University of California
Type of paper: Thesis/Dissertation Chapter
BCG Matrix and the Product Life Cycle
The BCG Matrix and the Product Life Cycle are two important tools that relate to different aspects of a product’s performance:
•The BCG looks at market share and market growth and how they impact on cash usage and generation.
•The PLC looks at sales/revenues over time and levels of profitability.
Boston Consulting Group (BCG) Matrix
Businesses must keep their product offerings relevant and profitable to stay in operation. The Boston Consulting Group developed a tool, called the BCG matrix, for categorizing a firm’s products in relation to the overall product life cycle. Product life cycle is based on the observation that products develop, similar to animals, through distinct phases of maturity that differ in amount of resources required and produced. The BCG matrix places each product a company offers according to the growth rate of the business and the relative market share the product controls. Identifying which quadrant of the BCG matrix a product offering falls into provides valuable guidance to management about the future of that product Stars
Products that enjoy a high relative position in terms of market share in a growing market are referred to as stars. They require large investments to maintain the market share, but often produce enough revenue to cover their expenses. Firms should make it a top priority to maintain the market share of products in the star quadrant of the BCG matrix to increase sales. As the product enters maturity, and growth rates decline below 10 percent, maintaining market share will require less investment, yet produce similar revenue, and become cash cows. Cash Cows
Cash cows produce substantial profits for their companies because they require little investment to maintain their high share of the market. Managers should divert profits from cash cows to help defend market share of star products, develop new products for emerging markets, or turn struggling products around. While cash cows often provide the largest profit margin in a company portfolio, firms interested in maintaining long-term profitability must invest in defending and creating star products that will become cash cows` Low market-share products that show low growth are referred to as dogs. Managers should minimize the number of dogs in the product portfolio. While many managers seek the challenge of trying to turn a dog product around, additional scrutiny should be given to any investment in dog products. Firms should decide whether to find a niche in the product’s market to control or divest from the product entirely to free up resources for more profitable ventures.
The most troubling quadrant on the BCG matrix is filled with products in high-growth markets that control relatively weak positions within their markets. These products, called question marks, require large investments to develop. Even with substantial funding, a question mark product is at a disadvantage due to the fierce competition in high-growth markets. Managers should consider the likelihood and means of increasing market share, such as specializing in a niche market, before allocating additional resources to question marks. If a question mark is unlikely to capture a niche market or stand out against the better established competition, the firm should divest to increase its overall profitability
Some limitations of the BCG matrix model include:
•The first problem can be how we define market and how we get data about market share
•A high market share does not necessarily lead to profitability at all times
•The model employs only two dimensions – market share and product or service growth rate
•Low share or niche businesses can be profitable too (some Dogs can be more profitable than cash Cows)
•The model does not reflect growth rates of the overall market
•The model neglects the effects of synergy between business units
•Market growth is not the only indicator for attractiveness of a market There are probably even more aspects that need to be considered in a particular use of the BCG model Product Life Cycle (plc)
The product life cycle has 4 very clearly defined stages, each with its own characteristics that mean different things for business that are trying to manage the life cycle of their particular products. Introduction Stage – This stage of the cycle could be the most expensive for a company launching a new product. The size of the market for the product is small, which means sales are low, although they will be increasing. On the other hand, the cost of things like research and development, consumer testing, and the marketing needed to launch the product can be very high, especially if it’s a competitive sector. Growth Stage – The growth stage is typically characterized by a strong growth in sales and profits, and because the company can start to benefit from economies of scale in production, the profit margins, as well as the overall amount of profit, will increase.
This makes it possible for businesses to invest more money in the promotional activity to maximize the potential of this growth stage. Maturity Stage – During the maturity stage, the product is established and the aim for the manufacturer is now to maintain the market share they have built up. This is probably the most competitive time for most products and businesses need to invest wisely in any marketing they undertake. They also need to consider any product modifications or improvements to the production process which might give them a competitive advantage. Decline Stage – Eventually, the market for a product will start to shrink, and this is what’s known as the decline stage. This shrinkage could be due to the market becoming saturated (i.e. all the customers who will buy the product have already purchased it), or because the consumers are switching to a different type of product. While this decline may be inevitable, it may still be possible for companies to make some profit by switching to less-expensive production methods and cheaper markets
The relationship between the BCG Matrix and the product life cycle The horizontal axis of the BCG Matrix represents market Shareand the vertical axis indicates anticipated market growth. The corporate business is divided into four categoriesthey are cash cows, stars, question marks, dogs. The product life cycle is a new product progresses through a sequence of stages from introduction to grow, maturity, and decline. The four categories of corporate business correspond to the four stages of the product life cycle (1) Question marks businesses correspond to the introduction stage of the product life cycle. Question marks businesses are in an attractive industry but hold a small market share percentage. In the introduction stage the firm seeks to build market share rapidly build product awareness and develop a market for the product. (2) Starts businesses correspond to the growth stage of the product life cycle. Start businesses are in a fast-growing market, and hold a dominant share of that market.
Their contribution to cash flow depends on their need for resources. In the growth stage, the firm seeks to build brand preference and increase market share. Market share tends to stabilize. (3) Cash cows businesses correspond to the maturity stage of the product life cycle. Cash cows businesses in this generate large amounts of cash but their prospects for future growth are limited In the maturity stage, the market reaches saturation. The primary objective is to defend market share while maximizing profit. (4) Dogs businesses in this category do not producer consumer much cash. However they hold no promise for improved performance. In decline stage there is a downturn in the market as sales decline discontinue the product liquidating remaining inventory or sell off.
The difference between the BCG Matrix and the product life cycle
•The corporate business is divided into four categories from two aspects of market share and anticipated growth rate however the product life cycle is divided into four stages from two aspects of sales and time.
•The BCG Matrix can roughly judge enterprise’s overall operating conditions but the product life cycle only reflects the market performance of a single product.
•The BCG matrix mainly studies the allocation and use of corporate resources, but the product life cycle mainly studies the use of the product marketing strategy.
• The BCG matrix can reflects corporate a variety of different business conditions, but the product life cycle can not reflects all businesses and product in the curve