Navigate Industry Dynamics with the BCG Matrix

# Navigate Industry Dynamics with the BCG Matrix

Syed Aquib Ur Rahman
Assistant Manager
Updated on Mar 3, 2023 09:22 IST

Unlock the secret to dominating your market with BCG Matrix! Discover how to allocate resources and boost profitability with this powerful business strategy tool in marketing.

Popularised by Bruce Henderson in 1970, Boston Consultancy Group’s BCG matrix is also widely known as the growth share matrix model. It has been a go-to strategic planning framework for many Fortune 500 companies for decades.

## Rules of Cash Flow Related to BCG Growth Share Matrix

BCG matrix primarily revolves around the cash flow and potential for the product’s growth in the market. Henderson’s essay, Product Portfolio, states four rules influencing a product’s cash flow.

• The first rule is defined by the experience curve effect that states – the more something is done, the easier it is to do. Henderson mentions that high margins and high market share exist in tandem.
• For a product to grow, additional cash input is needed to finance new assets. The amount of cash needed to maintain market share is determined by the growth rate of the product.
• A high market share can either be earned or purchased. If a company wants to buy market share, it must invest additional funds.
• There is a limit to any product market’s growth. Eventually, the benefits derived from growth will only materialise when the growth rate decelerates. If the growth rate does not decelerate, then there will be no such benefits. The benefits will take the form of cash that cannot be invested back into the same product.

## What is in the BCG Matrix?

The BCG matrix consists of four quadrants defined in a scatter diagram showing the relationship between relative market share and growth rate.

### Elements of the BCG Growth Share Matrix

#### Horizontal and Vertical Axes

The horizontal axis represents the relative market share, while the vertical one shows the growth rate.

Relative Market Share in the horizontal axis refers to the rule of the experience curve. The higher the market share, the more cash return will be.

The calculation will be

Relative Market Share = (Market share of a company / Market share of its strongest competitor) x 100

The Growth Rate in the vertical axis indicates the growing market. If it is high, there should be more investment.

This is how you calculate the rate of growth.

Growth Rate = ((Current market size – Original market size) / (Original market size)) x 100

• Question Mark represents products with the potential for high growth but a low market share.
• Cash Cow describes products having high market share in a low growth market.
• Star represents high growth and high market share.
• Dog or Pet represents low growth and low market share.

## BCG Matrix, Product Life Cycle, and Marketing

BCG Matrix is closely related to the product life cycle – development to decline – an important aspect of the marketing mix

### Question Marks in Relation to Development Phase

Question Mark or the unknown is like a startup in a high growth market that has the potential to grow big in the future.  Based on Henderson’s rules, question marks in the business need more investment to grow. At the initial stage, the unknown will not be able to generate as much money as it needs.

Similarly, regarding the product life cycle, the question mark in the Boston matrix equates to the development phase, where the product is first introduced to the market. At this phase, considerable investments in marketing activities are required to improve reach.

### Cash Cows in Relation to Growth and Maturity Phases

The cash cow can generate enough money. The business is at the so-called growth phase in the product lifecycle and continues to drive profit.

But it also indicates the maturity phase of the cash cow (or the business established and too saturated in the market). Henderson mentions, “if the rate of return exceeds the growth rate, the cash cannot be reinvested indefinitely, except by depressing returns.

### Pets or Dogs in Relation to Decline Phase

Dogs have low market growth and low relative market share. They continue to generate losses if they stay in the market or when the company invests.

### Stars in Relation to Growth Phase

The relative market share and market growth rate are high with the stars. In the product life cycle, stars are equivalent to the growth phase. During this phase, spending more is important, so it grows in the market.

## Parting Thoughts

The Boston matrix has different use cases and is particularly useful for managing a company’s portfolio to prioritise their businesses based on market growth and share into four categories in a matrix.

Similar courses such as Strategic Choice and Planning from FutureLearn and Marketing Mix Fundamentals on Coursera will help more if you want to acquire more practical guidance on such topics. These wholesome courses cover interrelated concepts such as business strategy, marketing communications, and leadership.