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

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"Do Dogs Always Die?"

.0 Introduction

.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":

. 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)

.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)

.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:

. 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.
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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 ...

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