Product Life-Cycle Analysis and BCG Matrix (19.2)

Chapter 19 - The Marketing Mix, Product and Price

Learning Objectives: To understand the Product Life-Cycle Analysis and the Boston Matrix Analysis

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Product Life Cycle / Product Portfolio Analysis

The Product Life Cycle is the pattern of sales recorded by a product from launch to withdrawal - it is used for Product Portfolio Analysis, which is analyzing what businesses/products a company is holding at a certain moment and helps deciding where to allocate resources.

Here is a quick summary of the Product Life Cycle:

Here is how we look at the different stages of the life cycle and their characteristics:

As you can see, sales are the highest at the maturity stage and therefore businesses want to stretch this stage as much as possible. To doing so extension strategies are implemented: strategies to extend the length of the product life cycle to increase profits and reduce costs.

• Introducing/selling the product in new markets;

• Adding new features to existing products;

• Repackaging and relaunching the product;

• Finding new uses for the product;

Here are some product extension examples:

A Product Portfolio Analysis which is assisted by the Product Life Cycle helps businesses with some important decisions:

• It aids managers on marketing mix decisions such as:

- When should the price of a product be changed? Increased or reduced?

- When should investment in promotion be at its highest? And its lowest?

- When to introduce product variations?

- What will the cash flow of the business look like depending on the life cycle of different products?

- Whether or not it's time to introduce new products to the market.

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Here is quick look at marketing mix decisions depending on product life cycle stages:

Finally, you also need to keep in mind the dependency of cash flow from the product life cycle:

• CF is negative during development/introduction (high development costs) - high outflows and low inflows;

• CF during introduction is also negatively impacted by the need for high investments in promotion - high outflows and start of inflows;

• At growth stage inflows should surpass outflows;

• At the maturity stage inflows are at their highest and outflows at their lowest - high sales, no spare factory capacity, low inventories, and low promotional spending);

• Cash inflows during decline are reduced due to decreasing sales and usual decrease in prices.

With cash flow in mind we come to a conclusion that a company should have a balanced product portfolio in which there are product in the various different stages:

• Products in the growth and maturity stages can help financing the introduction of new products;

• CF problems can arise when a business has most of its products on introduction and decline (very high outflows and low inflows).

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Limitations of the Product Life-Cycle:

- It is a simple analysis based on past or current data and cannot be used to predict the future;

- A product that has grown in the last few weeks/months isn't necessarily going to continue growing - it's not a trend graph;

- Sales of a product could crash suddenly giving no chance for extension strategies to be implemented (e.g. fashion);

To be effective for decision-making, this analysis needs to be used alongside the Boston Matrix Analysis.

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The Boston Matrix Product Portfolio Analysis (BCG) analyzes the product portfolio of a business in terms of market share and market growth:

Let's look at an example of a BCG Matrix:

• The size of each circle represents the total revenue of each product under the firm's portfolio;

• The matrix shows how each product compares measured by market share and market growth;

• It allows for existing product portfolio analysis;

• It helps formulating future strategies for each product in the portfolio.

The four quadrants of the matrix are labeled as following:

Understanding where each of your products fall will help you with formulating the most adequate strategy. Each quadrant comes alongside a 'recommended' action:

• Build: 'problem child' needs to be supported with additional investments on advertising and distribution (cash cows are the source of financing);

• Holding: continued support for maintaining market position and extension strategies (to refresh the product) may be necessary);

• Milking: the positive cashflow from established products can be invested in other products with potential;

• Divesting: the low performing 'dogs' should be discontinued (production and distribution). Consider contribution and other consequences of the decision such as redundancies and spare capacity.

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Limitations of the BCG Analysis:

- It is not useful to predict the future success of a product - it just establishes the current product portfolio situation;

- It is a simplistic planning tool and does not take into account other factors that can impact on the success of products (e.g. economic factors);

- It is only useful to identify products needing strategic action to be taken but does not provide answers on what actions;

- The BCG assumes that higher market share automatically leads to higher profit margins - which is not true.

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To-Do-List

• Activity 19.3

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Chapter 19 - The Marketing Mix, Product and Price