Understanding how the BCG Matrix has become an important analytical tool for companies is the first step towards adopting it. Therefore, we explain its origin, the concept and present 4 practical applications of the matrix, also known as a portfolio diagram.
BCG Matrix is a methodology created by Bruce Henderson in the 1970s. It allows analyzing through graphics the performance of a brand’s products in the market.
The BCG name stands for the location and for whom it was made: for the Boston Consulting Group.
Is BCG matrix a new term for you? Often in companies the positive results seem so drained that the end of the month is in a desperate situation!
Henderson encountered this difficulty in the 1970s. And so he developed the BCG Matrix. The objective is to make a graphical analysis of the products and services that a company offers.
Thus, it is possible to map investment opportunities or even retreat, in the case of items that generate profits below expectations.
STEP BY STEP FOR DIGITAL TRANSFORMATION INTO SALES
By not doing the survey, many businesses keep products in their catalog with no expectation of growth and earnings.
Worse still, they invest more in low-growth products and leave items with greater potential behind.
Understanding how the BCG Matrix has become an important analytical tool for companies is the first step towards adopting it.
BCG Matrix: Where It All Started
The name originates from the acronym of Boston Consulting Group (BCG). This company was founded by the entrepreneur and responsible for disseminating the analysis in the market.
The matrix is also known by other names such as Growth-Share Matrix and portfolio diagram. Bruce Henderson valued market experience.
He believed that a company’s costs tended to drop between 20 and 30 percent every time accumulated experience doubled.
With his expertise, he was one of 5 analysts appointed by Dwight Eisenhower. Their mission? Working in post-World War II Germany during the Marshall Plan.
These experiences allowed him to understand that products and services have a lifecycle. It is the variety of portfolios, with items at different stages of the cycle that keeps a company going.
Henderson said: “To be successful, a company needs to have a portfolio of products with different growth rates and different markets. The composition of the portfolio is a function of the balance between cash flows.”
It is in this cycle that the BCG matrix is developed. The objective is clear. It serves to identify the future potential that each product has.
And there’s nothing better than a graphic and didactic visualization for a more assertive decision-making process.
The BCG Matrix is critical for successful companies
Map the business. Develop investment strategies. Deeply analyze the context. This is where the BCG matrix works. Successful companies use strategy.
For example, in order not to spend resources on a Pineapple (a what? We’ve already explained below!) “Where should I concentrate the money I have for investment?”
This is called the “Million Question”, isn’t it? The truth is that by correctly using the BCG matrix you reduce the chance of wasting your capital.
A varied product portfolio with different market share and growth rates. That’s what successful companies have. And that’s what you look for in yours, right?
Therefore, the distribution in 4 simple categories allows you to see graphically and didactically how to better balance and invest the resources you have.
But how does the BCG matrix work anyway?
The BCG is a 2 by 2 (4 divisions) matrix. The horizontal axis represents market share. The vertical axis of the quadrant is market growth.
A product that has a large share of an ever-growing market is the “silver of the house” in matrix analysis.
The portfolio item that follows the opposite path requires the entrepreneur’s attention. Thus, each of the squares is assigned a graphical representation:
- ⭐ Star. Leading products and services from a market with good growth rates. As the market is large, there is a lot of competition and it is necessary to invest more to differentiate the product and avoid commoditization.
- 🐮 Dairy cow. They are leading products in low-growth markets. They do not require much investment from the company as they are already stabilized.
- ❓ Interrogation. Products and services that have a low share, even though the market has enormous potential. To improve results, big investments are needed.
- 🍍 Pineapple. The portion of a company’s portfolio whose items underperform in markets with low growth potential.
Important! In the original conception, in English, the pineapple is the “stray dog”. But, in Portuguese, the fruit was chosen to represent the bad products.
The pineapple is in the Brazilian imagination as an analogy for “problems”. It could be the cucumber too…
Next steps after the matrix
As Henderson explained:
“High-growth products require cash injections to grow, while low-growth products must generate excess cash. Both are needed simultaneously.”
In fact, when launching the products or services at the headquarters, the next steps involve defining strategies to work each one of them in the portfolio:
- Ramp up. Items with a rising market, such as Stars or those established as Interrogation, require building presence, increasing market share;
- To maintain. The part of your portfolio that already has a good market share in which it is only necessary to preserve that share. This is the case of Dairy Cows;
- To harvest. Measure adopted when the company wants to make the most of certain products and then discontinue them. The objective is to generate cash in the short term with Dairy Cows at the end of their life cycle. Or Interrogations with no potential to conquer the market or Pineapples;
- To abandon. Items incapable of being viable on the market.
3 practical examples of the BCG Matrix applied
We have separated 3 market examples that show how the BCG Matrix can be a crucial analysis for your business:
In the computer industry
- Star = Smartphones. They have become indispensable in modern life, with growing demand. There are numerous competitors on the market. However, constant improvements require increasingly robust devices and constant updating of devices by the consumer. In 2017, sales increased by 9.7%, according to IDC.
- Dairy cow = Tablets. They are becoming corporate tools and replacing notebooks in homes. Sales fell 4.8% in 2017, but IDC sees that the market has stabilized and two companies dominate the scene. They are Apple and Samsung.
- Interrogation = Notebooks. Sales grew 15.3% in 2017 (together with PCs). However, with the growing search for mobility, it is a product that will require a lot of investment to become even lighter and more portable than tablets.
- Pineapple = Desktop computers. They remain relevant to areas such as design, audiovisual production, and photography and game players. After all, they require enormous processing power. Outside the niche, shared growth with notebooks. The pair sold 5.19 million units (IDC does not specify the volume of each product), against 3.7 million tablets. The trend is to further reduce the market in the coming years.
In the automotive industry
- Star = Medium sedans and SUVs. Despite the dominance of popular hatchbacks, models such as Toyota Corolla, Jeep Compass and Renegade, Honda HR-V and Chevrolet Prism are the ones that grow the most year after year. Every year new models appear to try to grab a slice in the category.
- Dairy Cow = Compact Hatch’s. The most popular cars in Brazil are still at the top of sales. Chevrolet Onyx, Hyundai HB20, Ford Ki, Volkswagen Gold and Renault Sander remain relevant in a market where popular car costs an average of 41 times the minimum wage.
- Interrogation = Pickups. Models like the Fiat Toro, Ford Ranger, Toyota Hilux and Volkswagen Marko even have a good market. Mainly in inner cities. However, fewer and fewer pickups are among the 50 best-selling models. Size, price and high fuel consumption may be the answers.
- Pineapple = Turkeys. Popular in previous decades, models like Parity and Polio Weekend remained in the memory. The only model among the top 50 is the Chevrolet Spin, widely used in taxi fleets in the main Brazilian capitals. SUVs and sedans are more attractive cars, with plenty of space and close prices, depending on the model.
In the HVAC industry
- Star = Split Model. Known for separating the condensing unit and the evaporator (interface), split models are already very popular. In new buildings, it is common to see condensing units on the wall on all floors. Sales are growing in the space left by window models.
- Dairy cow = Models for large environments. Mainly aimed at commercial or industrial spaces. These split and duct air conditioners are always required. Also because thermal comfort is a basic requirement in business establishments that have constant demand. The cassette, floor-ceiling, corner-ceiling, four-sided models fit into this category.
- Interrogation = Portable or Mobile air conditioning. They draw the attention of unsuspecting consumers who see flexibility as a differential. In word-of-mouth, however, they are heavy devices (about 30kg). In addition, they need an outlet to vent hot air (it can even be a window).
- Pineapple = Window air conditioner. They were the best known models in the past. They are still going strong, mainly because of older buildings that already had the space reserved for window air conditioning. However, several manufacturers are leaving the model aside to bet on splits, more economical and less noisy.
Not everything is flowers! Advantages and Disadvantages of the BCG Matrix
The truth is, there is no perfect model for management. Just like any other, the BCG matrix has its limitations.
It needs to be combined with other techniques so that its simplicity is not a problem. That’s because not all products are the same.
And some businesses are more complex than others. Therefore, we have separated some advantages and disadvantages of its application.
See which makes the most and which makes the least sense for your company.
It’s advantageous when…
It enables a better understanding of your product. Also because it is quite simple to implement it, as we have seen before.
Better than that, it shows you what current stage of development they are in. And that’s a competitive advantage for your product over competitors.
After all, you understand whether it’s growing, stable, or falling. So you have the full picture. And it knows where it is essential to invest to increase the growth of what the company sells.
It is valuable data for making strategic decision making. Best of all is being able to do this without spending so much time and money.
Something that is certainly the ideal setting for any entrepreneur. And all of this, without a doubt, has a decisive impact on the CAC and LTV of your business.
Another advantage is the product variation. If one, by chance, goes into decline, your company already has something new gaining the market.
Understand the characteristics of the BCG matrix and identify them in your products. This is essential for assertive decision making.
Meanwhile, the “dairy cow” provides security for any business to have capital to continue investing.
But it’s not so advantageous when…
It is more efficient for companies that have been operating for a long time in their market.
As it is simple, it works for those who already have more data. It helps to increase the possibility of getting the analysis right.
However, it is up to the manager to understand another detail. Because this tool is focused on internal processes, it is not enough on its own.
Yes, you are well aware that there are other factors (in addition to market share and growth) that contribute to a product’s success or failure. And they cannot be ignored.
In order to apply the BCG matrix correctly, it is necessary to be aware of external factors that can affect the analysis.
The matrix comes in as a complement to the analysis of competitors, economic context, and market trends, among others. Use complementary techniques.
The simplicity of the BCG matrix won’t deliver everything you need. With this information, it’s easier to know what strategies to adopt to analyze where you are and where you can go.
So, how can we help you?
Take advantage and access our article that talks about how to forecast sales and the role of CRM in this mission.
Also read another text on our blog that discusses what CRM is and how it helps companies sell more.