The BCG matrix was established in the 1970s by Bruce D. Henderson, founder of the Boston Consulting Group, and is also known as the market growth rate-market share matrix. The BCG matrix is used to assess the performance and prospects of products or services, thereby arranging which sector the company should allocate resources to obtain maximum profits.
The BCG matrix visually divides commercial products into the following four categories:
1. Star: high growth – high share
Star needs to invest more resources due to its high growth, and because its high market share brings high profits, the net profit is offset by the balance between the two. Net profit depends on the amount of capital investment, and the company must continue to develop the market. BCG recommends companies should master several Stars, which will bring considerable cash flow when mature.
2. Question Mark: high growth – low share
Question Mark-type businesses have high consumption due to high growth, but low income due to low market share, and are money-losing businesses. Question Mark-type businesses may become Stars as companies strive to increase market share. However, not every Question Mark-type business has potential and quality, so companies must carefully evaluate whether to continue investing.
3. Cash Cow: low growth – high share
Cash Cow businesses are leaders in mature markets. Although their prospects are limited, they bring sufficient cash flow (milked). The company enjoys the advantages of economies of scale and the experience curve. As long as it maintains market share, it can be used to support the cash flow of the other three businesses. Companies must continue to innovate and improve processes to increase the cash flow.
4. Dog: low growth – low share
Dog-type businesses will not have big ups and downs and occupy a minimum amount of capital and human resources (cash trap). Enterprises can consider selling them (liquidate) or use Dog-type businesses to test the market.
It is worth mentioning that this theory is based on four main rules:
Rule 1: High market share brings high profits and cash flow
Rule 2: Growth requires cash
Rule 3: High market share comes from acquisitions or investment wins
Rule 4: No product market can grow forever
Macroscopic review
Know yourself and your enemy, and you can win the battles. I recommend business owners try to use the BCG matrix to examine their own business and that of their competitors, and divide different products/services into categories to help formulate corporate strategies and allocate resources. PepsiCo and Coca-Cola have been competing for more than a hundred years. The following BCG matrix compares the two as an example:
PepsiCo
PepsiCo’s products focus on food and beverages, generating revenue of more than $79.5 billion in 2021 with profits of more than $7.6 billion. PepsiCo distributes its brands through direct sales and other distribution networks. It has a diversified business including breakfast foods, snacks, sports drinks, water, iced tea and various coffee beverages.
1. Star: high growth – high share
Gatorade accounts for 67.7% of the sports drink market in North America and has been a mainstay of the market for half a century. It also has room for growth in the global markets. Mordor Intelligence predicts that the global sports drinks market will grow at a CAGR of 4.5% between 2022 and 2027.
2. Question Mark: high growth – low share
Diet Pepsi was first introduced in 1964 and was designed to cater to the dietary preferences of the baby boomer generation. Diet Pepsi’s U.S. share has declined from 6.1% in 2004 to 3.8% in 2021, despite today’s market acceptance of healthy and low-calorie beverages.
3. Cash Cow: low growth – high share
Snack brand Frito-Lay has nearly 60% market share in the United States, with sales of $4.8 billion in 2020, and is unlikely to lose popularity in the U.S. market anytime soon. Another brand, Tropicana, is also a cash cow, accounting for about 44% of the value of the American chilled juice industry. Its core product, Tropicana Pure Premium, is the third most popular food brand in the United States. Despite its high market share, PepsiCo sold Tropicana and some other juice brands in 2021 to make the business more focused.
4. Dog: low growth – low share
Expect all sugary cola drinks, including PepsiCo, to become dog businesses in the near future. In addition, Pepsi-Cola has also had many failed attempts, including Crystal Pepsi, 7UP Gold and Frito-Lay Lemonade.
Coca-Cola
Coca-Cola is one of the world’s most well-known brands, but rapidly changing consumer preferences mean its products may not necessarily have an advantage in every market. Coca-Cola follows the franchise model business strategy starting from 2006 and has become a long-term expansion and distribution partner through the operations of the Bottling Investment Group.
1. Star: high growth – high share
Bottled water brands including Kinley, Dasani and Glaceau Smartwater have grown rapidly and become important players in the bottled water market. In 2021,the sales of Dasani and Glaceau Smartwater in the United States reached US$1.911 billion.
2. Question Mark: high growth – low share
Due to market demand for healthy products, Coca-Cola has invested heavily in low-calorie or no-calorie beverages such as tea and juice. Yet diet Coke failed to capture the market as a healthier alternative.
3. Cash Cow: low growth – high share
Coca-Cola has quite a few Cash Cow businesses, the most important of which is Coca-Cola itself. Coca-Cola is already distributed in more than 200 countries and territories around the world, so potential growth is limited. Despite the decline in global soft drink sales, Coca-Cola remains extremely popular and continues to lead the market.
4. Dog: low growth – low share
Coca-Cola Life is a lower-calorie version of Coca-Cola made from the natural sweetener stevia, but consumers have shown little interest in natural alternatives.