Well thank you for watching this video on
the BCG Matrix. Over the course of the next several minutes, what we’re going to do is
define and describe what the BCG Matrix is, it’s purpose and what it’s used for. We’re
going to walk through the matrix and graphically kind of graph this out for you so you can
see how the matrix looks and what its purpose is. And we’ll go over some strategies on what
to do based on your findings in the BCG Matrix. Essentially, how do we use it? So the BCG Matrix was developed in the early
1970s, and it was developed by the Boston Consulting Group, which is a popular consulting
firm. And it was developed as a way of determining how companies can allocate their financial
resources. So the idea is is that many company’s have different product lines, and we need
to be able to figure out how we’re going to allocate resources. We shouldn’t necessarily
just you know split everything 50-50 where each particular product line gets the same
amount of resources. We should have a little bit of a maybe better methodology for distributing
those funds. There should be a more accurate where for us to determine how to get a better
return on our investment. And so that’s kind of the purpose of the BCG Matrix. And so the matrix itself looks at a couple
different areas. The first thing that it looks at is what we refer to as market share. And
so market share just very simply is the percentage of the market, so the overall market, that
the company controls. And market share is expressed as a percentage. So that if I were
to give you an example and say the company owns or has 40 percent market share and the
market itself is worth a total of $100 billion, well then our company holding 40 percent market
share would have revenue roughly of $40 billion. Because it maintains 40 percent market share.
And so typically we look at revenues when establishing market share. So that’s one of
the variables that the BCG Matrix considers. The next variable is what we call market growth.
And so market growth is the percentage that the market is expanding. Market growth is
a measure of market attractiveness. So obviously markets that are growing at higher percentages
are much more attractive to companies because their is more opportunity there. In markets
that a very very, not necessarily small in size but not growing significantly there not
as attractive because typically what happens is you have already established and very dominant
companies. And competition is very very fierce in markets that are characterized by low growth.
Because you’re fighting over a fixed pie if you want to kind of imagine it kind of like
an actual pie that you would eat. The size of that isn’t growing so that what happens
is the companies have to fight over their piece of the pie. Now with market growth if
it’s increasing significantly then the size of that pie is changing. So competition is
less fierce because everyone can kind of stake their own claim a little bit. Because the
market is still growing by a significant rate. And so those are the two variables. Now with
market share, one of the assumptions that the BCG Matrix makes is that if a company
has market share then usually it’s fairly successful from a financial standpoint. And
usually to have high market share, if you look at it from that perspective, you typically
have to be around a long time, benefit from economies of scale, customers have purchased
your products and probably been somewhat satisfied if you’re going to generate high market share.
So usually that’s a reasonable assumption although there is probably always exceptions
to everyone. So now that we know the variables in the BCG
Matrix, lets go ahead and plot out the matrix itself and go over some of the different components
and things that are included in the actual matrix. Alright so here is the actual matrix.
Now what we have to do is we kind of have to plot our variables. And so down here we’re
going to go ahead and list market share. And this is going to be high market share here.
And this is going to be low. In this area we’re going to list market growth. With high
market growth here and low market growth is going to go here. So a little different right?
Usually you’d think that the high side would go be over here but it’s kind of reversed.
At least for market share. So there are four total boxes in this matrix,
and each of these boxes signifies kind of a label that we put on a particular product.
And so just going through these one by one. The first one is what we call a dog. Now dogs
are characterized by both low market share and low market growth. So what that means
for you as the business owner is that you don’t necessarily have a big position in this
market. It’s very small. And so if you were to look at this, you know this product generates
such a little number of sales or revenue for you that it’s relatively insignificant. So
it’s not important to you. Now the other side of it is the market growth. It’s very very
low, which means that the market is very competitive. So if you were to look at what do we have
to do to change this. What do we have to do to get this product off the ground? Well you
have low market share so chances are people don’t even know about you. So you have to
increase awareness, which means you’re going to have to advertise, promote, and that costs
money and time. But then you look at market growth. Do we even want to be in this market
to begin with? It’s a low growing market, if anything it may even be declining. So if
spent all the money and resources trying to establish a position are we even going to
be around in this market? Is it going to be present in five years? If that’s the case,
maybe it’s not worth it. Now the next area is what we call our question
markets. Some versions of the BCG Matrix also refer to these as problem children. And the
reason that these are referred to as question marks is because we really don’t know what
to do with these. And problem children, because they generally are problematic. Because this
is kind of an executive managers or business owners worst nightmare. These operate in low
market share right? So we don’t have, we have a very small position in the market. Similar
to, similar to dogs. But they have high market growth.And so there’s potential here. There’s
less competition. It’s probably a newer market if it’s at a higher growth rate. And so what
we have to do here is we have to commit financial resources to figure out if this product could
potentially be successful. Now truthfully we don’t know, which is why it’s a question
mark. Because we can commit financial resources to it, but at the end of the day it might
still be a dog. And so that’s the decision that management has to make. And this is why
this is probably the most difficult area of the BCG Matrix to figure out what to do with.
The others are straight forward. But this particular area here, there’s a number of
different strategies which we’re going to go over, you can do depending upon what you
believe I suppose. Now the next area is what we call our starts.
Now notice the starts are characterized by both high market share as well as high growth.
So that means a couple of different things. The first of which is that we have a large
position in the market. We are likely the dominant player, right, the market leader
or maybe two or three. We have a very large market share. So this product, whatever it
is, generates a great deal of revenue for our company. Because once again, keeping with
the assumption that higher market share leads to high revenues. Which is fairly, fairly
reasonable. But the other end is that it’s in a high growth area, which means that the
market is continuing to expand by large, large percentages. Which means there’s still opportunity
for us. So there still is certainly potential in this market as well. And so these are definite
stars obviously, thus the actual label. They generate a great deal of revenue for the company,
but they’re also in growing industries that are very very attractive. So certainly a place
where all businesses would hope to be in. Now the last area of the BCG Matrix are what
we refer to as our cash cows. Now the reason that these are cash cows is because these
are in high market areas, meaning that we control once again a large position in the
market. Most likely a controlling stake. But the difference between this and stars is that
we have a very low growth rate in this market. Which means that there’s not a lot of potential,
but there’s also a great deal of competition. Now the different between this though, is
that we’re not trying to establish ourselves as the dominant player in the market. We already
are the dominant player. And so we don’t have to be concerned with advertising and promoting
because we are already going to benefit from having that large position. And so usually
what happens here, the reason they’re called cash cows is because they kind of sell themselves.
There’s brand awareness, there’s recognition, you don’t have to promote and advertise. It’s
in a declining market so usually what happens is companies reduce support as a way of generating
as much cash as possible. Because once again, there’s already a great deal of awareness
about these products. So now that we know what the BCG Matrix is,
and some of the components included, we have to figure out well what are our strategies
going to be. There’s a number of different things that we can do to develop an actual
strategy related to these areas. So lets identify some of those strategies.
What we can do, we can build market share. We can execute what we call a hold strategy.
We can go with a harvest strategy. Or we can divest. And so really quickly, building market
share means that we’re going to make additional investment. We’re going to increase our investment
in this particular product. Hold we’re going to do what we call maintain the status quo.
We pretty much do nothing. Harvest, we’re actually going to go ahead and reduce our
financial support. And so with build market share we’re investing. Harvest we’re reducing
investments. Maybe not eliminating them altogether, but we’re going to reduce the amount that
we put into the product for advertising, promotion, and those different sorts of things. And then
lastly divest, we eliminate these. And so looking at these strategies and applying
them to the BCG Matrix, the first thing that we do is, dogs we eliminate those. They’re
sucking up a lot of cash. We don’t necessarily want to invest in them. Remember we have very
small positions to begin with. It’s going to take so much just to generate any type
of market share. And truthfully it’s a low growth market, very competitive, it’s declining,
we don’t necessarily want to be there. Now the problem though is the question marks and
the problem children. Now technically we can eliminate these. We can go ahead and divest
from our position. But truthfully you don’t know if they’re going to be profitable. You
don’t know if they can turn into starts, and that’s what the goal is. To get your question
marks or problem children into stars. And so to do that, you’re going to maintain or
build market share. So you have two options really. Either you turn you put a little investment
in them to figure out if they can potentially be a star or you get rid of them so you can
use your financial resources to put towards something else. Now with regards to stars, you can do a couple
different things. Usually you would execute a hold strategy. You can also utilize a build
market share strategy. Once again you’re in a high growth rate so you can certainly carve
out a bigger piece of the market for yourself. You can just hold, you are the dominant player
in the market so simply we’re going to maintain the status quo. That’s certainly an option. Now eventually starts become cash cows. With
cash cows you usually engage in a harvest strategy. Meaning we reduce financial support.
The product is already going to sell itself. It doesn’t make sense if we continue to put
more advertising dollars into it. Instead our focus here is on generate as much cash
flow as possible. Kind of milking this thing for all of its worth. Thus the turn cash cow. And so those are the strategies that you would
use depending upon which area your product lies in the BCG Matrix. So once again, you
certainly have to consider the market share. What do you control related to this market
specifically? But also, what is the market growth like? As a way of determining how are
we going to allocate resources.