Tag: Portfolio analysis

The Life Cycle and Arthur D. Little

Every business owner should be aware of the product life cycle. They should be aware of the standard model of the PLC and where each of their products exist in their life cycle. they should also know if products in their mix have the ability to deviate from the standard model.

In the standard model of the product life cycle, there are four stages:

  1.  Introduction:  It takes time for a new product to be accepted by consumers. When a product is first introduced sales may be slow and the costs of promotion and distribution may be high. It is highly likely that new products will be loss-making.  The role of marketing is to increase sales and build the market. Price skimming or penetration strategies predominate.
  2.  Growth:  Sales rise. The rise in sales may be rapid; which may cause issues with having sufficient manufacturing capacity to meet demand. This is currently an issue with Elon Musk’s Tesla model 3.  Marketing’s focus shifts to brand building and creating offers which result in customer retention and brand loyalty. The business looks to new customer acquisition and expanding its base.
  3. Maturity:  This is the longest stage of the product life cycle.  Sales plateau. Profits may fall as efforts are made to defending and maintaining your market position. Products are innovated and reformulated.
  4. Decline:  At this stage sales fall.  It could be that a product is no longer seen as fashionable. New products in the market may be seen as a better option. Advances in technology may make existing products obsolete. Marketing activity on products at this stage may be minimal. Products may be abandoned, replaced or harvested for cash.

Of course not all products follow the standard model of the product life cycle. Some products become staples. Others may have cyclical or seasonal appeal. Often new uses can be found for old products. Lucozade was a brand of soft drink for invalids but it was reformulated and is now sold as a sports energy drink. Listerine began life as a household detergent but is now sold as mouth wash. Lyle’s Golden Syrup has been sold under the same branding for over 200 years.

The product life cycle is a critical analytical tool for product portfolio and product mix management.

It isn’t just individual products that have a life cycle. Brands have a lifespan and so do industries.

In 1973, Arthur D. Little created his Strategic Condition Matrix.  This measured industry maturity and a companies position in its chosen market.

Little defined four stages of industry maturity:

  1. Embryonic
  2. Growth
  3. Mature
  4.  Ageing.

Note that these stages mirror those of the product life cycle.

Little also defined five categories of competitive position:

  1.  Dominant:  It is rare for a company to find itself in this position.  It often relies on having a monopoly or having protected technological leadership.  A firm in a dominant industry position can exert significant influence on the behaviour of others in the industry and therefore has a vast range of strategic options.
  2.  Strong:   A firm is not as dominant but still has a significant level of strategic choice. A firm can act without its market position being unduly threatened by competitors.
  3.  Favourable:  The industry is fragmented but there is a clear market leader. Firms can exploit particular strengths through the use of appropriate strategies.
  4. Tenable:  Firms are vulnerable to increased competition in the market. Few options exist for a firm to strengthen its position.  Profitability is driven through specialisation.
  5. Weak:  Firms struggle to compete and possibly have unsatisfactory performance.  If you cannot improve your situation, you will be forced out of the market.  This position may be the home of inefficient firms and small traders who fight every day to make ends meet.

Other academics have added a further category of competitive position, Non-viable, where withdrawal from the industry sector is the only strategic option.

For each combination of competitive position and industry life stage, Little suggests the following strategy options:

  1.  Dominant Market Position: 
    1. Embryonic: Here the aim is to grow fast and to build barriers to market entry by potential competitors. Firms should act with offensive strategies in mind.
    2. Growth:  Again you look to grow fast through cost leadership.  You balance strategies between defence and attack.
    3.  Mature:  The aim is to defend your existing market position.  Cost minimisation is increasingly important. You attack weaker competitors.
    4.  Ageing: You again defend your market position and focus on profitable sectors. You consider abandoning unprofitable parts of the market.
  2.  Strong Market Position:
    1. Embryonic:   Grow fast and differentiate you offer from those of competitors.
    2. Growth:   Lower costs and differentiate your offer. Attack smaller and weaker firms
    3.  Mature:  Lower your cost base, differentiate or focus your offer.  Note these are Porter’s generic marketing strategies.
    4.  Ageing:  Harvest the market for cash.
  3.   Favourable Market Position:  
    1.  Embryonic:  You grow fast through differentiation
    2.  Growth:  Lower your cost base, differentiate your offer, attack smaller and weaker firms.
    3.  Mature:  Focus on particular market sectors and differentiate your offer. Hit smaller and weaker firms hard.  Create barriers to entry.
    4.  Ageing:  Harvest the market for cash
  4.  Tenable:
    1.  Embryonic:  Look to grow the industry and focus on profitable sectors
    2.  Growth:  This position is that of a problem child in the BCG matrix. You have the choice of holding onto your existing market position, you can look to a profitable niche or you can aim to grow the market. You may want to harvest the market for cash.
    3.  Mature:  You either hold on to your existing position in the market of you withdraw from the industry
    4.  Ageing: A managed withdrawal from the market is required.
  5.  Weak:
    1.  Embryonic:  Search for a profitable niche and attempt to catch others in the market.
    2.  Growth: Find a profitable niche or withdraw from the market
    3.  Mature:  A managed withdrawal from the market
    4.  Ageing:  Withdraw from the industry

Most western economies, USA, Europe, etc. are mature.  As a result, for many small firms, the most profitable strategy is one of niche marketing.

Beware the Big Bad BCG

When I say beware of the big bad BCG, I am not referring to Roald Dahl’s friendly giant.  I am also not referring to the inoculation every UK teenager gets and which produces a large purple pustule on your arm.  What I mean by the big bad BCG is the Boston Consulting Group’s Growth Share Matrix which is a prominent method of portfolio analysis.

Drucker (1963) identified that portfolio analysis was an important strategic marketing tool.  He declared that it helped firms:

  • Identify tomorrow’s breadwinners
  • Identify today’s breadwinners
  • Identify products capable of making a contribution to turnover
  • Identify yesterday’s breadwinners
  • Identify also-rans; and
  • Identify failures.

Every student studying business at college or university is taught the Boston Consulting group growth share matrix as the predominant method of analysing a company’s product portfolio.  However the matrix must be treated with care and it cannot be used in isolation.  Doing so could lead to some very expensive mistakes.

The BCG matrix plots the rate of market growth for a product or strategic business unit (SBU) against that product/SBU’s market share when compared with the largest competitor in the market. The latter is plotted on a logarithmic scale.

When using the matrix to examine product portfolios, you must consider the future potential of the market.  This can be achieved through using the market growth rate as one of the matrix elements.

What results from the matrix is an expression of a products competitive position.

The 2×2 grid produced in the matrix relies on four assumptions:

  1. Margins and funds generated increase with market share as a result of experience and scale effects.
  2. sales growth depends on cash to finance working capital and increases in capacity.
  3. To increase market share you need to invest cash which supports share-gaining tactics.
  4. Growth slows as  products reach life cycle maturity.  At maturity, additional cash can be generated without loss of market share.  This cash can be used to support new products and those which are in the growth segment of their life cycle.

Each of the four quadrants produced by the matrix has a distinctive name:

  1. Dogs:  These products have low market share and low growth.  They produce low profit levels or even losses.  They take up valuable management time.
  2. Question Marks:  (previously known as Problem Children)  These products have low market share but high growth.  They require cash investment if they are to succeed with an improved market position.  Often these are adolescent products entering the growth stage and there is a strategic choice between supporting them or divesting: picking winners and losers.
  3. Stars: These products have high market share and a high growth rate.  These are often market leading products.  Cash is needed to maintain market position and to defend against competitors.  Often star products are not the most profitable due to the cost of maintaining market position.  However, over time these products can become….
  4. Cash Cows:  These products have high market share but a low growth rate.  These are often established mature products.  These products generate cash which can then be used to support stars and selected question marks.  Often these products produce economies of scale and high profit margins.

Harris et al. (1992) expanded the matrix to add two additional ‘quadrants’:

5.  War Horses:  which have high market share but negative growth

6.  Dodos:  Which have low market share and negative growth.

A further suggested group is products which sit between cash cows and dogs.  These ‘cash dogs’ can be harvested for additional margins.

The BCG matrix suggests four potential product strategies:

  • Build:  Increase market share by investing in a product or SBU
  • Hold:  Defend your current position (useful for cash cows.
  • Harvest:  Increase short-term cash flows (Dogs and rejected question marks).  This is for products with no long-term future where you mortgage the product’s future for short-term gain.
  • Divest:  Get rid of products which are a drain on turnover and make better use of the money invested in them elsewhere.

There are significant pitfalls with the use of the BCG growth-share matrix for portfolio analysis.  It needs care in its interpretation.  It provides a snapshot of the current position.  It often results in products being required to meet unrealistic growth targets.  It also requires that products and SBUs need individual management.

Other typical mistakes in the use of the BCG matrix are:

  • Businesses investing heavily in an attempt to improve the market position of dog products
  • Businesses maintaining too many question mark products which means that resources are spread too thin.
  • Draining cash cows of funds which weakens them prematurely.  Alternatively investing too much in cash cows so funds cannot be used to support question marks and star products.
  • Seeing portfolio analysis as offering more than a contribution to management of products and that a products position produces only one potential strategy e.g. You must only defend a cash cow or that you must divest dog products.

For SMEs, the BCG matrix can be a poor tool to use.  It is unlikely that an SME’s products are going to be market leaders unless they operate is a specific niche market.

Properly used, BCG growth share matrix is a relatively easy to use tool for management and can offer a useful basis for strategic thought.  It can help identify product portfolio priorities.

However, it can be a poor guide for wider strategies as only market growth rate and market share are considered and other market factors are ignored.

It is difficult to calculate market share, particularly that of your competitors.  Smaller firms will nearly always have a smaller level of market share than that of multinationals.  The model driven by the matrix sees cashflow as being dependent on market growth.  This is not necessarily the case.

The BCG growth-share matrix fails to recognise the nature of marketing strategy and the forms of competitive advantage which will lead to success.

If you are going to use the BCG growth-share matrix, it is best to do so in conjunction with other portfolio models such as the GE strategic direction matrix,  The BCG growth-gain matrix and the Shell Directional Policy matrix.