Boston Consulting Group matrix

Benefits of a balanced product portfolio

• Having a broad product portfolio can a help business to increase its brand awareness.

• It also reduces the risks and exposure associated with having just a single product, e.g. seasonal fluctuations in demand.

• It increases the firm’s revenue streams as a variety of products will appeal to a wider customer base.

The BCG matrix is used to place a firm’s products according to its market share and the market growth. It is a useful marketing tool for managing a varied range of products. There are four product categories in the BCG matrix: (i) Question marks, (ii) Stars, (iii) Cash cows, and (iv) Dogs.

Question marks (also called problem children or wild cards)

• Products with low market share but in a high growth market.

• The product is at the introduction (launch) stage in the product life cycle.

• These products use up the firm’s finances (negative cash flow) but are yet to be profitable.

• These products may also have suffered from relatively inferior marketing or product quality.

• They require the most amount of funding as there is uncertainty for such products in the market. i.e., they represent a high level of risk.

• Marketers may attempt to convert question marks into stars, although this needs investment.

Stars

• Successful products with high market share in industries with high market growth.

• Stars are at the growth stage in their product life cycle.

• They require funding and investment to maintain their position in the BCG matrix, but less so than question marks, i.e., the level of risk is lower as star products are already established in the market.

• Marketers aim to invest in these products in order to turn them into cash cows.

Cash cows

• Products with high market share, in mature markets with low market growth.

• Cash cows are the most profitable in a firm’s product portfolio as they are at the maturity stage in their product life cycle.

• The products are well established in the market so are the main cash earners for the business.

Dogs

• Dogs are products with low market share in markets with low or declining growth.

• These products are at the decline phase of the product life cycle.

• They can still be profitable, at least in the short-term, so removing them is not always necessary.

• Firms with too many dogs in their product portfolio will suffer from poor cash flow.

• Firms need to decide whether to spend money on extending the life of such products, or to divest in order to prevent further losses since they drain cash from the business.

Product portfolio strategy

• For question marks, a building strategy is used in order to turn question marks into stars, i.e., increase investments in promising products that have scope for higher market share.

• For stars, the firm uses a holding strategy – some investment is needed to maintain high market share and to sustain consumer demand for the product. Assuming that stars maintain their relative market share (with or without additional financial support) they will eventually become cash cows for the business.

• For cash cows, a harvesting strategy is used to milk the cash from its best-selling products. The funds can be used to finance the investments in stars (with the intention of converting these into cash cows).

• For dogs, a divesting strategy is used, whereby poor performing dogs are phased out of the market as they reach the last stage in their product life cycle.

• Good product portfolio management requires a balance number of stars and cash cows. These products generate cash for the business and enable it to create new products (question marks) to meet ever-changing consumer needs and wants. Having too many dogs and question marks can create liquidity problems for the organization.

• Note: although market growth and market share might be high, this does not necessarily mean the firm’s profit is high. For example, high sales volume may be due to extremely low prices (and hence low profit margins). In addition, costs of production need to be considered to calculate profit.

 Top tip!

Whilst "stars" might seem to be the star product (something that or someone who is great is often referred to as a 'star') in a firm's product portfolio, cash cows are the products that generate the most cash.

Whilst cash cows operate in a market where growth is low, this does not mean that sales revenues are not high. In reality, the greater the market share that a cash cow accounts for, the more difficult it is to growth further. For example, a growing market worth $200,000 last year which has grown to $300,000 this year represents high market growth of 50% (although the increase in absolute terms is only $100,000). By contrast, a mature market worth $200 million last year and worth $220 million this year has grown by "only" 10% but this represents a huge $20 million increase in absolute terms.