, if the market growth rate is low, it may indicate that a segment is saturated and unable to provide substantial returns. It is therefore important to track the growth rate of a segment in order to understand where investments should be made.

• Measuring the market share of each business segment and comparing it to competitors is an important component of the BCG Matrix.
• In addition to market share, the growth rate of a given segment should also be taken into account when identifying business segments.

Analyzing for Growth

The BCG matrix is a popular tool used by organizations to identify strategies for growth and sustainability. By plotting their products or lines of business on a grid, companies can begin to understand where they should focus and invest in order to achieve higher returns over the long term.

Assessing Dominant Segments

The BCG matrix is divided into four segments, each representing different levels of market share and growth. Cash cows are products or businesses with high market share and low growth. These products or businesses tend to generate a significant amount of cash, but often require significant capital investments to maintain current market share. Stars are products with high market share and high growth; these require significant investment to ensure that growth is maintained.

Question marks are products or businesses in low market share and high-growth segments. While investments may be required in order to gain market share, the high-growth segments often provide opportunities for high returns. Finally, dogs are products or businesses in low market share and low-growth segments. It’s often best to invest limited resources in products in this category.

Evaluating Potential for Expansion into Adjacent Markets

In addition to assessing the current state of a business’s product or services, the BCG matrix can also be used to assess a business’s potential for expansion into adjacent markets. By examining the current market share and growth rates of a product or service in an adjacent market, businesses can begin to understand if significant investments may be warranted. It’s also important to examine potential competitive dynamics in adjacent markets and the potential for market saturation.

The BCG matrix is a valuable tool for understanding growth strategies, however, it’s important to remember that it should not be used as a standalone tool. A thorough analysis of a business’s environment and competitive landscape should be undertaken in order to gain an understanding of the best growth strategies.

Developing Different Strategies for Different Segments

The BCG matrix is an effective tool that can help companies identify growth strategies for their products or services, and it can be used for developing different strategies for different segments. In order to get the most out of the BCG matrix and tailor it to a business' needs, it is important to understand the four segments of the matrix and how to approach each one.

Establishing 'Stars'

To start, 'Stars' are products or services that have the potential for high growth, but also require a lot of cash for the company to maintain the growth. Because of this, it is important for companies to balance their growth strategy with a focus on profitability. A company should establish strategies that will maximize growth and profitability when dealing with ‘Stars’. This could include investing in research and development to further enhance the product or creating marketing campaigns to target new markets.

Identifying Cash Cows

On the other hand, the cash cows of the BCG matrix are products or services that provide steady cash flow, but low growth potential. Companies can utilize their cash cows to reinvest in other segments or their business, such as research and development, marketing, or other initiatives. A company might also choose to develop strategies to exploit a cash cow’s market share by introducing variations of successful products, or pursue an aggressive pricing strategy to further increase the demand.

Minimizing 'Dogs'

The 'Dogs' of the BCG matrix are products or services that have low growth potential and generate low cash flow. The strategies used on 'Dogs' are to minimize any losses that come with the product or service, while at the same time finding ways to increase growth and profitability. One approach is to look for ways to reposition the product or shift the target market. This could include testing different pricing techniques, tweak marketing messages, or rebranding. The goal here is to figure out a way to transition the 'Dog' segment into a 'Cash Cow' or 'Star'.

The BCG matrix can provide helpful insight for companies that are looking for growth strategies for their products or services. By understanding the four segments of the matrix and strategizing for each segment, companies can create an effective plan for improving their business.

5. Assessing Strategies through Time

In today's business world, market conditions are constantly fluctuating, and the BCG Matrix has a few simple principles to follow when assessing strategies through time. To successfully use the BCG matrix, one must analyze and respond to changes in both market share and growth rate.

A. Analyzing and responding to changes in market share

Assessing current and future market share is essential for developing successful growth strategies. When a company can identify changes in the market share trend, this allows them to understand the strength of a particular product's market position. When the market share for a product increases, it signals success and can increase the overall value of growth.

Identifying a decrease in market share for a particular product can illuminate any necessary required changes in the growth strategy. When market share is stagnant or declining, business leaders need to assess the product and how it should be modified in order to remain competitive in the industry. Re-positioning products and adjusting the business strategy can help to regain market share.

B. Analyzing and responding to changes in growth rate

Recognizing shifts in growth rate can be just as important as understanding changes in market share. High growth rates are typically most desirable when attempting to develop a successful growth strategy. This is because high growth rates can increase a business’s cash flow and assist with finding new customers.

When a business notices a decrease in growth rate, they must reconsider their strategy. By analyzing why the growth rate has changed, businesses can make necessary changes to the strategy and reposition products to optimize the growth rate. Investing in the market and creating new products are two strategies that can help to bolster growth rate.

Redirecting Resources

Once the BCG matrix is established, there are two main strategies that a business can use to allocate resources efficiently and maximize the utilization of funds for growth. These strategies include reallocating resources to take advantage of the market and discontinuing unprofitable operations and segments.

Reallocating Resources to Maximize Advantage

A company wishing to maximize its impact should pay attention to its Stars, Cash Cows and Dogs in the BCG matrix. Market leadership of companies with Stars should be maintained as far as possible, allowing them to take advantage of their dominant position. Cash Cows should also be given appropriate attention, seeking ways in which resources can be used to bring in more income and capital either through mergers and acquisitions or other external sources. Often, resources are diverted from Dogs towards these more profitable areas.

Discontinuing Unprofitable Operations and Segments

When resources are redirected away from Dogs, it often leads to the discontinuation of unprofitable operations and segments. It's important for managers to look at the shortterm and long-term goals of the company when considering whether or not to discontinue operations. This will ensure that the most profitable option is chosen, given the company’s current economic standing. Cutting losses from unprofitable operations can also help to free up resources to be devoted to more profitable areas.

Conclusion

The BCG matrix is a valuable tool for strategy formation in organizations. It has four main categories: cash cows, stars, question marks, and dogs. By analyzing the company's products or business units and assessing their market share and market growth rate, companies can use the BCG matrix to identify areas for potential growth and improvement.

Cash cows have a high market share in a low growth market, so they should generally be left alone and held onto for steady cash flow. Stars have a high market share in a high growth market and should be invested in to maximize returns. Question marks have high potential but also require a significant investment to become profitable, so should be monitored carefully. Finally, dogs have low market share in a low growth market and should be divested of to free up more resources for other more promising investments.

Using the BCG matrix to carefully identify areas of potential growth and improvement can enable a company to better make use of its resources and increase its competitiveness in the long run.