The BCG matrix and relative market share
The BCG matrix is built around two dimensions – namely market growth rate and relative market share.
Market growth rate
Market growth rate is designed to be a measure of market attractiveness and potential. Growth markets provide opportunities to a firm because they are getting much larger, but also because there are significant opportunities to improve the firm’s competitive position. Significant changes in a firm’s competitive position is much harder and more expensive in a mature market.
Relative market share
The second dimension of the BCG matrix is relative market share. This is the more important of the two dimensions. A high or low relative market share makes the difference between a cash cow and a dog – whereas a high or low market growth rate makes the difference between cash cow and a star (both good portfolios to have).
Relative market share has been included in the matrix as a definable way of measuring the firm’s competitive strength in the marketplace. Relative market share was included because it was built upon the following assumptions:
- Firms with a high market share are successful due to a combination of marketing factors
- A higher market share means that production is greater and these firms can build a cost leadership advantage primarily through the experience curve benefits
- The combination of high sales and a higher unit margin means that the firm has much greater profitability than any of its competitors
- Because of the structure of the definition of a cash cow in the traditional BCG matrix, they can only ever be one market leader and only one firm will own the cash cow in the whole industry
Is relative market share still relevant today?
As a standalone marketing metric, relative market share is still worth calculating and tracking of time. However, its value in the BCG matrix is becoming more questionable.
Keep in mind that the BCG matrix was constructed in an era where manufacturing was still a significant part of the economy – therefore the underlying focus on linking market share, experience curve benefits, and profitability.
However, much the economy is now service based, the role of other competitive advantages have become more important, and the speed of technology change has dramatically increased.
As a result, it is no longer possible to view a cash cow as a product portfolio that requires a simple level of maintenance reinvestment. One of the examples on this website is for Apple – do you think it would be possible for Apple to adopt a cash cow mentality to some of the product portfolios?
Apple competes on innovation, outperforming its competitors, pushing technology, and customer engagement. Therefore, Apple requires significant reinvestment in all of the product portfolios – regardless of what the BCG matrix quadrant they may be in.
In other words, given Apple’s strategy and technological environment, the BCG matrix offers them very little value.
Other factors to consider other than relative market share
The GE portfolio model recognizes that competitive strength is a combination of factors – and it is too limited to look at market share alone. Therefore, as relative market share has faded of a suitable surrogate for competitive strength is important to consider other factors such as:
- Brand equity
- Retailer relationships
- Logistics and distribution
- Innovation skills
- R+D capability and patents
- Strategic alliances
- Customer loyalty