11/02/2020 BCG Matrix Formulas - THE Marketing Study Guide Custom Search About About Privacy Policy Base Concepts Strategy Environment SWOT Consumer Behavior More... Segmentation Product Mix New Products PLC Promotion Pricing Services CRM Research Metrics Ethical Videos Career Quiz All Articles BCG Matrix Formulas BCG Matrix, Metrics There are relatively few calculations required in order to construct e ective BCG matrix. Probably the most di cult decision is to de ne the market – as there are often numerous ways of de ning the market, as is further discussed below. In terms of constructing the BCG matrix after the market de nition, there are two calculations required, namely relative market share and market growth rate. Relative market share formula Relative market share is the rm’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 = rm’s market share/largest competitor’s market share For example, if a rm has a market share of 20% and their largest competitor has a 40% market share, then the rm’s relative market share would be 0.5 (that is, 20%/40%). As another example, if a rm 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 rm that would have a relative market share greater than one – with the vast majority of brands or rms in the marketplace having a relative market share of less than one. This point gives rise to the most e ective 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 pro tability through the experience curve bene ts – which gave the rm a cost leadership advantage. Therefore, cash cows were businesses that had relatively high unit margins and were able to compete on price and generate signi cantly more pro ts than less e cient 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 signi cant di erences in price points between o erings. For example, Apple in the smart phone market primarily competes at the premium end and do not o er budget based https://www.marketingstudyguide.com/bcg-matrix-formulas/ 1/3 11/02/2020 BCG Matrix Formulas - THE Marketing Study Guide 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. 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/ rms – 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 e ectively calculate relative market share and market growth rate, the rm needs to make a strategic decision about what market it is in? While this may sound a silly question at rst, 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 di erent outcomes on the BCG matrix. Further Resources Visit All About the BCG Matrix (a related website) Excel template for calculating relative market shares PREVIOUS Market share in the BCG Matrix NEXT Market concentration All material copyright (2015-2020) and for RELATED SITES educational purposes only. 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