There are relatively few calculations required in order to construct effective BCG matrix. Probably the most difficult decision is to define the market – as there are often numerous ways of defining the market, as is further discussed below.
In terms of constructing the BCG matrix after the market definition, there are two calculations required, namely relative market share and market growth rate.
Relative market share formula
Relative market share is the firm’s or brands market share is an index of its largest competitor. In this way, relative market share becomes a measure of competitive strength. The formula for calculating relative market share is as follows:
Relative market share = firm’s market share/largest competitor’s market share
For example, if a firm has a market share of 20% and their largest competitor has a 40% market share, then the firm’s relative market share would be 0.5 (that is, 20%/40%).
As another example, if a firm was the market leader and had a market share of 30% and their next largest competitor had a market share of 20%, then their relative market share would be 1.5 (30%/20%) – or one and a half times the share of their next largest competitor.
Important note: Given the construction of the relative market share metric, there can only ever be ONE brand or firm that would have a relative market share greater than one – with the vast majority of brands or firms in the marketplace having a relative market share of less than one.
This point gives rise to the most effective way of classifying between cash cows and dogs and between stars and question marks – as is discussed below in the section on what level of relative market share to use when graphing the BCG matrix.
Unit market share versus dollar market share
It is possible to calculate relative market share – the bottom or horizontal axis of the BCG matrix – by using dollar market share instead of unit market share.
Traditionally, relative market share has been calculated using unit market share. This is because the underlying principle was that a high relative market share delivered profitability through the experience curve benefits – which gave the firm a cost leadership advantage.
Therefore, cash cows were businesses that had relatively high unit margins and were able to compete on price and generate significantly more profits than less efficient players with a small market share.
The model was also developed primarily for the purpose of industrial based conglomerates, in an era where price and promotion were more prevalent and the rate of technology change was slow – resulting in more stable industries.
However, in more recent times, speed of technology change has dramatically increased and there also significant differences in price points between offerings. For example, Apple in the smart phone market primarily competes at the premium end and do not offer budget based mobile phones.
As a consequence, it would be probably more appropriate for an organization such as Apple to use dollar market share if they were to utilize a BCG matrix. This approach is suggested in the example BCG matrix for Apple on this website.
Market growth rate
Calculating the market growth rate for the BCG matrix, a simple year on year growth rate is typically utilized. This would be calculated by:
Market growth rate = total market unit sales in current year/total market unit sales in previous year
As an example, if total unit sales in this year was 11 million – across all brand/firms – and in the previous year total unit sales was 10 million, then the year on year market growth rate is equal to 10% (that is, 11m/10m).
Annual calculation required
Because a year on year growth rate is being utilized, it becomes necessary to recalculate this metric for the purposes of the BCG matrix each year. This is important because it also allows the tracking of the portfolio over time.
Market definition
As highlighted at the start of this article, to effectively calculate relative market share and market growth rate, the firm needs to make a strategic decision about what market it is in?
While this may sound a silly question at first, it gets back to a “where to compete?” strategic question. As an example, Burger King may see themselves as competing in the fast food market only – whereas McDonald’s may see themselves competing in the broader market of fast food, diners and restaurants.
Therefore, their calculations of relative market share and market growth rate will defend as a consequence and generate different outcomes on the BCG matrix.
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