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Product Life cycle and BCG 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.

Figure 2 Portfolio matrix

2.2.1 Question Mark


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.

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.

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.

2.2.4 Dogs
These are the dead-end products whose time has been and gone and likely most offer
no future profits. Simply keeping them on the market is wasting resources generated by
Star and Cash Cow brands. Dogs should be disposed of unless they somehow
contribute to the sales of other brands/products within the portfolio.

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 center, 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 cannot 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 cannot 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.

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.