Strategy
How to Use The BCG Matrix to Maximize Profits Over Time
Ever since Boston Consulting Group founder Bruce Henderson came up with the idea for the BCG Matrix in 1968, this simple framework has helped companies clarify and prioritize opportunities for their business with the goal of maximizing profits over time. From Fortune 500 giants to small businesses, and even one person operations, everyone can benefit from applying the BCG Matrix. The matrix has two dimensions, growth potential and market share, so it is also called the Growth Share Matrix. Let’s dive in and see how comparing business segments based on these two metrics can help you plan and allocate resources wisely to maximize profits, not just today, but for the future.
Good question! Growth in this case refers to potential exogenous growth of the market segment under consideration – growth that will happen regardless of what choices the company makes. To be precise, this axis represents “market segment growth” on the BCG Growth Share Matrix. Each axis has a simple binary value of low or high, so the market share axis shows whether the company has a small slice of the market or a big one. So by now some of you are probably starting to think – “so if I have a small piece of the market but it is growing fast, that could still be a good place to focus.” That’s right. And of course it goes a little further. With two axes and two two values, you have 4 possibilities. BCG Matrix gives them names and offers some perspective about how to respond to choices in each quadrant.
We’ll start at the bottom left and work our way through the chart. The bottom row represents markets with low growth rates. But the first column represents markets where the company has high market share already. If you have a strong business unit in a stagnant market, it can continue to produce predictable revenue. You could invest in growth here. But another choice would be to fine tune your Cash Cow unit for profitability rather than try to take a dynamic approach to a stable environment. Your cash cow profits may create better returns if you invest them in another quadrant.
Bad dog! This quadrant is just no good no matter how you look at it. Low market share means so far you have not made much progress here, and the market is not going to grow either. Maybe there is an overlooked opportunity here, or maybe this is just outside your wheelhouse, a fool’s errand. If you have invested here, maybe it’s time to consider the sunk costs fallacy and overcome your aversion to withdrawing and cutting your losses. You might give it one last brainstorm and see if there is some key to success you are overlooking, but it’s probably going to be more effective to work on a market where you already have some success or a market that’s growing.
Star Quadrant of the BCG Matrix
The Star quadrant of the BCG matrix is a great place to be operating. Here in the top row on the left you have high market share and a high rate of growth. Allocating resources to this unit is, all else being equal, a good bet. Of course, the BCG Matrix is limited to only considering two variables. There are other considerations and perspectives to apply. You might, for instance, validate any plans you make to invest in Stars with a PESTEL Analysis.
How are Growth and Market Share Different?
Good question! Growth in this case refers to potential exogenous growth of the market segment under consideration – growth that will happen regardless of what choices the company makes. To be precise, this axis represents “market segment growth” on the BCG Growth Share Matrix. Each axis has a simple binary value of low or high, so the market share axis shows whether the company has a small slice of the market or a big one. So by now some of you are probably starting to think – “so if I have a small piece of the market but it is growing fast, that could still be a good place to focus.” That’s right. And of course it goes a little further. With two axes and two two values, you have 4 possibilities. BCG Matrix gives them names and offers some perspective about how to respond to choices in each quadrant.
The Cash Cow Quadrant of the BCG Matrix
We’ll start at the bottom left and work our way through the chart. The bottom row represents markets with low growth rates. But the first column represents markets where the company has high market share already. If you have a strong business unit in a stagnant market, it can continue to produce predictable revenue. You could invest in growth here. But another choice would be to fine tune your Cash Cow unit for profitability rather than try to take a dynamic approach to a stable environment. Your cash cow profits may create better returns if you invest them in another quadrant.
The Dog Quadrant of the BCG Matrix
Bad dog! This quadrant is just no good no matter how you look at it. Low market share means so far you have not made much progress here, and the market is not going to grow either. Maybe there is an overlooked opportunity here, or maybe this is just outside your wheelhouse, a fool’s errand. If you have invested here, maybe it’s time to consider the sunk costs fallacy and overcome your aversion to withdrawing and cutting your losses. You might give it one last brainstorm and see if there is some key to success you are overlooking, but it’s probably going to be more effective to work on a market where you already have some success or a market that’s growing.
Star Quadrant of the BCG Matrix
The Star quadrant of the BCG matrix is a great place to be operating. Here in the top row on the left you have high market share and a high rate of growth. Allocating resources to this unit is, all else being equal, a good bet. Of course, the BCG Matrix is limited to only considering two variables. There are other considerations and perspectives to apply. You might, for instance, validate any plans you make to invest in Stars with a PESTEL Analysis.
Question Mark Quadrant of the BCG Matrix
This can be the most fruitful quadrant to invest in. You don’t have any market share, and you don’t have any bad habits or old preconceptions that don’t apply anymore. You are free to build a strategy from the ground up in the moment with an eye to responding to upcoming changes. And here in the top right of the matrix you are in a high growth market segment. If you do a good job staking your claim, the growth and profits can eventually exceed those of a Star quadrant business unit.Two Bonus Updated Tips From BCG- More Questions Marks, Fast Testing
The BCG Matrix has been around since 1968, and it’s still relevant, but a lot has changed in the last 53 years. BCGs new guidance for using the matrix focuses on the accelerated rate of change in markets. Because of this, they recommend focusing a lot on question marks. In a dynamic environment, experimentation is the key. So see what you can accomplish in high growth areas that you have not tried yet. While you explore new markets, make sure to avoid wasting time. By running your experiments as quickly and cost-effectively as possible, you allow yourself more opportunities to discover success. If you are tight on marketing resources in-house, using Viral Octopus gigs can offer a quick and cost-effective low-hassle way to experiment.Get the Big Picture and Build a Strategy !
Use the growth share matrix to analyze your opportunities and allocate resources between projects. It’s easy. Draw your quadrant, place your opportunities in one of the four boxes, and then consider the implications of market share and market segment growth to optimize your business plan for increasing profitability and sustainable growth. That’s how you use the BCG Matrix! Come back in two weeks for more strategic marketing insight.
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