BCG matrix: how to calculate it and read the quadrants

What the BCG matrix is for

The BCG matrix is a matching-stage tool in the strategy-formulation framework. It shows the firm as a portfolio: which divisions hold a strong position in a growing industry, which in a slow one, and which are weak in both.

• It is fed by division-level data from your internal and external audits: shares, rival shares, industry growth, revenue and profit.
• It sits beside the TOWS matrix and SPACE matrix, and the strategies it points to are compared in the QSPM.

If your firm has only one business

The BCG matrix compares divisions, and each division needs its own market share and its own industry growth rate. A firm with a single business has one point to plot, so the matrix has nothing to compare.

• If the firm reports separate segments, product lines or business units that each have their own revenue, share and industry data, you can treat them as divisions. Say that you did and why.
• If it does not, say in your paper that the BCG matrix does not apply and rely on your other matching-stage matrices. Check with your adviser which they expect.

What you need before you start

For every division you need the industry it competes in, the industry's growth rate, the division's market share, the share of its largest rival, and its revenue and profit. Take them from annual reports, industry reports and your audits, and cite the source of each number.

Rival shares are often hard to find. If you estimate one, label it as an estimate in the paper and show how you made it.

Step 1: Calculate each division's relative market share

Divide the division's market share by the market share of its largest rival in the same industry. A result above 1.0 means the division is larger than its biggest rival, and a result below 1.0 means it is smaller. High share is on the left, and this guide puts the midpoint at 1.0.

Relative market share = division share ÷ largest rival share

Step 2: Find each industry's growth rate

Use the growth rate of the division's industry, not the growth of the division. The y-axis typically runs from −20% to +20%, with 0 as the midpoint, so an industry that is growing is above the line and one that is shrinking is below it.

Step 3: Place each division in a quadrant

Combine the two measures. High share sits on the left and high growth on top, which gives four quadrants:

Step 4: Size the circles and the slices

Draw each division as a circle at its position. The size of the circle is the division's share of the firm's revenue. Shade a pie slice inside it for the division's share of the firm's profit.

1. Add the revenue of all divisions, and divide each division's revenue by the total.
2. Do the same for profit.

Worked example: Tala Provisions (fictional)

Tala Provisions, Inc. is a fictional coffee roaster and a single business in the other guides. For this guide only it has 4 fictional divisions, so there is something to plot. All the figures are made up.

Take Online subscriptions. Its share is 8% and its largest rival's is 24%, so its relative market share is 0.33. Its industry is growing at +16%.

Relative market share = division share ÷ largest rival share8 ÷ 24 = 0.33

A relative share below 1.0 puts it on the right, and growth above 0 puts it on top: quadrant I, Question Marks. Tala cafés has 2.50 in an industry growing at −3%, so it is on the left and below the line: quadrant III, Cash Cows.

For the circles, Tala cafés is the largest at 50% of revenue, and its slice is 50% of profit. The figures sit clear of every common dividing line (0.50 and 1.0 for relative share, 0 and 10% for growth), so the quadrants come out the same whichever your source uses.

Your BCG numbers need sources, as your EFE does. Try the sample EFE, no account needed.

How to read the result

The quadrant describes a division's position, nothing more:

• Stars hold a high relative share in a high-growth industry.
• Cash Cows hold a high relative share in a low-growth industry.
• Question Marks hold a low relative share in a high-growth industry.
• Dogs hold a low relative share in a low-growth industry.

David lists the strategies usually considered for each quadrant. They are options to shortlist, not a decision, and the wording varies by edition.

• Question Marks (I): Strengthen with an intensive strategy (market penetration, market development or product development), or sell.
• Stars (II): Invest to keep or strengthen the lead, through forward, backward or horizontal integration, market penetration, market development or product development.
• Cash Cows (III): Manage to hold the position as long as possible. Product development or diversification can suit a strong one, retrenchment or divestiture a weakening one.
• Dogs (IV): Often retrenched, divested or liquidated.

Carry your shortlist to the QSPM and justify the choice there. A division exactly on a dividing line counts as high in the calculation Strama uses, so say how you treat a tie.

Where sources disagree: the dividing lines vary. David puts the relative-share midpoint at 0.50 and the growth midpoint at 0. The original BCG chart uses 1.0 and 10%. This guide uses 1.0 and 0; Strama starts at 1.0 and 10% and lets you change both. Use the lines your program expects and say which you used.

Limits of the BCG matrix

Be ready to say where the matrix falls short:

• It uses two variables. Relative share stands in for competitive position and industry growth for industry attractiveness, and it leaves out everything else.
• The result depends on how you define each industry. A narrow definition makes a division's share look large and a broad one makes it look small, so justify the market you chose.
• It needs data that students often have to estimate, especially the largest rival's share.
• It is a snapshot of one period, not a trend, so a division's position can change.
• It treats divisions separately, and does not show what they share, such as costs, customers or brand.

Common mistakes

What your panel will ask

What do the two axes measure?

The x-axis is relative market share: a division's share divided by its largest rival's, with high share on the left. Say where you drew the midpoint and why: 0.50 in David, 1.0 in the original BCG chart. The y-axis is industry growth rate, with 0 as David's midpoint.

Why is this division in this quadrant?

Read out its relative share and its industry growth, with the source for each, and then say which side of each dividing line it falls on.

Where did you get the rival's market share?

Cite the report or filing. If you estimated it, say so and show the estimate, and show whether the quadrant changes if the estimate is off.

Your company has one business. Why is there a BCG matrix?

Say what you treated as divisions and what data each has, or say the matrix does not apply and which other matrices carry the analysis.

What are the limits of the BCG matrix?

Two variables only, a market definition you chose, estimated data and a single snapshot. Say which of these affect your numbers most.

Where it goes next

Upstream, your audits and the EFE matrix supply the industry evidence, and the competitive profile matrix can help you pick the largest rival in each industry. Beside it in the matching stage are the SPACE matrix, the TOWS matrix, the IE matrix and the grand strategy matrix. Downstream, the QSPM compares the strategies you take from the matching stage.

Your BCG numbers need sources, as your EFE does. Try the sample EFE, no account needed.

Where this fits in your paper: the STRAMA paper format guide.

Sources

Method: Fred R. David's strategy-formulation framework, as set out in his Strategic Management: Concepts and Cases. Editions differ in detail, so check the edition your program uses for page references.

Tala Provisions, Inc., its divisions, its figures and its sources are fictional, made up for this guide.