As we have previously discussed, it is important for companies to regularly review their product range. This product analysis is known as a product portfolio analysis and needs to be set within the context of the individual product lifecycle. The main aim is to inform the business as to where it should direct future investment and where it should maintain or reduce it’s levels of investment.
The Boston Consulting Group
The Boston Consulting Group was a very well known consulting team that developed a method of visualising the product portfolio. The team developed a simple illustrative matrix, which became known as ‘The Boston Consulting Group Matrix’. Although this simple technique has attracted some criticism, it is synonymous with the product portfolio analysis process. Simply, the idea is based around a two by two matrix with market growth along one axis and the relative market share across the other axis.
Plotting the stars and dogs
The matrix was used to plot the different products on the grid, further enhancing the visualisation of the relative strengths of the different products. The team also developed names for this process, including ‘stars’, ‘cash cows’, ‘problem children’ and ‘dogs’.
Stars are products that achieve rapid growth and achieve a dominant position in the market (market share). However, competition is fierce and stars absorb huge amounts of investment. Judgment needs to be exercised to whether the market will continue to grow and the star will provide ongoing profits.
Cash cows are former stars; they have reached maturity and will achieve little further growth. They can be milked to provide finance for the stars in the company’s portfolio.
Dogs are products with low market share and low growth potential. These are nearly always profitable but may attract resources that could be better spent in other areas, developing a greater focus on high growth, high profit potential.
A problem child is a product that has low market share and inevitably causes the most problems. The trick is to figure out how to increase the market share and turn the problem child into a star.
The Boston Consulting Matrix has been further developed and has had new categories added. However, the basic principle applies that through the simple categorisation and visualisation of the product range, a number of choices and decisions can be explored. It is important that businesses understand their own product range against the product life cycle and the relative performance potential of each.