How To Use the BCG Matrix in 5 Practical Steps

By Indeed Editorial Team

Published January 3, 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

The BCG matrix is a framework designed to help organizations with their long-term planning. Regardless of your role within the company's management team, understanding the BCG matrix can help you make better decisions when managing your organization's investment portfolio. Before you can start making these decisions, it's important to learn to use the BCG matrix. In this article, we discuss what the BCG matrix is and explain when and how to use it.

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What is the BCG matrix?

The BCG matrix, also called the growth share matrix, is a planning tool created by the Boston Consulting Group that helps organizations analyze their different business units and product lines and efficiently allocate resources between them. Besides potentially improving resource allocation, this matrix also helps companies make more effective business decisions regarding product management, strategic planning and brand marketing. It takes the form of a chart, where the y-axis represents the rate of market growth and the x-axis represents market share.

BCG matrix categories

The BCG matrix chart is divided into four categories, where each business unit or product line is represented based on its relative market share and growth rate. The four categories are:

  • The cash cows: These business units or product lines have a large share of their market in a slow-growing industry. This typically means that they can generate significant revenue without the main organization needing to invest great amounts to keep up with the competition.

  • The dogs: These business units or product lines have a relatively small market share within a slow-growing and mature industry. This typically means that they're not likely to generate any significant earnings or losses, but they may be valuable to the parent organization because they synergize well with other business units.

  • The stars: These business units or product lines have large market shares in fast-growing industries. This typically means that, although they generate significant revenue, they also require additional funding to make sure that they keep up with their competition, and they're likely to turn into cash cows or dogs at some point in the future as the industry's growth declines.

  • The unknowns: These business units or product lines have relatively small market shares within high-growth industries. This is where most businesses enter the market, and their parent companies typically perform thorough analyses to help plan their growth, turn them into stars and eventually help them transition into cash cows as the industry's growth rate decelerates.

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BCG matrix axes

The two axes within the BCG matrix are:

  • Relative market share: This axis shows a business or product line's market share compared to its largest competitor. Knowing its position on the market in relation to its biggest competitor can be relevant when planning its future.

  • Market growth rate: This axis is an indicator of the market's current value and future potential. It's a useful piece of information, as higher growth rates typically mean more earnings and profits, but it also indicates the fact that future investments are required to keep up with the constantly expanding competition.

When to use the BCG matrix

Using the BCG matrix is generally appropriate when defining long-term strategies for various businesses and product lines. It usually applies to organizations with large and diverse product or investment portfolios. Here are some specific situations when it's typically most suitable to use:

  • If the organization is a major manufacturer

  • If the organization has a highly diverse range of products or multiple business divisions

  • If the organization has significant market shares in multiple markets

  • If the organization's management prefers to use analysis tools to help with their strategic planning

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How to use the BCG Matrix

Consider following these steps when attempting to use the BCG matrix for your organization:

1. Choose the product or business unit

The first step is determining what aspect of your organization you want to analyze with the BCG matrix. Some of the most common options include analyzing the entire company as a whole, strategic business units within the company, specific product lines or individual brands that the company owns. Depending on what you want to analyze with the help of a BCG matrix, variables like the industry, market, competition and position within the industry would all be different.

2. Define the market or industry

After deciding what you want to analyze, you can determine the exact market or industry to which it belongs. This step is crucial for creating an effective BCG matrix, as misclassifying the product line's exact industry or market can lead to inaccurate results. For example, a luxury product would be considered a dog if you classify it as an ordinary product, based on its relatively small market share. However, if you compare it to similar luxury products, its share of the market is likely to be considerably larger.

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3. Calculate the relative market share

After choosing the business or product line you want to analyze and clearly defining its market, you can determine its relative market share. You can make the calculation based on the revenue it generates or by actual market share. You calculate it by dividing your chosen unit's revenue or market share by the revenue or market share of its biggest competitor. After determining the relative market share, you plot it on the x-axis.

4. Determine the market growth rate

If the market or industry you're analyzing is relatively common, you're likely to be able to find industry reports that show its growth rate. Otherwise, you can get an estimate by analyzing the average revenue growth of the biggest competitors and using this data to make future projections. The market growth rate is a percentage, and you plot it on the y-axis.

5. Draw the circles on the matrix

Once you calculate all measures for all business units or product lines you want to assess, you can place them into the matrix. You can do that by drawing a circle around each business or product within the matrix. The size of each circle corresponds to the generated business revenue of each business or product.

Please note that none of the companies mentioned in this article are affiliated with Indeed.

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