A Step-by-Step Guide to Creating a BCG Matrix

Introduction

Are you looking to more effectively manage your resources? One popular tool to support decision-making is the BCG Matrix. Created in the 1970s by the Boston Consulting Group, the BCG Matrix is a strategic planning tool used to analyze and visualize the relative market share and industry growth rate of a portfolio of products or services. It is also commonly used to identify potential investments and assess their potential.

The BCG Matrix provides strategic planners with the information needed to effectively allocate resources and prioritize activities. When used effectively, a BCG Matrix can help managers develop a comprehensive picture of the relative attractiveness of various business opportunities, allowing them to make better decisions and improve organizational performance.

In this blog post, we will outline what a BCG Matrix is, the benefits of creating one and provide a step-by-step guide to creating one. Let's get started!

What is a BCG Matrix?

Establishing a Baseline

Creating a BCG matrix is a useful technique for analyzing a company's product portfolio and its competitive position in the market. To create a BCG matrix, business analysts first need to establish a baseline by evaluating the product portfolio and identifying its stars, cash-cows, and problem children.

Evaluating Product Portfolio

The first step in creating a BCG matrix is to clearly map out and understand the company's product portfolio. This involves examining each individual product, taking into account its place in the market, it its level of competition, its factors for success, and more.

Identifying Star Products

After establishing an accurate product portfolio, business analysts can then identify the star products within that portfolio. A star product is characterized by high market share, rapid growth, and exciting prospects. These products require a lot of investment in order to maintain their position, but they generate a lot of returns as well.

Analyzing Cash Cows

The next step of creating a BCG matrix is to analyze the products considered as 'cash cows'. These are products that typically have a high market share and a low growth rate. They require little investment in order to keep them running, and they generate consistent, reliable revenues. Analysts consider these products to be the backbone of the company, providing a steady stream of income.

Highlighting Problem Children

Finally, a BCG matrix helps identify 'problem children' - products that have a low market share and a low growth rate. These products usually require a lot of investment in order to survive, and they offer little in terms of returns. Analysts often recommend cutting these products from the portfolio, as they are unlikely to offer any significant benefits in the future.

Collecting Data

When collecting data to create a BCG matrix, it is important to gather information in three areas: market share, industry growth rate, and revenue forecast. Having an understanding of each of these components will help you gain an accurate picture of the market and how your product or service is performing in relation to the competition.

Market Share

Market share is the size of your company’s share of the total market for your product or service. It is important to determine your market share in relation to your competitors’ market shares to identify where you stand in relation to them. This information can be collected through market surveys, industry reports, and internal research.

Industry Growth Rate

The industry growth rate, or overall trend in the industry, is also important to consider. Knowing the short-term, mid-term, and long-term outlook of the industry can help you identify if it is an industry worth investing in. Industry growth rate can be determined by researching the economic indicators in the industry, such as inflation rate and GDP, as well as interviewing experts.

Revenue Forecast

The last piece of information to collect is the revenue forecast. This is the financial position of the company in relation to past, current, and future performance. It is important to consider the current financial position of the company and its competitors in order to make predictions about future performance. This information can be collected by obtaining the financial statements of the company and competitors.

Plotting Financial Data

The plotting of financial data is an essential task for the creation of a BCG matrix. The two dimensional plot of the graph is comprised of market share on the x-axis and industry growth rate on the y-axis. The four quadrants of data plots indicate a company's market share relative to the industry growth rate of the respective market segment.

Market Share on X-Axis

The x-axis or horizontal line of the BCG Matrix reflects the market share of a particular market segment. Market share is defined as the percentage of total sales within the market of a particular company. The higher the market share, the further right the company's data plot will appear on the matrix.

Industry Growth Rate on Y-Axis

The y-axis, or vertical line of the BCG Matrix, reflects the industry growth rate of the respective market. Industry growth rate is the average annual increase in demand for goods from an industry across a given period. A high industry growth rate means the demand for the goods is increasing, and the vertical data plots of companies in that market will appear higher up on the matrix.

Interpreting the Results

Now that you have created a BCG Matrix, it's time to interpret the results. Each of the four product categories—Star Products, Cash Cows, Problem Children, and Dogs—require different strategies. Let's take a closer look at each one.

Star Products

Products that fall into the Star category have a high relative market share, reflecting a strong position in the industry. These products may be seen as innovators and drivers of growth, and it is important to invest in their success. Areas of focus include marketing and investment for continued growth and innovation.

Cash Cows

Product that fall into the Cash Cow category have a high relative market share, but they are not necessarily growth products. They are established, mature products that generate steady but low returns, and they require minimal investment. It may be beneficial to harvest these products for cash, but be aware of the potential dangers of over-milking.

Problem Children

Products that fall into the Problem Child category have medium relative market share, and they become attractive when growth is possible. These products require careful analysis and investment to determine their potential. It may be more profitable to move these products into a more favorable position in the market, but investing in problem children can also be a drain on resources.

Dogs

Products that fall into the Dogs category have low relative market share, resulting in low returns. These products should either be divested, or given a makeover and reintroduced into the marketplace. Since these products bring in low returns, it is important to assess the effect they would have on the overall business if they were removed from the portfolio.

Utilizing Your Results

The BCG Matrix is essential in helping any company, big or small, maximize its performance and financial output. Now that you have identified your company’s respective categories, you can use the results to effectively plan individual strategies for each product division or business unit. Let’s take a look at each step, beginning with capitalizing on strengths.

Capitalizing on Strengths

When you become aware of which products or divisions fall into the “Stars” and “Cash Cows” categories, you will know which areas are the most profitable and should be given the most resources, attention, and energy. Are there any ways you can adjust and further monetize these sections? This can consist of increasing campaigns and sales efforts, adding new features to bring innovation and increased productivity, or finding more efficient ways to reduce costs and increase returns.

Improving Profitability

Neglecting the “Dogs” can be detrimental to your company’s success, but investing any more resources into them than they generate can be a costly mistake. However, removing them from the market could also alienate customers who’ve grown attached to that particular product or unit. What’s the solution? Situations like these are ripe for some creative problem-solving, allowing you to carve a path between the proverbial rock and a hard place. Reviewing the unit’s competitive advantage and the customer base’s needs could give insight into what options you have.

Implementing Strategic Changes

The “Question Marks” hold potential for success, but that potential also requires time and investment to come to fruition. Use the BCG Matrix to decide which of these businesses warrant continued attention, and outline a strategic plan tailored to their needs. These plans should include various objectives and timelines to keep the unit’s goals in check and the team accountable.

The BCG Matrix is a powerful tool to help categorize and understand each of your company’s products or divisions. Utilizing the results efficiently and strategically will help ensure that each area is functioning optimally, ultimately increasing your profitability.

Conclusion

The BCG Matrix is a simple yet powerful tool which all business owners should take advantage of, as it helps leaders easily recognize opportunities and develop strategies to better grow their businesses. After reading this step-by-step guide, you should now have all the tools to create your own BCG Matrix.

Benefits of Creating a BCG Matrix

The BCG Matrix can help a business leader make better decisions about how to allocate resources. It does this by allowing the leader to identify how much value each of a business's products or services provides. By following the 4-step process provided in this guide, business owners are able to quickly and easily assess the performance of their assets and develop strategies to maximize their assets.

Ways to Utilize Results

Now that you have created a BCG Matrix, you should be able to utilize the results to help guide your strategy and development. Here are some questions to consider when interpreting the matrix:

• Are there low share products which can be stopped or sold off?
• Are there high share, low growth products which could be further developed?
• Are there potential new products or services that could be created by leveraging existing assets?
• Are there any low share, high growth products which should be further developed?

Final Thoughts

The BCG Matrix can be intimidating at first, but with this guide you should be well on your way to creating one which can help guide the growth of your company. If you need any tips or further advice, do not hesitate to ask for help from a qualified expert.