The Boston Consulting Group’s product portfolio matrix (BCG matrix) is designed to help companies with long-term strategic planning for marketing in order to review growth opportunities to decide where to invest, to discontinue or develop products. It’s also known as the Share/Growth Matrix.
This matrix was created by the company’s founder Bruce Henderson in 1968. It was published in one of the BCG’s report called as “Perspectives”. This matrix was used by about half of all Fortune 500 companies & it is still central part to learn in strategy for marketers in business schools.
This article will give you the concept of BCG matrix & relevant terms to have a basic understanding for the same.
The matrix consists of 4 quadrants based on market growth rate & relative market share. Also refer to the snapshot while reading the article.
X- Axis- Relative Market share
Relative Market Share indexes a firm’s or a brand’s market share against that of its leading competitor.
Relative market share is calculated by subtracting a company’s market share from 100 to find the percentage it does not control. If Company Z controls 30% of its market, this means it does not control 70%. From there, the company’s market share is divided by the percentage of the market it does not control. Using our example, we’d divide 30% by 70% to arrive at a 42.8% relative market share for Company Z.
Significance: Absolute market share shows the great potential of the company within its industry but relative market share offers insights on how to identify & outperform specific competitors.
Y-Axis – Market Growth Rate
Market Growth Rate is a measure of the extent at which the market a company operates in is growing. This provides an insight into the size of the opportunity a company might have.
Market Growth Rate (%) = total sales in the market for this year /total sale in the market for last year
Every model has some limitations & all matrix /charts/models /formulae cannot give all the necessary information at once. Similarly, for BCG matrix, market growth share is one factor in the industry & relative market share is one factor in competitive advantage which overlooks the other factors. In fact, a business unit which dominates in the small niche but has a very low market share in overall industry cannot make a difference between cash cow & dog.
In our next articles, we will also tell you how to plot this effectively. Till then, happy learning!