In order to analyze the strategic position of a product or a Strategic Business Unit (SBU), in 1970 a management consulting firm, the Boston Consulting Group, created the business portfolio analysis model, also known as "analysis of Portfolio ”, in our environment known as the BCG matrix or growth - participation matrix, which is a 2 × 2 matrix, where the products or UEN are classified according to the market growth rate, which serves as an indicator of its attractiveness and the relative participation or market share that is used as an indicator of the competitiveness held, from which the following matrix is obtained:
In turn, the four quadrants of the grid represent different categories of strategic business units (SBUs) or very important products. These four categories not only help us to know what marketing strategies to apply but also superimpose elements of financial analysis, such as generation and requirements of funds according to each stage of the product and is a redefinition of the traditional concept of the product life cycle.
However, this analysis has been the target of numerous criticisms, as we will see in a later point, but it is important to recognize that this scheme has become the stepping stone for numerous subsequent developments and contributes a lot to financial and marketing issues.
Strategic Business Units
A. Business (UEN) or product question mark
They are products or SBUs that have a low participation in markets but with high growth rates in the market. These are generally new products that require a large amount of resources to maintain participation. Resources that must be generated by other products or UEN. As its name implies, it is a question mark for when they can reach any destination: which can be success or failure.
Due to this in some countries like ours it is also known as “problem children”, because this type of companies (UEN) or products, has not managed to establish itself in a highly competitive expanding market and therefore they are a problem. take care of it for the company, and / or the Executives.
B. Star businesses or products
These are high-growth, high-participation EUN companies, they represent the hope of the future. They are products that require great attention because their high growth rate must be financed, in other words they require a lot of cash to maintain their competitiveness within growth markets, but their strong leadership makes the flow of funds tend to be neutral.. Over time their growth will slow down and they will become cows that generate more cash.
Beyond the statements of the Boston Consulting Group, the strategy to be followed should apply the scheme of strengths and weaknesses, in order to prevent the star product from being interrupted or altered, on its path that leads to its transformation into Vaca Lechera.
C. Dairy cow business or products
Dairy cow products or businesses (cash-cows) are products that have a privileged position due to their participation (leading products) in a low-growth market or mature industries (due to low growth rates). Most of their customers have been with them for a long time and remain loyal, so the marketing costs are not high.
Therefore, they generate more cash than they can profitably reinvest in their own operations, thus the cash cows can be “milked” to support the other strategic business units (SBUs) that need more resources.
Very few businesses or products reach this position after successfully going through the competition in the star quadrant, to finally become cash-cow.
In our country in the Department of La Paz, we could cite Industrias Copacabana, specifically its chicken fast food, although there is a lot of competition, more informal than formal, the product is sold daily and does not need advertising on TV, as it is a product consolidated that even if its price rises, it does not decrease its clientele, it sells itself and has remained that way for years.
D. Dog business or products
These SBUs or products have little market share and operate in industries with low growth rates. It is not convenient for a company to invest a lot in this category of units, because they are not very profitable, in fact if the SBU or product is in this category for a long time, the owners or shareholders often choose to eliminate it and take it off the market.
Steps to prepare the BCG matrix
1. Calculation of the Industry and / or Market Growth Rate
The market growth rate represented on the vertical axis, is used to measure the increase in the volume of sales of the market or industry, it goes from high to low and from 20% to 5% with an average of 10%, percentages that are standards by the creators of the matrix.
It is estimated taking into consideration the total market sales volume in the last two years, or the last two periods. For practical purposes, the following is a hypothetical example of Bolivian beer companies, assuming that these three companies represent the entire industry, we have the following data as an example:
| BUSINESS | SALES YEAR (1) 2006 | SALES YEAR (2) 2007 | Market share
based on last year |
| CBN (National Bolivian Brewery) | 5,500,000.- | 6,000,000.- | 46.87% |
| AUTHENTIC beer | 4,000,000.- | 5,000,000.- | 39.06% |
| DUCAL beer | 2,500,000.- | 1,800,000.- | 14.06% |
| TOTAL | 12,000,000.- | 12,800,000.- | 100.00% |
For our practical exercise the calculation of the vertical axis (industry growth rate) we apply the following formula:
TC = (sales year 2 - sales year 1 / sales year 1) x 100
We would have the following result:
TC = (12,800,000 - 12,000,000 / 12,000,000) x 100
TC = 0.67 x 100
TC = 6.7%
In other words, the sales of the beer market have increased by 6.7% in 2007, compared to the 2006 management, the result is independent of the increases or decreases that each firm had in the two managements as it represents the entire market.
2. Calculation of the Relative Share
Similarly, the data of the mean relative participation is generally plotted at 1 or 1.5, above this level the market share is strong, while below the participation is low, the scale from 0 to 5 and a mean 1 and / or 1.5 (used in some cases), are the precise standard data that are normally used, even in our environment, with all the economic changes that we suffer, this measure is reliable for any portfolio analysis.
To calculate the relative market share. The participation of the product and / or company (UEN) is divided by analyzing its participation with the competitor with the largest participation.
For the practical case, the analysis company is CBN, we use the following formula:
CM = Sales of the company and / or% of market share / Sales of the largest competitor and / or participation of the largest competitor
For the calculation of the CM, the sales data of the last 2007 management that are in the previous table are used, from which the market share percentages of each company can be taken based on the total sales, and use that percentage data in the formula or just take into account the number of sales, for any of the cases the result will be the same. Replacing the data of the exercise we obtain the following:
CBN = 6,000,000 / 5,000,000 = 1.2
When there is all the market information, the competition data can also be calculated and we would have the following table:
| BUSINESS | CM |
| CBN | (46.87% / 39.06%) = 1.2 |
| AUTHENTIC beer | (39.06% / 46.87%) = 0.83 |
| DUCAL beer | (14.06% / 46.87%) = 0.30 |
In this last table we are using the percentage data instead of the sales data, since the result will always be the same.
For the creators of the BCG matrix, a share is high when it is greater than 1, and low when it is less.
3. Preparation of the BCG matrix
Based on these data, the matrix can be assembled, and in this way four groups of products-markets can be identified, with respect to which a diagnosis is made that allows the diagramming of an action strategy, as we will see later.
In our practical case, as we have already obtained the data, we are going to graph them in the BCG matrix and carry out a brief analysis of the results in this way we would have the following:
Data analysis
Based on the exercise done, and assuming the hypothetical data, we can conclude that the CBN company has dominance over the market with 46.87%, (strong market share) its product is the one that yields the highest income, in relation to its competition, because it is a consolidated market, which means that the market growth rate is not high.
In summary, although the sales data in the example are low, if we change them by three times in all cases, from the source data, the growth rate would not change, because it is a consolidated market that remains on the sidelines over time. of sales volume.
On the other hand, when there is a leading company in the market, the market share in the parent company will normally be between 1.1 and 1.8 maximum, the only cases where the company has a greater share above 2 or 3, is when the company has sales and / or majority stake 4 to 5 times greater than its largest competition, At least in our country Bolivia, the reference case would be the SAGIC company that wines and singanis that by the 70s and 80s was a leading company in the market, and its sales volume was 4 or 5 times higher than the competition, its Singani product "San Pedro de Oro", was sold practically by itself, another case would be STEGE products and sausages, which until the 80s and early 90s for sure, their market share was between 3 and 4 very strong but now, although it is still a leading product line, due to the high competition it now has, it was down to 1.6 or 1.9, although it is still in the COW segment, in synthesis only the sales volume determines whether a product is COW or DOG, since this volume of sales makes one a market leader.
Another important aspect that we must take into account is that the growth rate seen in figures (annual sales volume), is more important than seeing it in percentage to know if the market is attractive (profitable) or not. To better understand this idea, let's reason as follows if, hypothetically, a market X had the following figures in two steps: year 1 = 20 units sold and year 2 = 23 units sold, its growth rate would be 15%, but if we change these figures for more real sales volume for: year 1 = 20,000 units sold and year 2 = 23,000 units sold, its growth rate would continue to be 15%, and although this percentage is the same in both cases, in the BCG matrix would give us to think that the market or product is in STAR and is a growing market,But if the data were as in the first case, the market or product, although it is a star, is not profitable or attractive due to its low sales volume, so it is better to be guided by the absolute figures in the first case the figures were extremely low but they serve to realize that it is an unprofitable market.
However, another scenario can occur, when there are markets or products with high sales volumes per year but very little growth rate, from one management to another, let's see the following figure:
In this graph the growth rate of a market or product is 1%, although the company or SBU "A" is in a good position with respect to its competition, this market has a very low growth rate, even if they were large volumes of sales, 1% per year is very little growth, for those of BCG one can have a growth between 0 to 10% to remain COW above this one is a STAR, but when this type of behavior occurs below 5 %, it is worrying that this has generated a new paradigm and new denominations for these percentages so low, that if they are repeated for many periods of time they are called MILKED and / or CANTARO and FLEA, the first because like a pitcher, width of belly and narrow neck,the product or company receives income but the market has many competitors that make the growth rate very low, what is done in these cases is normally to capture the sales income as much as possible (milk), to cover the necessary expenses for maintain leadership in the market. On the other hand, if one is in the DOG segment, the company, apart from not being a market leader, is in one of little growth like that of the graph, for this reason the name of PULGA has been generated because it is so low the market growth and you have to pay a lot of income for your sales to go up and still your product will remain DOG, unless you are a market leader. When the market has products or companies that have a low growth rate, it is often the fault of the same companies in the sector,that saturated the market or are in the middle of war (high publicity and promotion of companies in the sector), which does not necessarily mean that this behavior is not profitable yet. In Bolivia, the typical case of this behavior is given to telecommunications companies, there was a time when all companies (ENTEL, VIVA, TIGO), entered a price war, each one lowered their service costs per minute and per second and promoted them to attract more customers, initially it worked but now they all have services in the capital cities, and the market had little growth, because it was saturated, to get out of these low levels a strategy is to look for new markets that increase sales, in the case of the example of telecommunications companies,This occurred when they expanded their coverage of services to the capitals of the most frequented provinces (Los Yungas, Copacabana, Montevideo, Riberalta, etc.), that is, new markets. This type of new denominatives (Cántaro and Pulga) is not very common and is not part of the original concepts of the BCG, but the analysis it provides from which gave birth to these new Sub-categories is important.
Typical strategies by segments of the BCG matrix
1. Strategies of the Interrogation segment
Normally when one is in this segment the key is in the relative participation of the market and not in the market growth rate, there are two alternatives to follow, such as the product or the SBU has not managed to establish itself in the market, the marketing manager and the executives They must know if it is possible to gain a good share in the market and be profitable: 1st alternative; If it is NOT possible to gain a good share of the market, then its share should be reduced or canceled and the product taken off the market or exchanged for another. Second alternative if YES, it is possible to gain a greater share in the market, the company will have to invest more resources to achieve a higher relative share in the market,The appropriate strategy for this type of unit is to seek first of all to create an impact on the market by showing a great differential advantage, thus obtaining the support of customers, in Bolivia this happened with SOFIA sausages, which is a line of derivative products del Pollo, like other similar companies, SOFIA invested a lot to improve the quality of its products and went from INTERROGANTE to ESTRELLA, as it is currently a leader in the chicken product line with high growth.since it is currently a leader in the chicken product line with high growth.since it is currently a leader in the chicken product line with high growth.
2. Star segment strategies
As it requires a lot of cash to maintain its competitiveness within the growing markets, the marketing strategy to follow is usually a very aggressive one to retain or even obtain a market share, this aggressiveness is translated into high promotion and advertising or expenses for provide extra added value to the product or service, on the part of the company that is in this segment, the example in Bolivia occurs in certain seasons with Stege that brings out its promotion of Sausages in San Juan, in this season the growth rate of this Product rises enormously but the leading participation is Stege, who generated an aggressive marketing strategy both in promotion, advertising and value added to the product.
3. Strategy of the Cow segment
The marketing strategy of this segment is to try to defend market share, that is, leadership, marketing strategies will reinforce customer loyalty, this can be through gifts, discounts on purchases or providing value added to the products or services, obviously they generate a cash expense but if these actions or others work to keep customers, the expense becomes an investment, to better understand why a company must invest to stay in this segment, let's resume the exercise previous practice and at the same time we increase more data, that is, more companies with their respective sales volumes, and maintain or create a new market leader,When the relative market share value is taken, the market leader will always be equal to or greater than 1 and the rest of the competition, no matter how many, will be below 1 (in the DOG segment), the EUNs or products that are in VACA will be able to recoup their investment because they have the highest number of sales and income, which is profitable from every point of view.
4. Dog segment strategies
The marketing strategies for this type of segment is to maximize the potential profits by minimizing expenses or promoting a differential advantage to obtain the largest share in the market, if the product is very bad, improve it and relaunch it (investment), and the last option It consists of reducing the investment in the dogs or canceling them.
In this segment, fortunately, any marketing and / or production strategy can be used to achieve whether or not to increase the market share above 0.5 and the closest to 1 or better to be equal to or more than 1 and stop being PERRO and ser VACA, in Bolivia in the city of La Paz the case of a product that was a dog and for a time it became a Cow, before so much competition from similar products appeared, it was TAMPICO initially there was not much competition and the product did not have a lot of growth, in the non-carbonated soft drink and orange market, but it was a dog because its product was not very good, so its sales fell; later it was relaunched and the formula was better processed in a better container,resulting in a better taste and for a while that gave them the largest share in the market and turned them into a COW product, one would say a star, but in La Paz at least non-carbonated products have little growth rate in relation to the carbonated soft drinks such as Coca Cola, Pepsi, Salvietti, Oriental, etc. Currently it is possible that TAMPICO has returned to being a dog because there is a lot of competition from similar products.
Criticisms of the BCG matrix
This matrix has been the most widely used portfolio approach, yet it is not without its critics, one of which is related to the colorful and ingenious names given to ENUs or products in the cells of the matrix.
The other criticism is given to the dividing line of the high and low of the market growth rate that is usually 10% in physical units and because only the single leader in relative market share (horizontal axis) is classified as "High" in participation in it, the use of the BCG matrix creates a ranking of between 60 and 70 percent of all business units and / or products in the category of "dogs". This misleading label encourages business managers to neglect the possibilities of those businesses.
Similarly, the idea implicit in the "Cow" encourages managers to milk the cow - or to use their earnings to finance other businesses or products, when the cash cow can itself be an excellent amount of reinvestment. It is clear that careful analysis can circumvent these dangers, but the BCG approach tends to favor simplistic analyzes of extremely complex situations and problems.
Conclusions and recommendations
Usually a company cannot influence the growth rate of an industry or market, an exception could be a dominant company within a fairly new and fast-growing industry, as happened with TELECEL when it entered the Bolivian market, but like companies Normally they cannot influence the market rate, they concentrate their attention on increasing their relative market share and better yet becoming a market leader, which is the main objective.
For this reason, marketing strategies based on the BCG matrix tend to focus on obtaining or discussing a market share, depending on the category of SBUs or products in question.
To obtain better benefits from the information for decision-making, through the BCG matrix, it is highly recommended to perform them separately for each product line, a BCG matrix, the company may have more than one product and in one it may be a leader while In another not, for this reason it is important to analyze each product separately, in the same way if the company is Corporate and works through its strategic business units (UEN), the corporation must analyze its BCG matrix separately for each EUN since Normally each EUN operates different activities or items, in La Paz Bolivia an example of a Corporate company are Industrias Lara Bisch SA, which has its UEN, the best known is Full Office, dedicated to commercializing supplies and office supplies.
It is also advisable to do it by Regions and / or market segments in Bolivia rather than market segments would be by Regions, that is, Departments, as they are called here, if the SBU or product is at the national level, it may be the case that each Region / Department and / or market segment has different behavior in relation to the product, or that the economy of each region affects the product, this may lead to having the same product in a region such as Star or Cow and in another region such as Question or Dog, Therefore, different market strategies would be applied by each Department in relation to the product or EUN.
It is advisable to apply the BCG matrix not annually, because there are markets with very changing behaviors or with seasonality in these cases it is convenient to apply the matrix for certain periods especially when the product has its seasonality, an example of this last statement is the case in La Paz Bolivia of STEGE sausages increased their sales in June in San Juan more than in other months of the year.
Finally, a negative aspect of our country to effectively apply the BCG matrix is that we do not have constant and timely sources of information, since to obtain the growth rate and market share a lot of information is required by product, item and / or sector and mainly from the competition, information that is not abundant in our environment, therefore the marketing manager would have to look for the necessary information in specific places for example in the Chamber of Commerce or Industry, National and Departmental or in the Chamber of the Sector to which it belongs the company (advertising chamber, hotel, etc.), in other sectors such as banking and insurance companies, this information can be obtained from their respective Superintendency, which obliges these types of companies to send their annual information,in whether the marketing manager must permanently be aware of the competition in product figures or UEN in relation to its major competitors, to execute the most appropriate marketing strategies.
Bibliography
- Marketing Fundamentals - William J. Stanton Total Marketing Strategies - latest edition Management - Freemar and Stoner.
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We leave you with a short video-lesson, from the Miguel Hernández University of Elche, in which the concept of the BCG Matrix is explained quite clearly, a good learning complement.
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