The Growth-Share Matrix (BCG model) is a strategic management framework that helps you evaluate the position your products are in regarding their market potential. It will visually map your product portfolio and tell you exactly in what state of potential your product is in. For instance, your product might be delivering steady cashflow but no real growth potential for the future. The goal of the model is to help you choose which products you should invest in and which products you should get rid of.
In today’s article you will learn:
- What a growth-share matrix is
- Why it will secure your long term growth and profitability
- How to make your own growth-share matrix FAST
Enough chitchat, let’s make you a growth-share matrix!
What Is The Growth-Share Matrix?
In 1970, Bruce Henderson made the growth-share matrix for the Boston Consulting Group to help companies analyze their products and business units. The growth-share matrix is a strategic planning and portfolio tool that shows your business which products or services you need to keep, invest in, or need to get rid of.
Market Growth and Relative Market Share
The BCG matrix is the place where your product meets the market. It's shaped in a square with a y-axis and an x-axis. The y-axis represents the rate of market growth. Whereas the x-axis represents the relative market share. The market growth is measured by the total growth of the market. A growth rate of 10% divides the y-axis and will tell you whether the marketing growth is attractive or not. With the market share, we make use of a relative market share. With a relative market share higher than 1 you own the largest part of the market. You are seen as the market leader.
P.S. Market growth above 10% is seen as high market growth and therefore attractive to investigate.
P.P.S. With a larger market share, your company will gain competitive advantages. For instance the reduction of costs through economy of scale.
BCG Growth-Share Matrix Categories
The BCG growth-share matrix has four portfolio categories:
- Question marks
- Stars
- Cash cows
- Dogs
Question marks: most products/services start as a question mark. These products or services have high market growth and low market share. They are known for their dynamic markets with huge market potential, but with a low market share. It’s unknown whether these products will be successful in the long term. Therefore the question marks represent themselves as questions whether they are worthy of investment or not. You will have to calculate the benefits and risks very carefully.
Stars: with high market growth and high market share, stars are your favorites within your portfolio. Stars are products that are conquering the market and are highly profitable. They still have a lot of space left to grow within the market and continue to provide revenues for a long time. Stars are the products or services where you want to invest in.
Cash cows: low market growth and high market share, every market will sooner or later turn ‘mature’. This means the market growth will settle down a bit and either grow slowly or not at all. These products are still very profitable and should be milked. However, we warry with investing in these products. You will want to keep your high market share, but also try to find a suitable substitution.
Dogs: low market growth and low market share, after time your cash cow will transform into a dog. These products have served their purpose but are now at their end. They are no longer profitable or wanted by the market. It’s advisable to get rid of these products and services. They will only cost you money and stop your business from growing.
P.S. don’t ask me why it’s named dogs… Who would want to get rid of a dog?! Anyways, back to the topic.
Why Should You Care About A Portfolio Analysis?
Okay so now your products or services have a name. And now what?!
Depending on the category your product/service is in, it is time to decide on how you will proceed in the future. To help you with this decision making there is an investment strategy linked to the growth-matrix model.
The investment strategy contains 4 different approaches, depending on the state of your product/service:
- Build
- Hold
- Harvest/milk
- Terminate
Build: you are going to build on the products/services that have strong market growth. They are profitable and are offering perspective for the future. You should especially invest in stars and question marks. The stars are proven to be profitable and should get investing to keep growing. Question marks that show promise should be invested in so they can become stars.
Hold: holding is choosing to keep a product/service and further invest in them, or get rid of them if they are turning out to be a disappointment. This strategy is meant for question marks and you should read hold more like a question than a statement. Hold? When a question mark has potential you should hold it and build them up to become stars. If a question mark is showing
Harvest/milk: harvesting a product/service means that you will sustain them with money but you are not investing lots of money in them to secure long-term growth. Harvesting is meant for cash cows. Cash cows are the financial backbone of your entire portfolio. They will provide you with the cash to invest in question marks and stars. Try to milk them as long as possible by holding and nurturing them efficiently.
Terminate: at the end of the product life cycle it's time to terminate your low share, low growth products. This strategy is meant for dogs. You could liquidate or reposition them. Liquidation will free up some cash to be invested in question marks. Repositioning is a strategy you could use if the product or service could serve a purpose in another market.
How To Make Your Own Growth-Share Matrix FAST
You can make your own growth-share matrix fast and within minutes. The steps are simple and won't take up much of your time. However, please do spend the time to evaluate your products thoroughly. You don't want to place your product in the wrong category. Otherwise, you could invest in the wrong products and end up losing money.
To make your own growth-share matrix follow these steps:
- Create a chart with an X-axis and Y-axis
- Your X-axis will display the relative market share
- Your Y-axis will display market growth
- Add the 4 categories: question mark, star, cash cow, and dog
- Place your products within the chart. Make use of the Y- and X-axis to rate your product precisely. The closer you draw it at the left the more market share you have. And the higher (vertically) you draw your product the more market growth it possesses
Below you see an example of an empty BCG growth-share matrix. We choose to keep it empty because you can easily identify the essentials necessary to make your own matrix. If you want to fill it in draw circles (either with colors or numbers) within the chart to position your products. Follow this up by making a legend at the bottom. Now you have made your own growth-share matrix! Congratulations and I hope it will bring you a lot of value.
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