What is the Boston Consulting Group Growth-Share Matrix and how is it used? Essay

1.1 What is the Boston Consulting Group Growth-Share Matrix and how is it used?

The Boston Matrix is an approach to product portfolio planning. It enables management to decide where and how resources would best be allocated, and allows them to make cash-flow forecasts. By answering the following questions they are “ensuring that there are enough cash-generating products to match the cash-using products”:

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1. Are you trying to fund too many new products?

2. Is there a need for immediate new product development?

3. Are there products that should be dropped?

(boston, businessreview, www.nvq5.com)

1.2 Practicalities of the BCG – How to use it

A circle, the size of which indicates the revenue it generates, represents each of the company’s products. It is plotted on the grid according to its relative market share and the growth of the market it operates in. An arrow is then placed in the direction they think each is moving. A pie slice sometimes represents the proportion of corporate profits generated by that product. (boston, business review, www.nvq5.com) The ‘Experience Curve’ suggests that a larger market share will enable the business to benefit from economies of scale, lower per unit costs and higher margins. (Peter W Turnbull, 1990)

The grid is then split into quadrants:

* Stars – “High-growth, high-share products that often require heavy investment to finance their rapid growth.”

* Problem Children – “Low-share products in high-growth markets that require a lot of cash in order to hold their share or become stars.”

* Cash Cows – “Low-growth, high-share products; established and successful products that generate cash that the company uses to pay its bills and support other products that need investment.”

* Dogs – “Low-growth, low-share products that may generate enough cash to maintain themselves but do not promise to be large sources of cash.”

(Kotler et al, 2001, pgs. 86-87)

1.3 Linking the BCG Matrix to the Product Lifecycle

(See Appendix 1)

As a company’s products progress through their natural lifecycle, they also progress through the stages of the BCG Matrix. A product will begin as a ‘Problem Child’ at launch, then grow into a ‘Star’. Once the product reaches maturity it becomes a cash generating ‘Cash Cow’, and then finally when it begins to decline it becomes a ‘Dog’.

(Boston Matrix, www.ecommerce-now.com)

2.0 Arguments for why dogs do always die

Specifics of a ‘dog’ which cause them to die:

1. Product in decline

2. Unsuccessful problem child

3. May generate some modest cash flow but only in the short-term

4. Absorb resources, including cash, if kept too long

5. Lost market share to competitors (cash cows past their best)

6. Market in which they operate becomes saturated or is eliminated entirely

7. Obsolescence

2.1 In Decline

More often than not dogs are products that have been replaced by new innovation. Lord Weinstock, Managing Director of the General Electric Company, believes that: “Innovation is indispensable in maintaining a successful business…if you do not change as the times, the markets, and products require, you are dead.” (cited in Baker & Hart, 1999, pg. 17) Therefore, if a company wishes to survive it must continuously develop new products in order to keep up with, and ahead of, the competition. However it only has limited resources. Therefore the old, unprofitable products with no future must be eliminated in order to shift resources into the new innovations. Hence dogs always die.

This practice is particularly dominant in the technological industries. Computers are a good example of this. They are continually being upgraded to more powerful, faster versions, leaving the less powerful, slower versions to become obsolete. A Japanese firm applied the Boston matrix to their Business Applications & ERP Systems products. (See Appendix 2) They discovered that their dogs didn’t offer all the features consumers required, so were suffering from reduced demand. Thus causing higher unit costs per product due to reduced economies of scale. They were also operating within unreliable, rapidly declining markets. (See Appendix 3).

(www.dpu.se/boston)

The Dreamcast, Segum and Mega drive are also examples of dogs that have declined and died. Competitors introduced alternative consoles such as the X Box and the Gamecube, which offered the consumer better graphics and faster loading times. In turn, the consumer grew to expect such features as standard. This resulted in reduced demand for, and the eventual death of, the Dreamcast and N64.

(http://shopping.yahoo.com/shop?)

2.2 Unsuccessful Problem Child

Not all Problem Children are successful. Robert Cooper discovered that “…of the tens of thousands of new consumer food, beverage, beauty & healthcare products launched every year, only 40% will be around 5 years later.” (cited in Kotler, 2001, pg.500)

If a new product is developed and not marketed properly, or is merely so advanced in the eyes of the consumer that they do not believe it will work, that product will fail to make an impact in the market place. It will start off on the Boston Matrix as a Problem Child, with low market share in a growing market, then instead of developing into a Star, recede into being a Dog.

The classic example of this happening was the Sinclair C5. Sinclair invented and Hoover assembled and serviced this electronic scooter thinking that it was a cheap, environmentally friendly alternative to the car. However it was what is described as a “push” product. The designers created this drastically different product, which consumers needed to be educated about, without realising that no need for it existed. People were perfectly content with their cars and were reluctant to believe that Hoover, a company renowned for producing vacuum cleaners, were capable of developing a safe, roadworthy vehicle. Less than 17,000 were sold and the company made a loss of about �7 million before finally conceding that production should be halted.

(www.nvg.ntnu.no/sinclair/vehicles/c5

)

2.3 May Generate Some Modest Cashflow but only in the ST

As Gauses Principle states: “The world is a finite environment so that new species can only come into existence if they can displace existing species…one will survive, one will decline – the new is substituted for the old.” (cited in Baker ; Hart, 1999, pg.21)

A dog can be kept as part of the product portfolio in the short term as this transition is not instant. There are always a few laggards who are reluctant to change, and therefore continue to purchase the old product. However this will not last for long as business consumers who do not upgrade will become economically uncompetitive and lose market share. Before long individual consumers will feel left behind, either technologically or socially, and will soon see the benefits offered by the new innovation. The dog product’s profitability will keep declining as reduced demand leads to reduced economies of scale and increased per unit cost. A price increase to cover these augmented costs is out of the question, as the product is already struggling to maintain its market position. Therefore the dog will, in the long term at least, need eliminating.

Good examples are the mangle and washboard. They were superseded by the washing machine, which was a radical new innovation designed to satisfy the same consumer need. People initially were reluctant to purchase as there was little consumer confidence, and they were expensive to buy. Therefore consumers continued purchasing mangles and washboards for a short period, whilst the company educated people as to the benefits of the new machine. Consumer confidence in the product grew, as is obvious by the fact that today, all households own a washing machine and washboards and mangles are extinct.

In a business context, the typewriter is a good example as it has now been completely replaced by the word processor. When word processors were first introduced they were expensive and considered a high-risk purchase. Hence firms were reluctant to buy and continued purchasing typewriters instead. However these firms soon discovered that they were losing their competitive advantage. Consumers were losing confidence in their company, as their documents took time to produce and did not look as professional as those of competitors.

2.4 Absorb cash if kept too long

“Given the finite financial resources of the company, those devoted to the weak product are less profitably invested than they might be if they were available to produce, promote & distribute either a new product or other existing products. The opportunity cost is potentially huge.” (Baker & Hart, 1999, pg.421) A company would obtain a far better return on investment if they invested in their up and coming problem children, at the beginning of their lifecycles, as opposed to throwing good money after bad on their dog products which are coming to the end of their lives. If dogs are kept too long their contribution to cash-flow will eventually become negative.

As was seen with the Sinclair C5.

(www.nvg.ntnu.no/sinclair/vehicles/c5

)

However it is not only finances that will be wasted, marketing and management resources will also be wasted keeping dogs alive. “Product overpopulation spreads a company’s marketing resources too thinly.”

(Baker & Hart, 1999, pg 421) If a company eliminated their dogs, it would free up marketing resources that would be better invested in ensuring the success of their problem children.

2.5 Cash Cows Past their Best, having Lost Market Share to Competitors

Not only has the market growth slowed down or become static, due to many shifting to new technology, their relative market share has also decreased due to the entrance of competition offering better perceived value. If a company operating within a saturated market continues to use old production processes instead of updating to new, more efficient methods, their products will become dogs. The competition will benefit from economies of scale and reduced costs, which they can pass on to consumers. Cost leadership purchasing will occur and they will soon discover they’re losing market share to competitors with ‘me-too-er’ products. Their products will become unprofitable dogs and eventually costs will get so high production will be halted in order to minimise losses.

This occurred with lino flooring. New production techniques meant vinyl flooring could be produced much cheaper, yet with a similar finish to lino. It was also much easier for consumers to maintain. Consumers saw better-perceived value from vinyl, so switched consumption. Thus pushing traditional lino out of the flooring market completely.

Meccanno are another example of an original invention being pushed out of the market. They were the original innovator of building sets for children and in the ‘baby-boom’ generation most children owned one. However nowadays parents buy their children me-too-er products such as Lego and K’nex, as they feel they offer better-perceived value. Such products were cleverly marketed to encourage sales, whilst Meccano was left to die.

2.6 Market in which they operate becomes saturated or is eliminated entirely

Market growth slows down or begins to decrease as a result of reduced demand for the products within that market. Often this is due to a product being replaced by a better alternative or new innovation. Sometimes however, the market is restricted due to increased consumer awareness or government legislation. A product could have an enormous market share within a growing market until it is discovered to be unsafe. Thus the market suddenly dies and market share is lost. Alternatively, a changing social environment could cause a slower, yet equally damaging, saturation of the market.

The IBM computer is a good example of a product that was replaced by new, or better innovation. They were once recognised as the leader in the field of computer technology. However they failed to recognise the need to develop a computer for use in the home, and were consequently eliminated by their competitors.

The obvious example of consumer awareness and government intervention is asbestos. Asbestos was one of the most commonly used methods of fire-proofing within the building industry prior to the discovery that it causes asbestosis, a disease that eats away at people’s lungs. Hence sales of the material immediately dropped, resulting in the product becoming a dog. The introduction of government legislation banning the use of the substance altogether, shortened the products decline stage and led to its immediate death.

(Active asbestos, History of Asbestos, available at: www.active-asbestos.co.uk)

As far as a changing social environment is concerned, increased incomes and improved living standards have caused an increase in demand for convenience goods. For example all parents today buy disposable nappies that can be used once, then merely thrown away. They do not need to be kept and cleaned, like the now extinct terry towelling nappies that they replaced.

(Woodruffe. H, 1995, Services Marketing)

2.7 Obsolescence

Baker and Hart state: “It costs 5 to 6 times as much money to create a customer as it does to keep one.” Therefore it is to a firm’s benefit that their products are expected to wear out and need replacing. If their products lasted forever they would continually need to find new customers, which costs more than merely ensuring their existing customers repeat purchase. Therefore all products are designed to suffer from obsolescence.

A good example where this occurs is with white goods, such as freezers, dishwashers and washing machines. Nobody expects such goods to last forever and it is common practice for a company’s technician

to say he cannot mend your existing machine as the company no longer manufacture the part he requires. This means you have to replace your existing machine with an alternative model. This obviously benefits the firm as instead of spending �5 – �6 on the spare part, you are spending �500 – �600 on a new machine. Because they are seen as essential items you want to replace them quickly, and the technician is on hand to suggest alternative models made by that firm. Because these models are upgraded versions of the existing machine, the consumer perceives them to have additional value to their old model, and therefore do not resent the purchase.

3.0 Arguments for why dogs don’t always die

Dog products do not die naturally of their own accord, management have to make the decision to eliminate them from the company’s product portfolio. Although many dogs are eliminated for the above reasons, some may be kept for the following reasons:

1. Product Extension Strategies

– Enhancement & Repositioning

2. Market Share and Cash flow/Cost Savings Mismatch – Niches

3. Product Line Scope

4. Defrayal of Overheads & Barriers to Exit

5. Demanded by Key Clients

6. Needed for the Maintenance of Essential Machinery

1.

3.1 Product Extension Strategies

“The Product lifecycle is a dependant variable which is determined by market actions, it is not an independent variable to which companies should adapt their marketing program. Marketing management can alter the shape and duration of a brand’s lifecycle.” (Mercer, 1996, pg.175) The shape of a product’s lifecycle is not set in stone, the growth stage can be revisited if a firm can continually modify their dog product’s position to meet changing consumer needs, giving it a scalloped lifecycle. “In practice, most ‘new’ products are modified existing ones.” (Mercer, 1996, pg.214) This may occur through feature modification, style modification, quality modification or image modification. (Mercer, 1996, pg.215) Houfek (1952) identified two broad categories of how this could be achieved: “product enhancement or product repositioning.” (cited in Balker & Hart, 1999)

Product Enhancement/Real Repositioning:

This includes feature modification, style modification and quality modification. (Mercer, 1996, pg.215) Firms continually add additional features to their existing dog products claiming improved quality, style or practicality. They may market these products to consumers as ‘new’ versions, when really they are merely a modified extension of the old one.

(Doyle, 1994, pg.175)

A great example of a company who have done this is Nokia. They are continually developing their old mobile phone handsets to include additional features. This allows them to extend the lifecycles of their existing products and to boost sales and market share within the saturated mobile phone market in which they operate. Take the recently launched Nokia 6385 model. It offers all the features of the 6340, and looks virtually identical, but offers the additional functions of PC synchronization and has an enhanced phone book and calendar. By renaming the model consumers perceive the phone as a new version, thus boosting sales and extending the 6340’s maturity stage. Such product proliferation is relatively easy for a company such as Nokia, as they already have powerful brand awareness within the industry.

(New Nokia Phone Models, www.nokiausa.com)

Psychological Repositioning

Alternatively, a firm could revive a dog product by repositioning it within the eyes of the consumer as it already exists. They can either reposition the product within another market, or revitalise its position within the current market by altering the promotional mix and extending the product line.

(Doyle, 1994, pg.175)

Skoda repositioned their products, all of which were dogs, by launching a new range of trendy, modern cars. This was teamed with a massive advertising campaign that played off their old, boring, traditional image. Hence altering the consumers’ perceived image of the brand as a whole.

Lucozade and vinyl records are good examples of products being repositioned within different markets. Lucozade was originally targeted as a drink to aid the recovery and rebuild the strength of sick people. However the market had become saturated and their market share reduced as people lost faith in the company’s tenuous medical claims. Instead of eliminating or enhancing the product, the company merely repositioned Lucozade within the growing energy drink market. Lucozade, originally a dog, is now a profitable cash cow with a high market share of the energy drink market.

Vinyl records were also a dying dog, as they were being replaced by CDs and tapes. However the club scene was growing rapidly and records became popular mixing material for DJs. They can scratch and rewind records, which they cannot do with CDs. Therefore records were repositioned away from the large, music buying public, and repositioned to the profitable niche of DJs.

3.2 Market Share and Cash Flow/Cost Savings Mismatch – Niches

The Matrix only takes into account two dimensions. Products defined by these 2 dimensions may be dogs, but could, by other dimensions, such as quality and differentiation, be seen as necessary to the company’s survival. “Product differentiation for a particular market segment may have low market share but produce high success within a market segment.” (St Scholastica, 2002, Matrix Models for Strategic Planning– some cautionary notes, www.css.edu ) The Boston Matrix also assumes that low market growth and low market share result in high costs of production due to few economies of scale. Thus resulting in low, if not negative, cash flow. This however is not always the case, as most of those products aimed at niche markets would, by definition of the BCG matrix, be defined as a “dog”.

Many such products operating within niches are highly profitable. Take, for example, tailor made clothing and fitted furniture. They offer a customised service so do not benefit from economies of scale, and have a low market share in a low growth market. Vivienne Westwood offers custom-made couture clothing of a ‘one off’ nature. The products are designed only for the customer and are originals. The couture clothing industry is a low growth market, of which Vivienne Westwood has a low market share. However because her products are highly differentiated and sell at a high price, the profits are high.

(Vivienne Westwood, www.viviennewestwood.com)

3.3 Product line scope

In many markets a company is expected to offer a full product mix, with adequate width, length and depth. (Baker & Hart, 1999, pg. 424) For example, Hotpoint would be expected to produce a range of washing machines of varying technical specifications and over an adequate price range. The larger a brands range, the more reliable and professional consumers perceive the brand to be. Also, people rarely purchase the lowest or highest product in the range, they purchase the next one up or down. Therefore, a company may choose to maintain their dog products in order to protect the other products offered within the range.

NFU did this with their insurance policy against foot and mouth disease. All but a few consumers had stopped purchasing and it had a low market share in a no-growth market. However it was not eliminated as the company wanted to be seen to offer a full portfolio.

(Alan Wallace, 1997, NFU)

3.4 Defrayal of Overheads & Barriers to Exit

“Many of the costs of multi-product companies are shared among many products…if one product is removed then the share of the burden is increased for the remaining products.” (Baker & Hart, 1999, pg.424) Take for example a publishing company such as Cond� Nast who produce a number of magazines, including Vogue, GQ, Glamour etc. (Cond�Nast Publications

www.condenet.com) If all these magazines were produced using the same equipment, the elimination of one magazine from the range would result in the others having to contribute more to the fixed costs of maintaining that equipment.

3.5 May be demanded by key clients

Even if individual items can be bought cheaper elsewhere, many companies will purchase everything, such as stationery, from the same firm merely for convenience. Therefore, if a supplier is unable to meet the firm’s requirements, the firm is likely to place their entire purchase order elsewhere. Hence companies may retain unprofitable dogs within their portfolios merely to keep such key clients satisfied. The losses made on the dog product are compensated for by the retention of the entire order.

3.6 Needed for the maintenance of essential machinery

Some dog products cannot be eliminated purely on the fact that they have become unprofitable. They may be necessary components used in the maintenance of essential machinery. For example, crucial hospital equipment may become faulty due to the erosion of a certain part. The part may not need replacing regularly, and therefore is an unprofitable dog, but it must still be immediately available, as it is vital that the equipment works consistently.

4.0 Conclusion

In conclusion, I personally feel that although most dogs do die, it is not always the case. The arguments for why dogs die are stronger than those for why they do not, but the statement as a whole is a huge generalisation. I agree with Lord Weinstock; consumer demands do change over time, and companies must adapt, or introduce new products in order to survive. As to whether this causes dogs to always die depends on how you define a ‘new’ product. Is an upgraded product new, or is it merely an extension of the old one?

Altering the products lifecycle to extend the maturity stage, or giving it a scalloped lifecycle may prolong the product’s life for a while, but how long will it last? Repositioning it, either using real repositioning or psychological repositioning, may remove the product from the ‘dog’ quadrant for a while, but eventually it is likely to find it’s way back there.

Technology evolves over time as companies continually try to gain competitive advantage. As this change occurs, consumers’ expectations evolve with it. If dog products do not, or cannot, grow with these changes, they will die out. It is a company’s mission to meet the needs of the consumer, and innovation is necessary in order to do so. However companies have limited resources available to them, so need to ensure they are invested profitably, not wasted on their dog products. This often results in dogs being eliminated.

Because the definition of a dog merely relates to a product’s market share and market growth, it does not necessarily follow that they are unprofitable, as seen with the niche markets. Consequently it would be unbeneficial to eliminate such products, so not all dogs die.

Perhaps, therefore, instead of stating, “Dogs always die,” it would be more accurate to say: “Dogs normally are eliminated.”

Appendices

Appendix 1 – Linking the BCG Matrix to the Product Lifecycle

http://www.ecommerce-now.com/images/ecommerce-now/Boston Matrix.htm

Appendix 2 – Example of the BCG Matrix in Use for Business Applications & ERP Systems

http://www.dpu.se/boston_e.html

Appendix 3 – Further Analysis of the BCG Matrix in Use for Business Applications & ERP Systems

http://www.dpu.se/boston_e.html

5.0 Bibliography

* Robert G. Cooper, “New product success in industrial firms”, Industrial Marketing Management

* Baker. M & Hart. S, Product Strategy & Management, Prentice Hall, 1999

* Eltec NVQ5 Management Program, The Business Review Cycle – Boston Matrix, available at www.nvq5.com/businessreview/boston.htm

* Kotler et al, 2001, Principles of Services Marketing, 3rd edition, Essex, Prentice Hall

* E-commerce-Now,2001, Boston Matrix, available online at: http://www.ecommerce-now.com/images/ecommerce-now/Boston%20Matrix.htm

* Yahoo! Shopping Tech Centre, 2002, available at: http://shopping.yahoo.com/shop?

* Data Research DPU, 2002, Life cycles for Business Applications and ERP systems, available at: http://www.dpu.se/boston_e.html

* Robert G. Cooper, “New product success in industrial firms, Industrial Marketing Management, pp. 215 – 23

* Planet Sinclair, C5, Sinclair Vehicles, 1985, available at: http://www.nvg.ntnu.no/sinclair/vehicles/c5.htm

* Elegance Furnishings, 2002, available at: http://www.elegancefurnishings.co.uk/vinyl.html

* Sunrise Carpets, 2002, Lino, http://www.sunrisecarpets.net/lwall.htm

* Active asbestos, History of Asbestos, available at: http://www.active-asbestos.co.uk/frame_centre_about_history.html

* Hart S.J, Product Deletion and the Effects of Strategy, European Journal of Marketing, 1989 Vol: 23 No: 10, Emerald

* Woodruffe. H, 1995, Services Marketing, Pearson Education, Essex

* Cond�Nast Publications, available at: