The BCG Matrix: Where to Draw the Line?

 

One of the challenges with the design of the BCG matrix is the decision of what values to place the axes in order to create the four quadrants.

Unlike as suggested in other areas of the Internet, these four quadrants do not have to be equal in size. For example, there is one video online that suggests that the 40% market growth rate is a good place to set the horizontal axis (separating cash cows and stars) because that makes the model looks symmetrical.

Please note that the template provided on this site will not be symmetrical if there are large positive or negative market growth rates – this is because the axis intersect at certain values in order to correctly classify a firm or product portfolio into the one of the four quadrants of the BCG matrix.

Value for the market growth rate

The purpose of the market growth rate percentage is to differentiate between markets that provide significant growth opportunity (and therefore where the portfolios will be classified as either stars or question marks) and those markets that are quite mature or perhaps even in the decline phase of the product life cycle (and will be classified either as a cash cow or as a dog).

The general rule of thumb is that a 10% average market growth rate should be used. Most economies grow around the 2% to 3% mark – which represents a mature market.

Therefore, it would be highly likely that the vast majority of firms utilize the BCG matrix would then use a market growth rate somewhere in the range of 7% to 15% – which represents around five times the growth rate of a mature market.

This is why 10% is commonly used because it sits well within the range of 7% to 15% and is a nice round number that is easy to recall. It would be highly unlikely to set the market growth rate percentage above 15%.

It would be unrealistic to consider a cash cow operating in the marketplace where there was still 15% natural growth – which is primarily driven by increased usage and non-consumers entering the market for the first time. In reality, any product portfolios operating in a 15% plus growth market must be classified as stars or question marks.

Value of relative market share

This value in the BCG matrix is a little bit more complicated. However, like the setting of the measure for the market growth rate, the goal is NOT to have a symmetrical looking BCG matrix. Instead the goal is to correctly classifying and differentiate the product portfolios between cash cows and dogs, as well as between stars and question marks. Note: Please also refer to the separate article on the black hole of the BCG matrix.

In the original design of the BCG matrix by the Boston Consulting Group in the late 1960s and early 1970s, the relative market share access was set at 1.0.

This means that in any industry or market that can only ever be ONE cash cow or ONE star. And, as a result, all other players will sit on the right-hand side of the matrix either as dogs or question marks (depending upon the growth rate of the market at that time).

Keep in mind that the BCG matrix was highly interrelated with the experience curve that delivers a cost leadership position and essentially there was a competitive race to be the market leader in manufacturing industries in particular.

bcg matrix for appleHowever, as discussed in the article on whether relative market share is still relevant today, setting the differentiated between a cash cow and a dog at a relative market share of 1.0 no longer makes sense.

The free Excel template for making the BCG matrix provided on this website uses sets the measure for relative market share at 0.5.

As a result, there can be multiple cash cows within the same industry. This is highly likely today with differentiated products and other competitive advantages. Therefore, provided a firm or a product portfolio has a market share of at least half the market leader they should be classified as a cash cow (or a star, as the case may be).

Any firms or product portfolios with a market share of less than half of the market leader will be classified as either a dog or a question mark.

For practical purposes, the measurement on the BCG matrix should be set at a level which acknowledges that a low relative market share carries significant competitive disadvantages and weaknesses that probably cannot be overcome without significant investment.

While this figure may vary slightly by industry or market, setting the measurement somewhere in the range of 0.3 to 0.6 of relative market share seems appropriate – and again this template has adopted 0.5 as it is within that range and is a easier number to recall.