The BCG matrix is useful for following purposes:
1. The Relative Market Share (RMS)-
1.1. For assigning the cash generation from the business.
1.2. For understanding your and your competitor’s business improvement (as it is compared with the BCG of previous 1 year).
Relative Market Share (RMS) indicates, how likely the cash generated, because the higher the relative market share (RMS) the more the cash will be generated. As a result of 'economies of scale' (a basic assumption of the BCG Matrix), it is assumed that these earnings will grow faster and higher the share. The exact measure of the brand's share is relative to its largest competitor. Thus, if the brand had a share of 20 percent, and the largest competitor had the same, RMS would be 1. If the largest competitor had a share of 60 percent, however, the RMS would be 0.33, implying that the organization's brand was in a relatively weak position. If the largest competitor only had a share of 5 percent, the RMS would be 4, implying that the brand was in a relatively strong position, which might be reflected in profits and cash flows. If this technique is used in practice, this scale is logarithmic, not linear.
On the other hand, exactly what is the high relative share is a matter of some debate. The best evidence is that the most stable position (at least in fast-moving consumer goods markets) is for the brand leader to have a share double that of the second brand, and triple that of the third. Brand leaders in this position tend to be very stable—and profitable; the Rule of 123.
The selection of the relative market share metric was based upon its relationship to the experience curve. The market leader would have greater experience curve benefits, which delivers a cost leadership advantage.
Another reason for choosing the relative market share, rather than just profits, is that it carries more information than just cash flow. It shows where the brand is positioned against its main competitors, and indicates where it might likely to go in the future. It can also show what type of marketing activities might be expected to be effective.
2. The Market growth rate-
2.1. For understanding a brand competitive position.
2.2. For understanding brand how it working with your promotional-strength and how competitor’s promotional-strength is working (Here we showed BCG matrix of present and 1 year earlier).
Rapid growing in rapidly growing markets, is what organizations are strive for; but, as we have seen, the penalty is that they are usually net cash users – they require investment. The reason for this is because often the growth is being 'bought' by the high investment, in the reasonable expectation that a high market share will eventually turn into a sound investment in future profits. The theory behind the matrix assumes, therefore, that a higher growth rate is indicative of accompanying demands on investment.
The cut-off point is usually chosen as 10 per cent. Determining this cut-off point, the rate above which the growth is deemed to be significant and likely to lead for extra demands on cash which is a critical requirement of the technique; and once again, that makes the use of the growth–share matrix problematical in some product areas. Evermore, the evidence, from fast-moving consumer goods markets, is that, the most typical pattern is the very low growth, less than 1 per cent per annum. This is outside the range that is normally considered in BCG Matrix work, which may make, application of this form of analysis unworkable in many markets, where it can be applied. However, the market growth rate says more about the brand position than just its cash flow. It is a good indicator of that market's promotional-strength, of its future potential (of its 'maturity' in terms of the market life-cycle), and also of its attractiveness to future competitors. It can also be used in growth analysis.
3. The product life-cycle (PLC)- for getting an insights of your business opportunities that is moving through 'life-cycle' phases of introduction, growth, maturity and decline.
PLC phases are typically represented by an anti-clockwise movement around the BCG Matrix quadrants in the following order:
3.1. Products in high growth markets with low market share. (Upper Right Quadrant), the ‘introduction- phase’ of PLC.
3.2. Products in high growth markets with high market share. (Upper Left Quadrant), the ‘growth- phase’ of PLC.
3.3. Products in low growth markets with high market share (Lower Left Quadrant), the ‘maturity- phase’ of PLC.
3.4. Products in low growth market with low market share. (Lower Right Quadrant), the ‘decline- phase’ of PLC.
4. You can track product on desired movement.
While you are planning of market BCG Growth-Share analysis, the worse must be planned for, to ensure continuity of the concern in the event of a calamity. Companies which have a continuity plan usually sustain shocks better and ensure achievement of the targeted market share.
The natural cycle for most brand unit is that they start into a growing market in right upper quadrant, then grow the share to move towards the upper left quadrant. Eventually, as the market growth slows the asset maintains the share and to move towards the lower left quadrant. At the end of the cycle, if the share falls it moves towards the lower right quadrant.
4.1. If your product is on the upper right quadrant (products in high growth markets with low market share)
From a market entry position brands are usually launched into high growth markets, but suffer from a low market share. It is much more common for new products to be launched into high growth market.
They are growing rapidly and thus consume large amounts of cash, but because they have low market shares they do not generate much cash. This quadrant brands has the potential to gain market share and move towards to the upper left quadrant.
Your desired movement should be on right track
These products often require significant investment to push them into the upper left quadrant. If the initial investment decisions were sound, and sales follow on at a faster rate than the other competing products, the product will move into the upper left quadrant, as increase in relative market shares are achieved.
4.2. If your product is in the upper left quadrant (products in high growth markets with high market share)
In this quadrant, sales and market shares are increased. Brands of this quadrant generate large amounts of cash because of their strong relative market shares, but also consume large amounts of cash because of their high growth rates. There is significant market demand. They may be approaching the mature phase of their life
Your desired movement should be on right track
They are in the market leading position and must have sales which continue to grow at a high rates in order to maintain their market positions. These product lines require large amounts of funding to ensure that they can fight the competitors and maintain their growth rate.
If your brand of this quadrant can maintain its large market share, it will move to the lower left quadrant when the market growth rate declines or slow.
4.3. If you are in the lower left quadrant (products in low growth markets with high market share)
The product lines that fall within this category enjoy a large shares of the market in a slow-growing industry. This means that they are able to generate revenues in greater amounts than the investment required to maintain their business.
Your desired movement should be on right track
This quadrant is well established and are likely to be in the mature phase of their life cycle. Generally brands of this quadrant are very profitable and by the time they are classified as such they will be making a major positive contribution to the company’s cash flow. This is the right quadrant when you think about “brand extension”. Example, the Amoxicillin plus Clavulanic Acid that is the extension of Amoxicillin. This allows your brand to stay in this quadrant for a long period.
Under the growth-share matrix model, as an industry matures and its growth rate declines, a business unit will stay in this quadrant or move to the lower right quadrant, determined solely by whether it had become the market leader during the period of high growth.
4.4. If your are in lower right quadrant (products with low growth with low market share)
In this quadrant investment is minimized as the product ages and loses market share. Product units of this quadrant have a smaller market share in a mature and slow-growing industry. Usually, these product lines manage to earn what is put into them, breaking-even and maintaining the market share.
You desired movement should be on right track
The products of this quadrant neither generate nor consume a large amount of cash. They may be linked to low profits, and the prognosis for investment is generally low. Unless some new competitive advantage can be introduced.
It is likely that these products will not be able to compete and will not attract the resources necessary to improve the product’s position within the market.
Not to move from this quadrant as long as you are making cash, or if you see your product needs a market presence and would help business in other product of your portfolio, or you may quit the business.
. Disclaimer: No single approach is appropriate for every person, product, and business. We recommend you decide what you think is best for you. All validation tactics are done to build confidence before investing your time and money. There is no single test that can give you an answer, rather it’s a combination of everything, including your gut feeling, you should rely on.