Question

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5 Identify and explain fully the 4 Growth Market Product Strategies. 6. Identify and explain fully the BCG Matrix

Answer 1

1. Four market product growth matrix are as follows:-

i) Market Penetration Strategy: Existing Products + Existing Markets = Low Risk

The Market Penetration Strategy creates growth by focusing on introducing current products to existing markets. In such instances, customers may be aware of a product but for some reason are not purchasing it. This strategy is typically used to achieve one or more of the following objectives.

• Increasing or growing the market share of current products with pricing strategies, promotions, advertising and an increase in sales efforts
• Securing dominance of growth markets by identifying which markets offer the best prospects for existing products
• Driving competitors out of a mature market with aggressive pricing and promotional campaigns
• Increasing usage of a product by existing customers through special offers and loyalty schemes

ii) Market Development Strategy: Existing Products + New Markets = Some Risk

The Market Development Strategy creates growth through the introduction of current products to new markets. This strategy is used when a company has identified markets that were previously unidentified or when it wants to expand its market reach. Here too, there are a number of tactics to enter and develop a new market for existing products.

• Focus can be turned to new and untapped geographical areas
• New pricing procedures can be used to attract new target audiences
• New distribution channels can be created to offer products in new ways and to new customers

iii) Product Development Strategy: New Products + Existing Markets = Some Risk

The Product Development Strategy is a growth tactic used when a company introduces new products into existing markets. A company would typically use this approach when current products are no longer selling. New competencies and skills may be required by the company to successfully develop products.

This strategy is likely to be more expensive than the market focused tactics and requires more time. Emphasis needs to be placed on a detailed analysis of customer needs, research and development, and early introduction to ensure products are first to market. The company can use the following methods to stimulate growth.

• Adding new features to existing products
• Innovative and new technologies can be added to products or used to improve products

iv) Diversification Strategy: New Products + New Markets = High Risk

The Diversification Strategy is used when new products are introduced to new markets. Diversification is the most risky of all the approaches. This strategy requires the highest amount of investment of both time and resources.

While this approach is likely to be the most costly, diversification offers a company security and an advantage should it suffer in one sector of the business because it can then rely on another. Ansoff reinforces that this strategy will require the company to acquire new skills, techniques and possibly facilities. Good feasibility studies and research are key to ensure a winning approach.

There are three diversification strategies that an organisation can consider: concentric diversification, horizontal diversification, and conglomerate diversification.

• Concentric Diversification – leveraging a company’s core technical know-how to diversify its current products into new markets
• Horizontal Diversification – the introduction of products that are unrelated to a company’s core products to existing markets
• Conglomerate Diversification – the purchasing of another company in order to diversify.

2. BCG Matrix: The Boston Consulting group’s product portfolio matrix (BCG matrix) is designed to help with long-term strategic planning, to help a business consider growth opportunities by reviewing its portfolio of products to decide where to invest, to discontinue or develop products. It's also known as the Growth/Share Matrix.

The Matrix is divided into 4 quadrants based on an analysis of market growth and relative market share, as shown in the diagram below.

Stars. Stars operate in high growth industries and maintain high market share. Stars are both cash generators and cash users. They are the primary units in which the company should invest its money, because stars are expected to become cash cows and generate positive cash flows. Yet, not all stars become cash flows. This is especially true in rapidly changing industries, where new innovative products can soon be outcompeted by new technological advancements, so a star instead of becoming a cash cow, becomes a dog.
Strategic choices: Vertical integration, horizontal integration, market penetration, market development, product development

Cash cows. Cash cows are the most profitable brands and should be “milked” to provide as much cash as possible. The cash gained from “cows” should be invested into stars to support their further growth. According to growth-share matrix, corporates should not invest into cash cows to induce growth but only to support them so they can maintain their current market share. Again, this is not always the truth. Cash cows are usually large corporations or SBUs that are capable of innovating new products or processes, which may become new stars. If there would be no support for cash cows, they would not be capable of such innovations.
Strategic choices: Product development, diversification, divestiture, retrenchment

Question marks. Question marks are the brands that require much closer consideration. They hold low market share in fast growing markets consuming large amount of cash and incurring losses. It has potential to gain market share and become a star, which would later become cash cow. Question marks do not always succeed and even after large amount of investments they struggle to gain market share and eventually become dogs. Therefore, they require very close consideration to decide if they are worth investing in or not.
Strategic choices: Market penetration, market development, product development, divestiture

Dogs. Dogs hold low market share compared to competitors and operate in a slowly growing market. In general, they are not worth investing in because they generate low or negative cash returns. But this is not always the truth. Some dogs may be profitable for long period of time, they may provide synergies for other brands or SBUs or simple act as a defense to counter competitors moves. Therefore, it is always important to perform deeper analysis of each brand or SBU to make sure they are not worth investing in or have to be divested.
Strategic choices: Retrenchment, divestiture, liquidation

Conclusion:- BCG matrix quadrants are simplified versions of the reality and cannot be applied blindly. They can help as general investment guidelines but should not change strategic thinking. Business should rely on management judgement, business unit strengths and weaknesses and external environment factors to make more reasonable investment decisions.