Product Life cycle and Boston Group Portfolio Matrix

With the high development of the information technology, the uncertainties of market and finance give rise to the shortened product life cycles, corrupted marketing environment and frequently reduce in price (Carmo, Ken, 2003). The traditional strategic analysis methodology, such as, product positioning matrices, SWOT analysis, Porter’s five force model recommended by Michael E. Porter(1998), are not enough to develop a comprehensive marketing strategy for companies in such fierce business competition. Robert and Antonio (1998) found that effective and analytical activities could help augment the overall return on management. Referring to this, the paper examines a strategic analysis tool – Boston Group Portfolio Matrix. This essay will firstly discuss the definition of product life cycle and the Boston Matrix, and its ultimate principle in the analysis of product assortment. Following this, it will declare the model limitations of Boston Group Portfolio Matrix. After that, this paper will explain how to use the model in the applications, and discuss the appropriate strategies for the company the assignments have mentioned. Finally, it will focus on the suggestions when referring to the limitations of using the BCG Matrix for strategic planning.

2.0 Brief introduction of product life cycle and Boston Group Portfolio Matrix

2.1 The concepts of product life cycle and Boston Group Portfolio Matrix

Before discussing the BCG Matrix, it is necessary to comprehend the concepts of the product life cycle, for they have been considered being relevant. (Wheelan and Hunger, 2006; John Stark, 2004; Michael Grieves, 2005) considered the product life cycle as a curve chart that shows the stages products go through from introduction to decline. Figure 1 (Tom, 2009) provides a diagrammatic indication of this cycle. The product life cycle has been stemmed from the biological life cycle with the same stages of introduction, growth, maturity, decline and withdrawal (Marketing Teacher, 2006). Lynch (2006) has explained why it is meaningful for companies to provide more than one product or service.

Figure 1 Product life cycle

The BCG Matrix has driven from the early 1970’s, and has been produced by the Boston Consulting Group (James and Charles, 1997). Based on the theory of product life cycle, the BCG Matrix has been of the most famous portfolio management Decision Making Tools in giving priority to the product portfolio in a firm or section. Kotler(1997) considered the Boston Group Portfolio Matrix Model as the noted business portfolio model. The Boston Group Portfolio Matrix has two dimensions – market share relative to competition, and market growth (Burgelman, Modesto, Steven, 2000). In the commercial department, market share is significant because of the advantage to have a greater share than opponents. At the same time, the market growth is decisive because the growing markets offer more chance for companies than lower growth markets.

2.2 The ultimate principle of BCG Matrix

The matrix model, demonstrated in Figure 2(BCG Matrix, 2009), has been created to show how a balanceable range of services or products could be offered (Carl, George, 1998; Carl, Michael, 2006). These four areas have been given characteristic titles to indicate their strategic sense.

2.2.1 Problem Child or Question Mark

A problem child product or a question mark placed in the top right quadrant, has a low market share and high growth in a market. The low market share states clearly that it does not earn enough money while the high market growth demonstrates that investment is necessary. And it is very hard to forecast if problem children will transform into stars or dogs.

Figure 2 Portfolio matrix

2.2.2 Stars

In the market context, star products placed in the top left quadrant, have high relative market share running in an area with high growth. In order to generate large amounts of income, they will probably need to invest. When the market growth rate reduces, investment will also cut down, and the stars will turn into the cash cows. For example, the Apple Computer has a great share in the quickly growing market share rate for light digital music player (Cantrell¼Œ2006).

2.2.3 Cash Cows

These are products or services with high shares but in low-growth markets. Cash cows in the bottom left quadrant, means the mature business need little investment. The cash they create can be invested in other projects.

The bottom right quadrant stands for the business with low market share in low growth area. It is comparatively tough to get rid of the low market share situation.

In the application, the advice for management is to invest the capital obtaining from the “Cash Cows” into the “Stars”. In order to balance a product portfolio well, it is vital to add the number of number of “Stars” that can grow healthily. Of course, making sure there are a lot of Cows to generate income. Obviously, the Boston Group Portfolio Matrix has its own advantages, the point is that it takes emphasis on the profitable services and helps the managers to develop strategies on the product assortment.

3.0 Model limitations of Boston Group Portfolio Matrix

McDonald (2003) pointed out that the Boston Group Portfolio Matrix Model had a number of limitations. Except for the market share and market growth, there are other factors influencing the development of a product, such as the brand value and the product positioning (Drummond & Ensor 2004). Moreover, the model is dependent on net cash consumption which is considered as a basic balanceable measure, it is not the appropriate to apply in the modern economies. In addition, the matrix is based on the false hypothesis that high rates of growth consume sums of cash resources and that a mature market would generate the expected profit. For example, capital intensity keeps in a low point, a business could grow by itself, and the high entry barriers may result in the sustainable profits. What is more, the market growth is not the only element when evaluating the attractive power of a market, besides, a rapid growing market is not always the commercial attractiveness.

4.0 How to use the model

As for the methods of applying this model, it can be shown from the following steps: First of all, it is essential to assess the each business’ prospect, which is indicated by growth rate of market. The data of growth rate of market can get from the management analytical system. Evaluating competitive power of each business is the following, relative market share, which could be required from the market survey, has been used to express competitiveness. Subsequently, it is important to mark every business in the Boston Group Portfolio Matrix. The precise instructions is to draw a circle with the coordinate point of business in two-dimensional coordinates to centre, the size of each circle represents the sales. Finally, finding out standard lines of both coordinates is the last and key stage. Making sure the standard line of growth rate of market and relative market share is just to divide the two-dimensional coordinates into four quadrants. And then, the companies can diagnose whether business portfolio is balanced. An unbalanced business portfolio means too many Dogs and Problems, or too few Cash Cows and Stars.

After analyzing the companies’ business, it is constructive to offer some appropriate strategies. There are four methods mentioned: “Build” strategy is coming first, it is appropriate for the Question Marks transforming to the Stars. The product market share should be added to consolidate its competitive power. The next is “Hold” strategy used for Cash Cows so that they can produce sums of cash, whose purpose is to preserve the current market share. Moreover, “Harvest” strategy is used for Question Marks which can not turn into the Stars and for Dogs as well as weak Cash Cows. Here the director just wants to augment short-term cash flows quickly. The last is “Divest” strategy, which is suitable for the Question Marks that can not be the Stars in the future and for the Dogs. At this moment, the managers want to get rid of the products wasting the company’s resource and put the resource into other business where they will acquire greater benefit.

In this assignment, there is a company with 8 Strategic Business Units shown in the following Boston Group Portfolio Matrix (Figure 3).

Figure 3 eight Strategic Business Units

According to the aforementioned analysis, in Fig. 3, the company has three question marks. “Build” strategy is acceptable for the three Strategic Business Units to increase their market share and make them turn into the Stars. But if there are no hope of becoming Stars, “Harvest” and “Divest” strategies are also suitable for these Strategic Business Units. Moreover, there are two Strategic Business Units in the cell of Stars, both”Build” and”hold” are fit for them. And then, the only one Cash Cow should adopt the “Hold” strategy to maintain their market share, but for the weak Cows, the “harvest” strategy is the best. Finally, as for the two Dogs,”Divest” is the strategy appropriate for this cell.

5.0 Suggestions referring to the limitations of the BCG Matrix

Given the above limitations, the BCG Portfolio matrix must be used with worry. A.T. Kearney has commented the weakness of BCG Portfolio matrix, for example, the development of corporate business could only rely on internal financing, external financing is out of consideration. On the other hand, these businesses in the BCG Portfolio matrix should be independent, but normally the businesses in companies are always relative to each other. In order to overcome the weakness of the BCG Portfolio matrix, it is considered that market share could be replaced by the customer share, which can solve the problem of relative businesses.

Although it has some certain limitations, the BCG Portfolio matrix remains a simple and effective method to look at the corporation’s product portfolio with a glimpse. And it is valuable for the company to make a correct decision on allotting firm’s resource and making the following market planning. Tim (2008) and Malcolm (2007) stated clearly that the strategic marketing plan is significant for every company.

6.0 Conclusion

To sum up, because of the characteristic of the BCG Matrix, analytical methods of a new BCG Matrix is on the development. Specifically, Nelson and Winter(1982) recommended a revolutionary economic model used for testing various results of the matrix’s investment rules. Phelan (2004) believed that the BCG matrix adapted to the exploratory policy model. It is profound for managers to use the valuable information engendering from the BCG matrix as the foundation for strategic decisions on which business should draw the further investment, shaping the fraction of resource distribution strategy (Dawn Brewer, 2010). Armstrong and Brodie (1994) deemed that Portfolio matrix had been widely regulated. However, initially experienced by the Boston Consulting Group, the BCG matrix was undoubtedly an available tool.