A BCG matrix aims to draw strategies within a portfolio of products or services, prioritizing those with the greatest potential. The name BCG comes from Boston Consulting Group, a company that started using the tool in the 70 years.
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What is and how to do strategic planning?
The BCG matrix is a management tool developed by Bruce Henderson for the consulting firm Boston Consulting Group in 1970. It is a table with two main axes (market share and market growth) created for the analysis of catalog of products or services.
With this matrix it is possible to classify each of the products or services of your portfolio in 4 different groups:
- Dairy cows
- In question
Let's talk a little bit about each of these groups right after the index.
- What is the BCG matrix
- Practical example: how we improved our product catalog with the BCG matrix
- Use the BCG Matrix Worksheet to do your analysis in practice
Dairy cows are an allusion to cows that provide livelihoods for farms in rural areas. The products that should fall into this category are probably the most mature of the company.
They have large market share, but are in a low growth market, probably because it already stabilized after periods of more aggressive growth.
Because they are dominant in a mature market, they are do not need large investments to generate good profit margins.
Stars are their products that have high market share and meet in a high growth market.
They are crucial part of your billing, however, need high investments to remain strong in the market. Therefore, they end up generating lower margins.
You must continue investing, because one day, when the market matures, they can be transformed into dairy cows for the company.
The products in question are those that have low market share, but are in a high growth market.
Often these are new products or services, you are still testing the offer. You need increase their market share, so that they will see stars one day.
To do so, the investment must be high and may even generate a negative return at the beginning. This is normal, as long as there is no misconception about the expectation of market growth. If so, you may end up getting a pineapple in hand.
Pineapples are products that you do not want to have in your portfolio. They have low market share and are in a stagnant market.
Achieving market share in this situation is very difficult because players with more participation are already established and the market is not growing, giving little room for innovation.
It is strongly advised that these products be re-evaluated. If there is no possibility of a turn of the game, perhaps the best way is to discard it.
Jack Welch was the president of General Electric in the 80 decade and was known to have made profound changes in the company that made it achieve high growth rates.
He made very strong changes in organizational culture and cuts in areas that were in the red for over 20 years, prioritizing products that were in the worldwide TOP-3 in their markets.
It can be said that he did an analysis similar to the BCG matrix. He kept the dairy cows and the stars, set deadlines for those in question and got rid of pineapples.
The story is told in the book Passion for Conquer, as illustrated above.
Before getting into the strategies for how we use the BCG matrix to improve our spreadsheet catalog, it’s worth contextualizing what the LIGHT for those who do not know.
Basically, we have developed business spreadsheets to help managers and entrepreneurs in their day-to-day business challenges. If you want to understand it in a more visual way, I recommend you to enter our website and know the worksheets.
To use the BCG matrix, we had 5 essential steps that I indicate for those who are in the same process of organizing their products or services:
- Step 1 - Creating the spreadsheet catalog
- Step 2 - Classification in relation to the sales estimate and level of market share
- Step 3 - Understanding Growth Expectancy
- Step 4 - Splitting spreadsheets by type
- Step 5 - Spreadsheet Catalog Improvement Strategies
Let's look at each of these steps in practice:
The first step is to organize what your products or services actually are. Always having an up-to-date list of these items will help you not to get lost and always have an understanding of the importance of each. In our case, we have more than 100 business spreadsheets and spreadsheet packages. So, just for purposes of this example, I will only list 8 products:
- Sheet Cash Flow
- Economic Feasibility Study Sheet
- Skills Performance Evaluation Worksheet
- Strategic Planning Worksheet
- Defect Control Worksheet
- Business Diagnostics Package
- LUZ Spreadsheet Package
With its catalog of products or complete services, we can enter the classification of the BCG matrix itself.
For this moment there is not much mystery, as we have already shown, this is a array 2 × 2, which allows you to have two ratings in relation to the sales growth estimate item and two more in relation to the level of market share.
These ratings are market-expanding or stagnant for growth estimates and for much or very little market share. See how our rating stayed on BCG matrix worksheet:
The logic is very simple, let's see an example for the case of the cash flow spreadsheet. This is our spreadsheet with the highest amount of sales (a lot of market share) and the one with the most demand (expanding market).
Another example would be strategic planning, which despite having little participation in our portfolio today, is highly sought after, especially at the end of the year.
Simply follow the same process for all your products and, after completing the 2 step, begin to identify which products are expected to grow even more than the market and which have lower expectations.
Once again, in our example we can see both cases, from our cash flow spreadsheet, which continues to grow because it is the most sought after spreadsheet. And that of the economic feasibility study spreadsheet, which, despite being extremely positive, showed a smaller growth than the rest of the spreadsheets in recent times.
According to the classification made so far, we have already been able to divide the spreadsheets and packages by the main types:
- Milky cow
- In Questioning
See below the BCG matrix spreadsheet automatically filled with the products:
Cool, so far you have a much better view than just a list of products or services.
This rating allows you to understand what your best products are and is a strong indicator that it is worth creating strategies to further increase your share of your revenue. And also to reduce the share of products that are not beneficial to the business in general.
In our case, we realized that we had a very extensive product catalog with a high percentage of pineapple spreadsheets (about 38%). With that information we were ready to go to our fifth and final step and think about what to do with that information.
This may be the most challenging part of the whole process. This is where you will make real decisions that impact your business. In general, we have had these approaches:
Products or Services Estrela
These are already their sales champions, both in market share and growth estimates. Forgetting them is a big mistake. Make sure they are always 100% regarding quality, service, support and factors that influence your customer's purchase decision.
In our case, we are always keeping an eye on the cash flow spreadsheet to track sales and almost always when this indicator falls, it is because we had a problem on the site or adopted a bad strategy.
Products or Services in Questioning
These products are the most susceptible to change and may have positive or negative behaviors. In this case, one of the possibilities is to turn a questioning product into a star in your catalog. Usually this is only possible if you invest right and get ways to communicate with your audience.
Once again, in the case of the strategic planning worksheet, we perceive a seasonal opportunity, since more people are interested in it near the end and the beginning of the year, which historically are more likely moments in thinking about the business strategy as a whole.
Therefore, the BCG matrix worksheet already makes some indications according to its filling:
Another possibility is you find products with a large stake in your business, but with a weakening trend. At these times it is essential that you understand what strategies can make the product gain strength again.
An example of our spreadsheet catalog was the economic feasibility study sheet, that we were able to create actions and revitalize its strategy to maintain its growth and participation within our revenues. For you to have a notion, nowadays it is one of our best selling spreadsheets.
Dairy Cow Products or Services
These products or services are already established. You just need to maintain your strategies and be concerned about anything going wrong.
Products or Services Pineapple
Perhaps here is the great danger, since many companies have difficulty in getting products or services from the catalog. In our case, by the end of the year we had more than 140 spreadsheets available. Of these, a good part contributed very little to our monthly income and had no prospect of growing. They were real pineapples.
At that moment we decided to adopt a strategy of reformulating our catalog and took a series of worksheets out of the air. From our example we take these:
- Defect Control Worksheet
- Business Diagnostics Package
Around 40 spreadsheets went out of circulation. Or because they do not expect growth or because they generate more problems than benefits.
In the end, the most important thing is that you know how to do the classification within the BCG matrix worksheet and that has the strategic ability to "kill" your products or services that are pineapples with no prospect of improvement and invest in those who are star or high potential questioning items.