The Boston Matrix, or The Boston Consulting Group Matrix, is a business tool used for marketing management that helps to plan for a balanced Product Portfolio.
The Boston Matrix can be used to manage both the variety of products owned and sold by any business organization as well as various Strategic Business Units (SBU) which are different divisions of a firm.
While a Japanese conglomerate Hitachi has a Product Portfolio that includes diverse products such as consumer electronics, vehicle spare parts and high-speed trains, an American conglomerate Berkshire Hathaway as a product portfolio including company subsidiaries, equity positions in other businesses and other securities such as Treasury bills.
All these different components of product portfolios of various businesses can be planned and managed using The Boston Matrix.
Two dimensions of The Boston Matrix
The Boston Matrix looks at two different dimensions of products such as Market Share and Market Growth in order to assess new products and existing products in terms of their market potential.
This activity known as the Product Portfolio analysis allows a business to decide which products should receive more investment and which products should be remarketed or withdrawn from the market. The analysis also allows firms to develop growth strategies by adding more new products to existing products, or to launch a completely new product range.
This knowledge is crucial because a successful business must have a portfolio of products with different market growth rates and different rates of market share.
All in all, The Boston Matrix effectively links growth, market share and Cash Flow when it comes to the products sold by the business.
Types of products in The Boston Matrix
To start with The Boston Matrix, a business should place each individual product or brand in its Product Portfolio into one of the four quadrants. It is done based on the products’ market shares and the products’ growth rates in the industry.
These four groups of products represent different segments in the Product Mix as they correspond to different stages of the Product Life Cycle (PLC):
- QUESTION MARKS. These are products with future potential.
- STARS. These are products with high market growth and high market share.
- CASH COWS. These are mature products that are well-established on the market
- DOGS. These are declining products.
Let’s take a look in details at these four different groups of products representing four possible outcomes in The Boston Matrix:
1. QUESTION MARKS (PROBLEM CHILDREN)
These are products with low market share and high growth rate. They operate in high growth markets, but their outcome is unknown as they have not established their position on the market yet. They do not have a significant market share, but have high potential.
Product Life Cycle (PLC): Question Marks are new products to the market in their launch stage of Product Life Cycle (PLC) which have an uncertain future. The pioneering companies take the risks in the hope of securing good early distribution arrangements, image, reputation and market share.
Sales revenue: Low revenue.
Costs: High investments required. Many resources must be used which are absorbing cash to gain higher market share. Not always clear whether a business should invest more in these products. Management must decide which products to grow or drop. When growth is chosen, build them to turn them into Stars. When divesting is chosen, resources can be used to help other products.
Profit: Profit is usually low, or the product can even make a loss until it moves into the rising Star category, which is by no means guaranteed. Gross Profit Margin (GPM) is likely to be high. But, Net Profit Margin (NPM) tends to be low as overheads in the form of costs of research, development, advertising, market education and low economies of scale are normally high.
Cash: Main users of cash.
(+) Successful: Require substantial investment, if successful, these products will become Stars. To increase market share, the money must be made available to back the product through wider promotion and distribution.
(-) Not successful: If the products are not new and still remain in this category, the firm should analyze reasons for such a small share of a fast growing market. This may suggest inferior marketing or product quality. Or, the application of the product has not been spotted and acted upon yet.
The firm needs to decide whether it is worth supporting these products further. If yes, develop strategies to gain a higher share of the growing market. To do nothing, if not successful, these products will become Dogs.
Examples: Apple Mac computers 30 years ago.
Aim: Build to turn them into Stars. New business development and project management principles are required here to ensure that the potential can be realized.
2. STARS
These are great products with high market share and high growth rate. They operate in high growth markets and have high sales potential.
Product Life Cycle (PLC): Stars are successful products in the growth stage of Product Life Cycle (PLC) which have made it past the initial market introduction. They are now enjoying high growth penetrating the market.
Sales revenue: Demand is strong and the company has good market share in a growing market. Generate significant large revenues provided good growth potential continues to exist.
Costs: Because the market is competitive and so marketing costs are likely to be significantly high. Require marketing support to keep market share and growth. Investments need to be made to keep developing and promoting Stars. It makes sense to invest heavily in them to accelerate the growth.
Profit: Generate a lot of profit. Produce very good returns and profitability as the market is receptive and educated, which optimizes selling efficiencies. Pricing is relatively unhindered because saturation or over-supply do not exists yet. However, high marketing costs may reduce the profit margins.
Cash: Generate high amounts of cash. That cash can be used in an attempt to turn some of the Question Marks (Problem Children) into Stars.
(+) Successful: Worthy of continuing investment as the market is strong and still growing, competition is not yet fully established. If successful when position maintained but market growth slows down, these products will become Cash Cows.
(-) Not successful: If not successful because lost market share, these products will become Question Marks (Problem Children) again. If not successful because lost growth rate, these products are likely to move down to Cash Cow status, and the company will need to have the next rising Stars developing from its Question Marks (Problem Children).
Examples: Vodafone mobile phones in the mobile phone industry.
Aim: Harvest. If the firm retains high market share, then higher profits and Cash Flow should be generated when the market matures.
3. CASH COWS
These are products with high market share and low growth rate. They operate in low growth markets that are mature, but have achieved their sales potential.
Product Life Cycle (PLC): Cash Cows are highly successful products in the maturity stage of Product Life Cycle (PLC) which are well-known to all customers, and understood.
Sales Revenue: Strong sales generating high sales revenue.
Costs: Relatively low costs as they require minimal investment. Production overheads are established and minimized due to high volumes and good economies of scale.
Do not require the same level of marketing activity as Stars to increase market share. As there is very little potential for market growth, so there is little point in investing further in them.
Profit: Generate large amounts of profits. Provide companies with solid strong profits year in and year out. Have superb profitability.
Cash: Generate substantial cash flows. Cash will be ‘milked’ to provide for investment in other products: research and development, new product development, support Question Marks (Problem Children), maintain Stars, etc. Also, to pay dividends to shareholders, pay off debts, etc.
(+) Successful: No further investments required to remain successful as there is little or no additional growth available. Need maintenance and protection along with good cost management to prolong their high earning potential. Extension strategies ought to be used to delay decline.
(-) Not successful: When these well-established products stop being successful and start losing market share, they run the risk of becoming Dogs.
Examples: Coca-Cola in the soft drinks industry, or Kit Kat and Snickers in the chocolate bars industry.
Aim: Maintain. Milk the returns from previous investments which established good distribution and market share.
4. DOGS
These are products with low market share and low growth rate. They operate in low growth markets and have little prospects. Businesses that have stopped developing find themselves having very high or even entire proportion of their products in this quadrant.
Product Life Cycle (PLC): Dogs are old products in stagnant markets which have reached the end of their life, so they are in the decline stage of Product Life Cycle (PLC) having low market presence.
Sales Revenue: Low sales hence generate little sales revenue. Overall, do not generate much revenue for the firm.
Costs: Still require company resources; hence tie up cash (capital). Therefore, may have potentially high impact on overhead costs.
Profit: Tend to generate modest to low profit, if any. Low or negative profit margins as price discounts may need to be offered to withdraw them entirely from the market.
Cash: Do not generate much cash, just modest cash. However, when they make a loss, they can be a drain on a firm’s finances. Firms that have too many of them may face liquidity problems – shortage of cash.
(+) Successful: To try to make them successful again instead of just disposing, use product extension strategies. To turn the product into a Question Mark, the firm may reposition the product into a niche market where more premium price can be demanded.
(-) Not successful: There is no point in developing these products unless there is a strategic reason for retaining them. If not successful, when extension strategies fail, these products should be dropped. Simply, get rid of them.
Examples: Canned food SPAM in the cold meats industry.
Aim: Divest.
The Boston Matrix and managing Product Portfolio
If a company produces a single product and that product follows the product life cycle, then it is inevitable that the company will eventually go into decline and be forced to close.
This may not be as bad as it sounds. If the company has made profits then the investors will have funds to move onto a different project or do something different with their lives. Also, during the decline phase the capital assets of the company will be sold, so there will be further cash for reinvestment as a result.
However, most companies would prefer not to go out of business. One way to avoid this is to extend the life of the product so that it never declines. This might be an objective of sustained marketing, as indicated already above.
Another way around the product life cycle is to create a range of products all at different stages of the product life cycle. When one product goes into decline another product will hopefully be reaching its maturity phase, and so on. This can only be achieved if the company invests in research and development.
The following graph shows transformation of products in The Boston Matrix:
When companies have a range of products all at different stages of Product Life Cycle (PLC), and possible serving different markets and different market segments, this is called a product mix.
The Boston Matrix and product strategy
Strategic analysis of products can be undertaken to support products sold by the firm. This can be done, if the business has a balanced portfolio of products, meaning that all four quadrants shall be filled.
Analyzing Product Portfolio with the use of The Boston Matrix can help business managers to determine a specific strategy for each of the four groups of products. In fact, The Boston Matrix proposes four different product strategies arising from this analysis how to deal with Question Marks (Problem Children), Stars, Cash Cows and Dogs.
1. QUESTION MARKS (PROBLEM CHILDREN)
The strategy is to support to build market share.
Ideally, the company will be able to turn them into Stars. Initially, managers need to think hard whether these products have any future potential, or it is more likely that that they will become Dogs. New business development and project management principles are required here to ensure that this potential can be realized. This requires investing necessary resources to gain market share. If market share is not increased, then they will simply drain cash from the business endangering the whole Product Portfolio. Selecting a few of these products for further development is recommended.
2. STARS
The strategy is to invest to harvest and grow.
Harvesting and growing Stars should be a priority for the firm reaping the benefits (profits) of the product. Ideally, the firm will retain high market share on those products This usually requires investing huge amounts of money into advertising to turn stars into Cash Cows in order to keep high market share. When these Stars are turned into Cash Cows as the market matures, then higher profits and Cash Flows should be generated.
3. CASH COWS
The strategy is to hold to maintain the positions.
Cash Cows should be maintained for as long as possible to milk the returns (profits) from previous investments which established good distribution and market share. This strategy involves investing enough resources to keep Cash Cows in their current position as they are because the profits are at the highest levels on these mature products. Investment is likely to be minimal though as the market growth is low at this stage. Therefore, the business should be investing just enough to keep the Cash Cows well and alive. Cash from Cash Cows shall be used for development and support of other products.
4. DOGS
The strategy is to divest to get rid of them.
This strategy involves selling off Dogs immediately or phasing them out gradually depending on their current levels of market share and the growth level of the market. Especially those Dogs that are unlikely to bring any future benefits to the firm. Nevertheless, in the end, these products are facing unavoidable divestment to free up resources to be used elsewhere – in developing selected Question Marks (Problem Children) or promoting Stars.
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The optimal strategy for the Product Portfolio of a firm takes advantage of the firm’s strengths (Stars and Cash Cows) to develop other attractive opportunities (Question Marks (Problem Children)) and Stars.
It is because Stars and Cash Cows are the main generators of cash while Question Marks (Problem Children)) and Stars are the main users of cash. Stars and Cash Cows should outnumber Question Marks (Problem Children), otherwise the firm may have a cash shortage.
Common strategic mistakes regarding The Boston Matrix
Over-milking the Cash Cows, so that they have insufficient resources to remain competitive.
Under-milking Cash Cows, so that insufficient cash is made available for investment in other products.
Making large investments in Dogs, hoping to turn them around, and failing.
Maintaining too many Question Marks, and under-investing in each.
Advantages of The Boston Matrix
- Helps with strategic analysis. The Boston Matrix provides information about the firm’s products in the Product Portfolio or about Strategic Business Units (SBUs). Especially the visual aspect provides an excellent framework for a strategic analysis and for strategic planning. As business managers need to know their products, their customers and the market very well, The Boston Matrix provides the foundation for making more informed marketing decisions. It is especially important because product development always has Cash Flow implications, e.g. too much investment in unsuccessful products may have serious consequences.
- Helps to manage Product Portfolio. The Boston Matrix helps the business to build and manage the ideal product portfolio – a balanced Product Portfolio with a range of products. Having a diverse product portfolio – a few Question Marks (Problem Children), some Stars, several Cash Cows and few or no Dogs – is important for a firm’s Cash Flow. Only selling to a single market limits the revenues of the business.
- Helps to determine product strategy. The Boston Matrix helps to manage appropriate strategies for different product categories to foster transformation of products within the Product Portfolio. Money generated from Cash Cows is usually used to turn Question Marks (Problem Children) into Stars and Stars into Cash Cows. Managers also need to decide whether to spend money on reviving demand for Dogs or withdraw investments in them to releasing cash for other products.
- Helps to spread risks. The Boston Matrix helps firms to achieve the common strategy to increase the Product Mix. It is desirable because it enables the business to generate more sales revenue from more products and to spread risks among more products. It means that a decline in sales for one product may be offset by favorable sales of other products in the Product Portfolio.
Disadvantages of The Boston Matrix
- Does not fully reflect real market performance of products. This might happen when higher market share as it is for the Cash Cows products does necessarily brings higher profits as it is stated by The Boston Matrix model. For example, Euro Disney reported huge losses between 2002-2006 despite having a high market share in the theme parks industry and receiving large amounts of revenue thanks to its brand popularity. It is because the company faced the problem of recovering high development costs fast enough.
- Cannot be used on its own. While The Boston Matrix can provide a quick overview of the firm’s Product Portfolio, it fails to explain the exact position of the products in the Product Life Cycle (PLC) grid. It is possible that a Question Mark (Problem Child) is not early on in its life cycle because it just can be an old product that has a low market share in a large market. Hence, The Boston Matrix should always be used in conjunction with other business planning tools such as Product Life Cycle (PLC), The Ansoff Matrix, etc.
In summary, The Boston Matrix model is a tool for planning and assessing existing and development products in terms of their market potential (market growth and market share), and thereby implying strategic action for products and services in each category.
Consider also your existing products and services themselves in terms of their market development opportunity and profit potential. Some will offer very high margins because they are relatively new, or specialized in some way, perhaps because of special Unique Selling Point (USP) or distribution arrangements. Other products and services may be more mature, with little or no competitive advantage, in which case they will produce lower margins.
The Boston Matrix is a useful way to understand and assess your different existing product and service opportunities.
