MARKETING MATERIAL
Product Package Product Audit Product Strategy Market Penetration
Product Development Market Extension Diversification Ansoff Matrix
Product Life Cycle Competitive Saw Stepped Saw Marketing Depreciation
Product Portfolios Boston Matrix Relative Market Share
Criticism of Boston Matrix Advantage Matrix Marketing Myopia Product Mix
Product Plan Packaging Services Features of Services Intangibility
Inseparability Variability Perishability Core Services Social Marketing
9435 MARKETING Chapter 5
- Product or Service Decisions
Introduction
The focus of suppliers' activities is the product or service that
is offered. While all other aspects of marketing have their part
to play, it is the product or service itself that ultimately
matters to the consumer. By defining the product/service offer
(Which, in its extended form, will involve most of the 4 Ps), the
supplier defines almost all of the marketing mix.
The strongest, most influential, theories of marketing have been
developed in this area. The Ansoff Matrix, covering degrees of
diversification, is one example. The most important and pervasive
--in theory if not in practice --is, however, that of the
Product Life Cycle (PLC). A significant amount of other marketing
theory relates to the PLC, and hence the theory behind it is
crucial; if, as this chapter shows, often fundamentally flawed in
terms of practical applicability. The other main element of
theory is the Boston Matrix; which is also very influential --
and again also potentially flawed in practical use. This is
based, in part, upon the assumption of `economies of scale' (or
`learning effects'), which are also explored. Despite their
attractive simplicity, however, these theories typically have
only specialized applications.
Beyond this theory, the product specification is developed,
particularly in the area of quality. The last part of the chapter
extends this, in some detail, to meet the specific needs of the
service sector in general; and of non-profit organizations in
particular.
So far we have considered that part of marketing which deals with
the processes of finding out what the customer wants; arguably
the most important element of marketing --and the one which is
most often neglected. But knowing about customer wants is not
sufficient in itself, and so we now turn our attention to the
responses of the producer or supplier.
It is worth reiterating that the 4 Ps (Product, Price, Place and
Promotion) simply provide a convenient framework. But whatever
the framework, 'the most important contribution to the overall
marketing mix will almost certainly be the product or service
itself'. A good product might sell even if the promotion is
mediocre. A bad product will rarely obtain repeat sales, no
matter how brilliant the promotion is. Unilever developed a
toothpaste dispenser which was able to add stripes to the paste
coming out of the neck of the tube. In the USA this feature was
emphasized using the slogan `Looks like fun, cleans like crazy'.
It was a smash hit, but repeat sales were dismal --because the
`fun' only justified one purchase. In the UK, however, the
company sold the product on the basis that the stripe contained
the flouride and was an essential component --it is still going
strong. Despite the feelings of some advertising agencies, and
the echoes in popular myth, a good product or service is the
essential prerequisite to a successful marketing campaign; a fact
which is clearly recognized by most managers.
The importance of the product was demonstrated in the early days
of the market for portable PCs. Compaq, then a small start-up
company, and IBM met head on. It should have been no contest. Yet
the customers judged the Compaq product to be better, albeit only
marginally so, and eventually IBM had to withdraw its product
from the market; leaving Compaq to go on from strength to
strength.
At this stage it is worth pointing out that the product (or
service) as perceived by the customer is a much more complex
construct than is normally allowed for. 'Indeed, the most
important specification of that product or service is the
`positioning' described in chapter 6'.
For example, in the case of branded products, such as Heinz Baked
Beans, the physical product itself is submerged under layers of
image, not to say emotional involvement built up from childhood,
to which decades of advertising and promotion have contributed.
Even with industrial goods, such as computers, it is often the
intangibles which are most important. Hence IBM's philosophy of
`customer service'.
This overall combination of product, packaging and service is
often referred to as the `extended product'.
Confusion may sometimes be caused by taking too sophisticated a
view of superficial answers by consumers. As Gardner and
Levy - 1 - point out:
... the reasons people usually give for using a product are
inclined to be either strongly rationalized or related to the
product's most obvious purposes ... When such goals as these are
taken at their face value, and considered to be the end of the
matter, they lead up many blind alleys. The belief that people
are fretting over these minute differences ... results,
sometimes, in a shrill focus on product merits beyond all
proportion and sensible differentiation.
This is the reason why the more sophisticated research techniques
(such as repertory grids) have been developed to explore the
consumer's hidden motivations.
For existing products or services, the starting point is to
decide exactly what you have. As Drucker - 3 - says:
The best way to come to grips with one's business knowledge is to
look at the things the business has done well, and the things it
apparently does poorly. This is particularly revealing if other
apparently well-managed and competent businesses have had the
opposite experience.
This is not as obvious as it might at first seem. Even the
`physical' features of the brand may need to be reviewed; and the
facts book added to, because those managers (possibly including
the brand manager) who have become used to seeing the brand
perform --in the way it has always performed --may have
forgotten what other features it may potentially have.
AUDIT 7.1
Prepare a short description of the important features of your
organization's main products or services, together with the
technology that lies behind them.
Are there other features, or aspects of the technology, which are
not currently important but which might be useful in future?
The main feature of a product audit, though, is to look at the
products or services in terms of what the customer sees in them.
The brand which counts is the one that the 'customer' sees.
Some of the factors which may need to be examined in this review
or audit might be:
What is the market segment that this `brand' addresses?
Who are the existing customers?
Who are the prospective customers?
What benefits are these customers and prospective customers
seeking?
How does the product or service match up to these customer needs
and wants?
How does it compare with competitive products?
You will later find that there are other, more detailed and
sophisticated questions that will also need to be examined. But,
for the moment, the basic question, `How does the customer view
the brand?' is a good starting point.
AUDIT 7.2
Now conduct the second part of your product audit and answer the
list of questions above in terms of your organization's main
brands.
These questions could be addressed in the form of a 'benefit
analysis'. This is a more rigorous analysis of the benefits
that the product(s) offers, in terms of what the customer needs
and wants. In sales-oriented organizations it is often described
as 'feature/benefit' analysis; though this too frequently
substitutes a mechanistic, product-oriented set of supplier-
determined `benefits' to match the chosen list of product
`features'.
'The list of customer benefits must, therefore, be very
carefully compiled, preferably using sophisticated market
research, to see it from the customer's viewpoint'. The list
also needs to be clearly 'prioritized', to be ranked in
order of what the customer considers most important: otherwise
the temptation is for the supplier to concentrate on the items
where the organization can excel, regardless of the fact that
these are relatively unimportant to the customer. On the other
hand, the 'differential benefits' which the supplier can
offer, as against the competitive offerings, may be very
important; particularly if most of the other important benefits
are offered by all brands --and do not differentiate between
brands in the market. Equally, 'the benefits offered by the
organization itself' should not be ignored; it is often these
`service' and support elements, rather than the product, which
are the final influence on the customer's buying decision.
The `product' strategy, the route by which to reach your long-
term product objectives, will need to be developed specifically
for each product or service. But, in general, there are said to
be four basic product strategies for growth in volume and profit
(which is what shareholders conventionally demand):
market penetration
product development
market extension
diversification
These were originally described by Igor Ansoff; - 5 - and were
subsequently developed as the well-known `Ansoff Matrix':
Product
Present<>New
Present<>Market penetration<>Product development
Mission (market)
New<>Market development<>Diversification
The most frequently used strategy is to take the existing product
(or service) in the existing market and try to obtain improved
`penetration' (or, more accurately, an increased share) of that
market. There are two ways in which this can be achieved:
Increasing sales to existing customers
Finding new customers in the same market
In general, the first strategy means persuading users to use
more. This may be achieved by motivating them to use the product
on more occasions, perhaps by replacing an indirect competitor;
for example, inducing a house-hold to eat beans on toast an extra
time each week, instead of fish fingers. It may, on the other
hand, simply be to use the product more often without any need to
take business from competitors; as Unilever used Timotei to
promote the more regular shampooing of hair. Possibly it may be
to use more each time; promotions offering `30 per cent more
free' may have, as one objective, the intention of persuading
customers to get into the habit of using more.
The second strategy almost invariably relates to taking business
directly from competitors, increasing both penetration and market
share.
Product (or Service) Development
This involves a relatively major modification of the product or
service, such as quality, style, performance, variety and so on.
Returning to our example of the car market, the provision of
`high-performance' versions of the existing models can be used to
extend the ranges to cover additional customers. Similarly,
adding sausages to tinned baked beans will possibly cause some
existing users to increase their usage, but may also attract new
users.
To be most effective, such developments should extend the
`product' into a new segment, or to a new competitive position in
relation to the clusters of consumers.
This depends upon finding new uses for the existing product or
service, thereby taking it into entirely new markets; as Apple
did in persuading customers to use its PCs for desktop
publishing. Alternatively, this may be achieved by moving into
other countries; in this context, most export operations can be
viewed as `market extensions'.
This quantum leap, to a new product and a new market, involves
more risk, and is more normally undertaken by organizations which
find themselves in markets which have limited, often declining,
potential. One obvious example is that of the tobacco companies
which have diversified --often at considerable cost --into
areas as diverse as cosmetics and engineering. However, it can be
a positive move to extend the application of existing expertise;
as Amstrad diversified from consumer electronics to home
computing and thence to business computing. But beware of
diversification which is undertaken simply because the grass
looks greener in the new market.
Heinz, for instance, has steadily (and successfully) extended
beyond its `57 varieties' core business (which revolved around
baked beans and soups). Its `Weight Watchers' brand is now worth
more than $300m in the US. But it should be noted that, in common
with many other similarly successful diversifications, this was
built on a logical extension of the company's existing
strengths.
As already mentioned, these four basic product strategies are
often shown in a modified version of the `Ansoff Matrix' - 7 -
(figure 7.2). The four alternatives are simply the logical
combinations of the two available `positioning variables'
(products and markets).
A number of such matrices (but with different
characteristics/dimensions/variables) are used in this book,
since this is one of the favourite graphical devices adopted by
marketing academics. All they are intended to convey, however, is
a useful visual representation of the four categories to be
obtained by splitting each of two groups of variables (or
`characteristics' or `dimensions') into two further categories --
giving four possible permutations. The resulting `pigeon-hole'
matrix just shows these four resulting combinations.
(Fig 7.2 near here)
In this context, the matrix illustrates, in particular, that the
element of risk increases the further the strategy moves away
from known quantities --the existing product and the existing
market. Thus, product development (requiring, in effect, a new
product) and market extension (a new market) typically involve a
greater risk than `penetration'; and diversification (both new
product and new market) generally carries the greatest risk of
all. In his original work, - 8 - which did not use the matrix
form, Igor Ansoff stressed:
The diversification strategy stands apart from the other three.
While the latter are usually followed with the same technical,
financial, and merchandising resources which are used for the
original product line, diversification usually requires new
skills, new techniques, and new facilities. As a result it almost
invariably leads to physical and organizational changes in the
structure of the business which represent a distinct break with
past business experience.
For this reason, amongst others, most marketing activity revolves
around penetration; and the Ansoff Matrix, despite its fame, is
usually of limited value --although it does always offer a
useful reminder of the options which are open.
In a similar vein to the original Ansoff Matrix, Peter
Drucker - 10 - has identified three kinds of opportunities:
Additive
Breakthrough
Complementary
'Additive'. The `additive opportunity more fully exploits
already existing resources'. In Ansoff's terms, it is the new
product in an existing market or the existing product in a new
market. As Drucker says, `it does not change the character of the
business'.
'Breakthrough'. This typically `changes the fundamental
economic characteristics and capacity of the business'. It is the
high-risk extreme of diversification, of which Ansoff in effect
warns. This warning (which lay at the heart of Ansoff's
categorization) has, however, largely been ignored by subsequent
teachers.
'Complementary'. This is a category not separately explored
by Ansoff (although, in practice, it could possibly lie in either
of the two development quadrants, but is most likely to lie in
that of diversification). As Drucker says, `The complementary
opportunity will change the structure of the business. It offers
something new which, when combined with the present business,
results in a new total larger than the parts.' But he also
emphasizes that it `always carries considerable risk'.
AUDIT 7.3
Using the Ansoff Matrix, plot what product (or service) and
market strategies your organization is following.
What strategies do you think it ideally ought to follow? What are
your reasons for your suggestions?
The 'life-cycle' has long been a very important element of marketing theory. You should be aware, though, that its supposed universal applicability is largely a myth[1]; but an important one, which you will need to appreciate before you can dismiss it!
Its 'intuitive appeal' is based on the analogy of natural (human) lives. It, thus, suggests that any product or service moves through identifiable stages, each of which is related to the passage of time (as the product or service grows older) and each of which has different characteristics;
At this first stage of a product's life, the supplier can choose from strategies which range from 'penetration', where the supplier invests to gain the maximum share of a new market, through to 'skimming', where the maximum short term profit is derived from the 'innovation'. In either case the main task is to create awareness of the brand. In general the 'pioneer' which invests can expect to retain the highest market share; usually double the share of later entrants, even over the longer term.
As a result of awareness having been largely established, and in the light of growing competition, the emphasis at this stage may well be on promotion of the 'brand'; establishing the correct attitudes to the product. Promotion is still heavy, and suppliers often have to make further, substantial investments. In recent years, another feature of this phase has been the battle for distribution.
No product or service can grow forever; and eventually all the significant, potential uses will have been developed. The sales curve will flatten, and it will have reached maturity. The majority of products or services currently in the market place are at this stage, and much of the theory and practice of marketing revolves around this 'steady state'; building groups of loyal users, and attracting those of competitors.
Eventually the whole market may decline or other newer products may be introduced which are themselves a substitute for the established product. The product or service thus goes into a terminal decline - though this decline can last for years.
Every product or service must, almost by definition, have a life cycle. It is launched, it grows, then it dies. As such, it offers a useful 'model' to keep at the back of your mind. Indeed, if you are in the introductory or growth phases, or in that of decline, it perhaps should be at the front of your mind; for the predominant features of these phases may be those revolving around such life and death. Between these two extremes, it is salutary to have that vision of mortality on front of you.
The most important aspect of product life-cycles is, however, that to all practical intents and purposes they often do not exist! In most markets the majority of the major (dominant) brands have held their position for at least two decades. The dominant product life-cycle, that of the brand leaders which almost monopolise many markets, is therefore one of continuity!
In the most respected criticism of the product life cycle, Dhalla & Yuspeh[2] state;
"...clearly, the PLC is a dependent variable which is determined by market actions; it is not an independent variable to which companies should adapt their marketing programs. Marketing management itself can alter the shape and duration of a brand's life cycle."
Thus, the life cycle may be useful as a description, but not as a predictor;; and usually should be firmly under the control of the marketer! The important point is that in many, if not most, markets the product or brand life cycle is significantly longer than the planning cycle of the organisations involved. It, thus, offers little of practical value for most marketers. Even if the PLC exists for them, their plans will be based just upon that piece of the curve where they currently reside (most probably in the 'mature' stage); and their view of that part of it will almost certainly be 'linear', and will not encompass the whole range from growth to decline.
I have included the above section on the Product Life Cycle despite the fact that - as you no doubt detected - I think that it has little value in practice. Indeed, I believe that its use may be positively dangerous for many organisations; since it tempts managers of successful, mature brands to prematurely anticipate their move into decline. But is probably the most widely known, and taught and respected, piece of marketing theory! It is imperative, therefore, that you appreciate the problems that its use, in any form, might pose.
How, then, might you manage change?
At one extreme, seeing fractures in advance, or even recognising their implications after they have occurred, is very difficult. This is best handled by 'scanning', described in the later chapter on the 'External Environment'. Responding to them once they have been detected is perhaps best ensured by undertaking the most effective possible marketing - better than that of other organisations which might also attempt to take advantage of the fracture - and, most important of all, reacting much faster than these competitors.
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Handling the less dramatic changes which regularly occur in the stable market - and are the staple diet of most marketers - is a different matter. These are dealt with especially poorly by the PLC. The technique which has accordingly been developed, as a positive alternative to ineffective use of the PLC in this ('Mature') range, is called the 'Competitive Saw';
The principles involved are very simple: as is indicated by the chart above.
The first is quite simply that every 'stimulus' (every investment, be it an advertising or promotional campaign or a new feature added to the 'product') results, after a short delay, in an rapid improvement in 'output', raising the product or service's position (typically directly in terms of its competitive position, and indirectly in terms of sales levels).
The second is that this advantage is then steadily diluted as competitors invest in their own activities, and the performance level (the competitive advantage or sales) slowly drops until the next stimulus is applied. Because of the competitive aspect and because it largely removes variations due to seasonality etc, the measurements are usually in terms of relative share (though absolute figures may also be used).
This is a very simplified model of what actually happens, though something approaching it can be observed in practice (in the way that, for instance, advertising agencies routinely track the impact of advertising campaigns on awareness levels), which is not the case with the Product Life Cycle which it replaces. Despite its simplicity, it offers a number of significant benefits:
INTIMATIONS OF MORTALITY - it very effectively replaces the one important function of the Product Life Cycle, that of reminding managers that there will be no future if they do not look after their brands, and continue to invest in them - but it does this more directly and practically, and without the major drawbacks inherent in the PLC model.
TIMESCALING - on much the same theme, it is an ever-present reminder that you cannot neglect your brands, or stop investing in them, for too long - especially during the very extended 'maturity' phase of a successful brand
LINKAGE OF INPUTS AND OUTPUTS - it encourages, and provides a framework for, managers to actively plan what inputs are needed, when, and what the outputs will be; and what the efficiency of conversion of inputs to outputs is
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SURFACING OF INVESTMENT - it makes very clear the need for, and the results of, investment policies on brands. This becomes even more clear in the 'Stepped Saw';
This looks at the effect of major inputs, major investments (such as new products or significantly increased promotional spending). These may have the effect of raising the average level of the 'saw teeth'; though, as shown above, later neglect (or a comparably strong competitive response) can just as easily result in a step down to a lower average level.
As the above illustration shows, there are two elements to performance. One is the average level; averaged over the short timescales that normally are reported on by the Competitive Saw. This is strategically most important since it shows longer term trends (a slowly decreasing average might be hidden by the variations in the short-term saw).
The other is the pattern of the saw itself, the time intervals and the performance variation per cycle, which determines the tactical approach.
The idea of the saw should not lull you into expecting regularity. Different stimuli will have different impacts, and will be more or less efficient, so the saw will be a jagged one;
As the saw is primarily an illustration of the impact of short term investments, the main criterion will be which of the stimuli available will result in the most efficient investment pattern (which, advertising or new features say, will produce the greatest impact for the same amount of money), though a mix of stimuli will usually produce the highest efficiency overall.
The three main lessons of the competitive saw are the importance of relative performance, the time related nature of this, and the investments which lie underneath.
Adopting the long-term perspective implied by the third of these observations reveals another important implication. Thus, following the implied principle of the fixed asset, the shorter-term sawtooth maintenance pattern can be overlaid on a gradually declining trend in performance; notionally equivalent to depreciation in financial accounting. Thus, over time there may be a slow drift away from the ideal position - as the customers' needs and wants change and/or competitive positioning improves. Your own response to this may take two forms. The first, and perhaps the most effective, is that of 'dynamic repositioning'. The need for change is regularly tracked and the brand's position readjusted - in much the same way that an autopilot's feedback mechanisms ensure that an airliner follows the correct flightpath. The emphasis here is on the dynamic approach to (current) change - where most of marketing theory revolves around decisions based upon static (historic) positions.
If such dynamic repositioning is not possible, perhaps because the necessary product changes come in discrete steps, then periodic readjustments may be needed. This is where the concept of depreciation is especially valuable. Thus, it allows the build-up of reserves to cover the significant costs of such repositioning exercises.
The investment in a successful brand needs to be maintained both in the short term, by regular marketing programmes funded from annual budgets, and in the longer term, by less frequent major investments (in repositioning and relaunching) which require reserves provided by a depreciation fund; Marketing Depreciation.
Encouraged by PLC theory, which seems to emphasises the futility of long term investment, the long-term asset investment aspect of brand performance is largely ignored by traditional marketing theory. We believe that, on the contrary, it should represent the main element of marketing strategy - and (in view of the dangers it poses for the unwary) the PLC should be dropped from the marketers vocabulary!
Most organizations have more than one product or service, and
many operate in several markets. In the context of the product
life-cycle, this theoretically confers the advantage that the various products,
the `product portfolio', can be managed so that they are not all
at the same phase in their life-cycles; indeed, ideally, so that
they are evenly spread throughout it. This allows for the most
efficient use of both cash and manpower resources.
This simple example shows some of the benefits that can be
obtained from a well-managed product portfolio. The current
investment in C, which is in the growth phase, is covered by the
profits being generated by the earlier product, B, which is at
maturity. This had earlier been funded by A, the decline of which
is now being balanced by the newer products.
An organization looking for growth can introduce new products or
services which it hopes will be bigger sellers than those which
they succeed. Perhaps an easier, and more likely, route is to
introduce more products or services, of equal size, than are
being lost; thus increasing the size of the portfolio, and with
it the volume of sales.
On the other hand, if this expansion is undertaken too rapidly
many of these brands --at the beginning of their life-cycles --
will be hungrily demanding investment; and even the earliest of
them will be unlikely to generate profits fast enough to support
the numbers of later launches. Therefore, the producer will have
to find a source of funds until his investments pay off.
As a visual tool for managing portfolios, the Boston Consulting
Group, a leading management consultancy, developed its well-known
matrix. For each product or service the 'area' of the circle
represents the value of its sales. The Boston Matrix thus offers
a very useful `map' of the organization's product (or service)
strengths and weaknesses (at least in terms of current
profitability) as well as the likely cashflows.
The need which prompted this idea was, indeed, that of managing
cash-flow. It was reasoned that one of the main indicators of
cash generation was relative market share, and one which pointed
to cash usage was that of market growth rate.
This indicates likely cash generation, because the higher the
share the more cash will be generated. As a result of `economies
of scale' (a basic assumption of the Boston Matrix), it is
assumed that these earnings will grow faster the higher the
share. The exact measure is the brand's share relative to its
largest competitor. Thus, if the brand had a share of 20 per
cent, and the largest competitor had the same, the ratio would
be 1:1. If the largest competitor had a share of 60 per cent,
however, the ratio would be 1:3, implying that the organization's
brand was in a relatively weak position. If the largest
competitor only had a share of 5 per cent, the ratio would be
4:1, implying that the brand owned was in a relatively strong
position, which might be reflected in profits and cashflow. If
you are using this technique in practice, it should be noted that
this scale is logarithmic, not linear.
On the other hand, exactly what is a high relative share is a
matter of some debate. The best evidence - 37 - is that the
most stable position (at least in FMCG markets) is for the brand
leader to have a share double that of the second brand, and
treble that of the third. Brand leaders in this position tend to
be very stable --and profitable; the Rule of 123.
The reason for choosing relative market share, rather than just
profits, is that it carries more information than just cashflow.
It shows where the brand is positioned against its main
competitors, and indicates where it might be
likely to go in the future. It can also show what type of
marketing activities might be expected to be effective.
Rapidly growing brands, in rapidly growing markets, are what
organizations strive for; but, as we have seen, the penalty is
that they are usually net cash users --they require investment.
The reason for this is often because the growth is being `bought'
by the high investment, in the reasonable expectation that a high
market share will eventually turn into a sound investment in
future profits. The theory behind the matrix assumes, therefore,
that a higher growth rate is indicative of accompanying demands
on investment. The cut-off point is usually chosen as 10 per cent
per annum. Determining this cut-off point, the rate above which
the growth is deemed to be significant (and likely to lead to
extra demands on cash) is a critical requirement of the
technique; and one that, again, makes the use of the Boston
Matrix problematical in some product areas. What is more, the
evidence, - 38 - from FMCG markets at least, is that the most
typical pattern is of very low growth, less than 1 per cent per
annum. This is outside the range normally considered in Boston
Matrix work, which may make application of this form of analysis
unworkable in many markets.
Where it can be applied, however, the market growth rate says
more about the brand position than just its cashflow. It is a
good indicator of that market's strength, of its future potential
(of its `maturity' in terms of the market life-cycle), and also
of its attractiveness to future competitors.
The development of the theory is that, in common with other four-
quadrant matrices (such as the Ansoff Matrix, which we have
already met), products or services lying in each of the quadrants
will behave differently, and require different marketing
strategies. As is often the case with such techniques, however,
the quadrants have since been given rather exotic names
(presumably to improve their memorability --though in practice
causing considerable confusion):
'Stars' (high market share, high market growth rate). These
are probably relatively new products in the growth phase. Because
they have high market shares, however, they may be generating
sufficient gross profits to cover their current investment needs.
Usually the predominant strategy is to grow them to the next
stage, the `cash cow', where the most profit is made.
'Cash cow' (high market share, low market growth rate). Here
the brand has maintained its high share, and hence cash
generation capabilities, but the market life-cycle has now moved
to maturity and the growth is slow (as we have seen,
conventionally below 10 per cent per annum), if at all.
Investment is not required to any significant extent, because
there is little need to recruit new customers and almost no
demand for new plant. A `cash cow' is, therefore, the main
generator of cash of the profit which will cover the on-going
investment in new products.
'Problem child' (often called the `question mark' --low
market share, high market growth rate). This is a product,
typically a recently launched one, which has not yet built its
market share. As it does not yet have the share to deliver
reasonable profits, it will almost certainly be a net user of
cash; possibly substantially so. Such `problem children' are
often where most of the cashflow generated by the `cash cows'
transfers to, but the organization hopes that this will be a good
investment; as the market is attractive and the `problem child'
could eventually become a winner, as one of its future `cash
cows'.
'Dog' (low market share, low market growth rate). A product
here has little or no prospects. It may not yet be making a loss,
unless it is demanding a disproportionate use of overheads, but
it will probably do so in the not too distant future. Hence it
too should have its future regularly reviewed, so that it can be
discontinued as soon as it becomes a burden.
A basic, but hidden, assumption behind the Boston Matrix is the
product life-cycle. Thus, following the PLC, successful products
will steadily process around the quadrants in anticlockwise
fashion; starting as problem children, then moving through stars
to cash cows, where hopefully they will dwell for some time, and
then on to dogs and eventually extinction. Unsuccessful ones will
never become cash cows, and will probably move from problem
children directly to dogs, if they are allowed to survive for
that long.
One of the most informative uses of the Boston Matrix is to plot
competitors' positions as well as your own. This gives a valuable
insight into their position (especially their cash position), as
well as indicating how they may behave in future and showing the
relative strengths and weaknesses of your own brands.
AUDIT 7.6
Can you identify at least one `star', `problem child', `cash cow'
and `dog' from among your organization's product (or service)
range? Plot them on a Boston Matrix. Predict what will happen to
each in five years' time.
Now apply the same principles to all the major products of your
organization (or at least, say, the top products). How well
balanced does the `port-folio' look? What does this imply for
future development of the organization? What changes are needed
to ensure a more stable future growth?
Criticism of the Boston Matrix approach
As originally practised by the Boston Consulting Group, the
matrix was undoubtedly a useful tool, in those few situations where
it could be applied, for graphically illustrating cashflows. If
used with this degree of sophistication its use would still be
valid. However, later practitioners have tended to over-simplify
its messages. In particular, the later application of the names
(problem children, stars, cash cows and dogs) has tended to
overshadow all else --and is often what most students, and
practitioners, remember.
This is unfortunate, since such simplistic use contains at least
two major problems:
'Minority applicability'. The cashflow techniques are only
applicable to a very limited number of markets (where growth is
relatively high, and a definite pattern of product life-cycles
can be observed, such as that of ethical pharmaceuticals). In the
majority of markets, use may give misleading results.
'Milking cash cows'. Perhaps the worst implication of the
later developments is that the (brand leader) cash cows should be
milked to fund new brands. This is not what research into the
FMCG markets - 39 - has shown to be the case. The brand
leader's position is the one, above all, to be defended, not
least since brands in this position will probably outperform any
number of newly launched brands. Such brand leaders will, of
course, generate large cash flows; but they should not be
`milked' to such an extent that their position is jeopardized. In
any case, the chance of the new brands achieving similar brand
leadership may be slim --certainly far less than the popular
perception of the Boston Matrix would imply.
As with most marketing techniques there are a number of
alternative offerings vying with the Boston Matrix; although this
appears to be the most widely used (or at least most widely
taught --and then probably 'not' used). The next most
widely reported technique is that developed by McKinsey and
General Electric; which is a three-cell by three-cell matrix --
using the dimensions of `industry attractiveness' and `business
strengths'. This approaches some of the same issues as the Boston
Matrix, but from a different direction and in a more complex way
(which may be why it is used less, or is at least less widely
taught).
Boston Consulting Group's Advantage Matrix
The Boston Consulting Group subsequently developed another, much
less widely reported, matrix which approached the `economies of
scale' decision rather more directly. This is their `Advantage
Matrix' (figure 7.14) which takes as its `axes' the two
contrasting `alternatives', `economies of scale' (here shown as
`potential size of advantage') against `differentiation' (here
shown as `number of approaches to achieving advantage'). In
essence, the former category covers the approach described in the
preceding section, while the latter represents the approach
(described by Michael Porter, - 48 - for instance, as well as
in chapter 6 of this book) of `differentiating' products so that
they do not compete head-on with their competitors. The result is
the four quadrants shown in figure 7.14.
(Fig 7.14 near here)
'Volume business'. In this case there are considerable
economies of scale, but few opportunities for differentiation.
This is the classic situation in which organizations strive for
economies of scale by becoming the volume, and hence cost,
leader. Examples are volume cars and consumer electronics.
'Stalemated business'. Here there is neither the opportunity
for differentiation nor economies of scale; examples are textiles
and shipbuilding. The main means of competition, therefore, has
been reducing the `factor costs' (mainly those of labour) by
moving to locations where these costs are lower, even to
different countries in the developing world.
'Specialized business'. These businesses gain benefits from
both economies of scale and differentiation (often characterized
by experience effects in their own, differentiated, segment);
examples being branded foods and cosmetics. The main strategies
are focus and segment leadership.
'Fragmented business'. These organizations also gain benefit
from differentiation, particularly in the services sector, but
little from economies of scale; examples being restaurants and
job-shop engineering. Competition may be minimized by innovatory
differentiation.
Apart from the fact that it has not suffered as badly at the
hands of later popularizers, the particular advantage of this
matrix is that it highlights the assumptions that are hidden in
the Boston Matrix. It may also give a better feel for the optimum
strategy and the likely profits, but it does not give any feel
for the cashflow, which was the main feature of the original
matrix.
The strategies that can be developed on the basis of this matrix
are illustrated by Rowe 'et al'. - 49 - (figure 7.15).
ACTIVITY 7.2
The Boston Matrices for two organizations are shown above. Each
has eight products. In the case of company A they are evenly
spread around all four quadrants. In the case of company B they
are concentrated only in the `cash cow' quadrant.
Which organization do you think is better placed?
Having now completed our description of two of the most elegant
and widely taught marketing techniques, the Ansoff and Boston
Matrices, it is worth issuing a further warning.
'Marketing techniques should be the servants of the marketer.
They should be used as an aid to the creative decision-making
processes, and can never be a substitute for them. Although they
may frequently offer helpful insights, they almost never offer
definitive answers in themselves'.
There is sometimes a desire to look for simple solutions to what
are usually complex marketing problems; and, in particular, to look
for solutions which incorporate the expertise of acknowledged
masters in the field. These desires are not infrequently
stimulated by the service providers who are offering such
marketing panaceas.
The temptations for the marketer can be severe when the
techniques are as elegant, and in their own way powerful, as
those we have just looked at. Indeed, they do frequently offer a
'very' valuable insight; into the issues of portfolio
planning, for example.
In all cases, however, the wise marketer will recognize that such
techniques usually offer just one perspective on the problem. The
marketer should always consider other perspectives; which are
almost invariably available --even the Boston Consulting Group
has several. In any case, as we have seen, each of these tools
typically has a limited range of situations in which it may be
appropriately applied.
The experienced marketer will approach each new situation afresh.
In many ways a blank sheet of paper is the most powerful
analytical tool. Only when all the options have been examined,
should it be decided which of the specific tools available, if
any, is most suitable. That marketer will then use these chosen
tools in the most appropriate manner, as part of the overall
approach. 'There is no one tool that offers a universal answer
to all marketing problems'. Undue attention to any one
individual tool can distract the marketer from the range of
other factors which may apply. The myopia this can cause is
particularly well illustrated by the dangers inherent in ill-
informed use of the Boston Matrix. The apparent implication of
its four-quadrant form is that there should be balance of
products or services across all four quadrants; and that is,
indeed, the main message that it is intended to convey. Thus,
money must be diverted from `cash cows' to fund the `stars' of
the future, since `cash cows' will inevitably decline to become
`dogs'. There is an almost mesmeric inevitability about the whole
process. It focuses attention, and funding, on to the `stars'. It
presumes, and almost demands, that `cash cows' will turn into
`dogs'.
The reality is that it is only the `cash cows' that are really
important --all the other elements are supporting actors. It is
a foolish vendor who diverts funds from a `cash cow' when these
are needed to extend the life of that `product'. Although it is
necessary to recognize a `dog' when it appears (at least before
it bites you) it would be foolish in the extreme to create one in
order to balance up the picture. The vendor, who has most of his
(or her) products in the `cash cow' quadrant, should consider
himself (or herself) fortunate indeed, and an excellent marketer;
although he or she might also consider creating a few stars as an
insurance policy against unexpected future developments and,
perhaps, to add some extra growth.
Returning to activity 7.2, the chances are that 80 per cent of
you would have chosen company A, because of the evenly balanced
spread of products. Even the 20 per cent of you that chose
company B would have probably felt nervous about that choice.
Yet, as you should now realize, the clear choice has to be
company B. Think of it in terms of the eight cash cows. Which two
would you want to downgrade to become only stars, which to
problem children --and which would you want to destroy by making
them dogs? Of course, the question over-simplified the position.
It did not specify the size of the brands (a star the same size
as a cash cow might be preferable, since it will presumably
grow).
The real lesson is that the Boston Matrix is useful as a tool to
do a certain job. It should, for example, remind the owners of
company B to invest in some new products, so that they may
become stars and then cash cows, to underwrite an uncertain
future. On the other hand, it should not distract attention from
the much more important task of maintaining the cash cows so that
they 'do not' turn into dogs; and the money stripped out to
fund new developments should never be at the expense of the
future of those existing cash cows.
Igor Ansoff, - 51 - almost alone amongst writers of textbooks,
issues this warning about the need to understand what is being
measured:
... before the BCG matrix is used, it is essential to make sure
that the future prospects are adequately measured by volume
growth and the firm's relative competitive position by its
relative market share. When the conditions are right, the BCG has
the advantage of simplicity ...
One of the most important marketing papers ever written was that
on `Marketing Myopia' by Theodore Levitt. - 52 - Some
commentators have even gone as far as to suggest that its
publication marked the beginning of the modern marketing movement
in general. Its theme was that the vision of most organizations
was constricted in terms of what they, too narrowly, saw as the
business they were in. It exhorted CEOs to re-examine their
corporate vision; and redefine their markets in terms of wider
perspectives.
It was successful in its impact because it was, as with all of
Levitt's work, essentially practical and pragmatic.
Organizations found that they had been missing opportunities
which were plain to see once they adopted the wider view. The
impact of the paper was indeed dramatic. The oil companies (which
represented one of his main examples in the paper) redefined
their business as energy rather than just petroleum; although
Shell, which embarked upon an investment programme in nuclear
power, subsequently regretted this course of action --even good
ideas can sometimes lead to unforeseen, and costly, problems.
Indeed, this point can also be used to illustrate the dangers
inherent in any `management fashion'. Peter Spillard - 53 -
comments, rather critically, that:
Following the lead given by Levitt in his over-popular writings
on myopia of one kind or another, marketers faced with market
shifts have been only too ready to respond by chasing them
uncontrollably wherever they might lead. They have ascribed
objectives to their organizations 'in toto' which they
probably would not have espoused had they thought about them
carefully.
In the wider context, though, Levitt's concept of myopia is
invaluable. Even now, too much of marketing is constricted by the
narrow vision of marketers using just the few tools they have
bothered to learn. The world is a large place; and cannot be
limited by a few crude rules-of-thumb --no matter how expert, or
charismatic, their inventors!
AUDIT 7.7
This will be a rather unfair set of questions; but it does
reflect the problems caused by the apparent strength of the PLC
and Boston Matrix theories.
Look at your answers to the previous three audits (7.4--6). In
the light of the last two sections (which indicted uncritical
application of these theories) how would you now change your
answers? What does this say about the influence of management
theory?
In the light of this new `realism', what would you now propose
for your organization?
There are other dimensions on which the `product' portfolio,
`the 'product mix'', can be balanced. Classically, the two
most important are:
'Width'. The number of different (independent and distinct)
`product' lines carried; which is a measure of the number of
different 'markets' addressed. Thus, Unilever has a very
wide range of product types (covering Birds Eye frozen foods as
well as Persil detergent) but Coca-Cola for many years had a very
narrow range (based on just the one product).
