Is it time to assemble or review your business budget and you’re racking your brain for ideas on how to increase revenue? How about looking at the portfolio of products or services? Often the solution is to assess whether what the business offers is overvalued or undervalued. To do this, there is a tool called the BCG Matrix, commonly used by the marketing team but can also help the controller in company strategies.
How does the BCG matrix work?
The BCG Matrix received that name because it was created by the Boston Consulting Group in the 1970s. It allows for better targeting of investments and consequently increases the utility of the company. So let’s understand how it works and how you can use this tool to improve your results.
The BCG Matrix allows us to understand the moment in which each product or service appears on the market. It consists of two axes, represented in a graph: market growth (y-axis) and relative share (x-axis).
Each axis, in turn, is made up of two sectors, resulting in a quadrant, where the categories are assigned: dairy cow, star, question mark, and dog.
The market growth axis represents how much the market has been growing and has room for the product being analyzed. Now the relative share axis is how much of this market is dominated by the company within the niche: is the level of dominance high or low?
Let’s think of an example to leave no room for doubt, such as notebooks, which continue to expand (market growth axis). Now, what the market share of notebooks does company X have? Is it the volume compared to your competitors? In this case, we refer to the axis of relative participation.
In other words, it is asking questions and answering those questions that will classify the company’s projects into four categories. For this reason, it is important to fully understand each one of them and what is the market behavior (both in terms of growth and relative participation) that each one represents. Analyze the following image.
Understanding each quadrant of the BCG matrix
As we mentioned, the BCG Matrix has four categories, we are going to describe each of them:
Milk cow
Here we are talking about an established product or service that has reached its limit, as it has a high market share and low growth. A possible assessment, therefore, is that it is not worth making large contributions of resources, but keeping it at the level it is at, without losing focus, of course.
Star
This is part of the matrix in which every company wants its products to be since reaching this quadrant means that the item has a high market share and a high possibility of growth. It means, then, that there is a lot of potential and a good space to cover.
Question product
This is the quadrant to which the company should pay more attention. This is because market growth is high and share is still low. You are not achieving your full potential. Then, perhaps it is a question of reserving a greater economic contribution in the budget, making that product or service become a star.
Dog
This is the quadrant that represents a problem. In it are the products that have low market share and low growth rates. Here, the question is: To what extent is it worth investing in this product or service? Perhaps it is better to direct these resources to products that bring a better return for the business.
The possibilities
Thinking about the company’s budget, we can imagine some scenarios. The resources obtained from the dairy cow can, for example, be used to increase the potential of products considered questionable. This increases the chance that this item will gain space on the market.
Likewise, the company can also identify the possibility of making a greater investment in the star, increasing its potential. Here, however, an addendum is worthwhile: this growth does not last forever. At some point, that product or service will become a source of income when you hit your limit.
Since it is difficult to predict how the market will behave for the entire range of products that the company has, it simulates financial scenarios as an output. Imagine that your organization has just launched a product. That is, it is in the question mark quadrant, with a still low growth rate, but the company has increased the marketing budget for demand to grow. After a few months, the demand grew absurdly, this is a sign that he became a star, but the company was not prepared to handle such a high amount of sales, which caused delays in deliveries and many complaints from customers. Another situation that can occur is a product that is in the cash cow quadrant, is the flagship of the company, and suddenly sales drop drastically, hurting cash flow.
In both situations, the company could have been prepared if it had created the simulation scenario. The main function of Scenario Projection is to analyze the context (internal and external) in which the company operates and to identify future factors that are likely to occur. This allows the company a clearer vision of the current scenario and allows for more informed and accurate decision-making.
Product life cycle
Quadrants also make it easy to identify a product’s life cycle and where it fits into each stage. For example, if your company intends to add a new product to the portfolio, it will be classified as “Concerned” because little is known about its market share.
The low demand for products that are already on sale is also a cause for questioning. If other than this in demand, the product has never been a leader or near the top within its niche, it’s a dog. This is where you have to make an analysis, of whether or not to continue with production.
The stars are usually the second phase of the products that were “in question”, with the difference that you already know more about the market share and you manage to place the article in the correct position within the BCG Matrix.
For a star to reach the market leaders, it is necessary to invest work, time, and money. Only then, when they complete the cycle, do the products become Cash Cows.
But they may never get there, as it all depends on how big the market is and how much is shared among competitors.
How to assemble the BCG Matrix
Before drawing the matrix itself, you need to do the following steps:
- Choose the products or services to analyze.
- Define the market, that is, the target audience that will serve as a parameter for the analysis.
- Calculates the market share, which shows the size of the market share that the item consumes. To make this calculation, divide the result of the sale of the article analyzed by the total sale in the market.
- Know the growth rate of the item analyzed, comparing the performance between two periods, which can be annual, semi-annual, or whenever it is possible to measure said growth.
- Identify the share of the largest competitor of this product in the market.
From these answers, it is possible to identify in which quadrant of the BCG Matrix each product should be placed, based on data and not conjecture. Remember, in this stage of building the matrix, consider the moment of the life cycle in which the product is: launch, growth, maturity, or decline. In addition to the investment strategies of the company in each product.
Finally, once the matrix is built, it is possible to move on to the budget stage and carry out the analyses necessary for decision-making.
Budget planning and BCG Matrix
Having mastered the tool, it is time to use the BCG Matrix to help the company and other areas, such as marketing and sales, to better analyze the behavior of the company’s product portfolio. But it’s time to use this information strategically, especially in company-wide budgeting. As?
Simple! The use of this tool can be a way to more easily find where to invest or where to reduce costs when making the company’s Budget.
In sales, for example, the team can already plan sales (also known as Revenue Forecast or Revenue Projection) and define which product will be the focus in that period. Marketing can also predict in which to invest more actions.
When you do budget planning, some points end up becoming a source of problems, while others are solutions. The use of the BCG Matrix can be essential at times, such as: changing the profit margin and generating bigger financial results with less investment.
Another place where you can provide support is in the mapping of Skills to develop the company in the market. Knowing the market challenges your company faces makes it easier to understand what to develop in your employees. In addition to allowing you to carry out new and old projects and design the budget based on these guidelines.
Have you already done the BCG Matrix of your company?
Looking at the results and the impact on competitiveness, we must point out that the portfolio analysis must be careful and take into account the main details of the products. If budget professionals and managers do not consider this assessment, the company risks losing ground to the competition.
With that in mind, we recommend that you start implementing the BCG Matrix into your company’s product portfolio management process now. By doing everything correctly, you will be able to gain competitiveness and even optimize the application of the company’s resources, which are often scarce or highly controlled.
