Marketing tools for Business #1
One of the things we often get asked is “why do you use theoretical tools when working with business owners – can’t we be a bit more practical?
Well we’re going to look at a number of techniques that could be described as “theoretical” but which are immensely useful at a practical level in even small businesses.
We’ll start with #1 – the Boston Matrix!
Also called the BCG Matrix (after its creators the Boston Consulting Group), it provides a useful way of screening the opportunities open to you, and helps you think about where you can best allocate your resources to maximise profit in the future.
However, the Boston Matrix is also a good tool for thinking about where to apply other finite resources: people, time and equipment.
Let’s take a look at the model…
To understand the Boston Matrix, you need to understand how market share and market growth interrelate.
Market share is the percentage of the total market that is being serviced by your company, measured either in revenue terms or unit volume terms. The higher your market share, the higher the proportion of the market you control.
The Boston Matrix assumes that if you enjoy a high market share you will be making money. (This assumption is based on the idea that you will have been in the market long enough to have learned how to be profitable, and will be enjoying scale economies that give you an advantage).
The question it asks is, “Should you be investing additional resources into a particular product line just because it is making you money?” The answer is, “not necessarily.”
This is where market growth comes into play. Market growth is used as a measure of a market’s attractiveness. Markets experiencing high growth are ones where the total market is expanding, meaning that it’s relatively easy for businesses to grow their profits, even if their market share remains static.
By contrast, competition in low growth markets is often bitter, and while you might have high market share now, it may be hard to retain that market share without aggressive discounting. This makes low growth markets less attractive.
Understanding the Matrix
The Boston Matrix categorises product (or service) opportunities into four groups, shown on axes of Market Growth and Market
What do they mean?
Dogs: Low Market Share / Low Market Growth
In these areas, your market presence is weak, so it’s going to take a lot of hard work to get noticed. You won’t enjoy the scale economies of the larger players, so it’s going to be difficult to make a profit. Because market growth is low, it’s going to take a lot of hard work to improve the situation.
Cash Cows: High Market Share / Low Market Growth
Here, you’re well-established, so it’s easier to get attention and exploit new opportunities. Because the market has stopped growing, it’s only worth expending a certain amount of effort as your opportunities are limited.
Stars: High Market Share / High Market Growth
This is a good place! You are well-established, and growth is exciting! There should be some strong opportunities here, and you should work hard to realise them.
Question Marks (or Problem Children): Low Market Share / High Market Growth
These are the opportunities that no one knows what to do with. They aren’t generating much revenue right now because you don’t have a large market share. But, they are in high growth markets so the potential to make money is there.
Question Marks might become Stars and eventual Cash Cows, but they could just as easily absorb effort with little return. These opportunities need serious thought as to whether increased investment is the right way to go.
So how do we Use the Tool?
1 – Plot your own products on the worksheet according to their market share and market growth.
2 – Classify them into one of the four categories. If a product seems to fall right on one of the lines, take a hard look at the situation and rely on past performance to help you decide which side you will place it – the positions are not set in tablets of stone – they merely offer a way of looking at your products and making the best plan for the future.
3 – Decide what you will do with each product/product line. There are typically four different strategies to apply:
- Build Market Share: Make further investments (for example, to maintain Star status, or to turn a Question Mark into a Star).
- Hold: Maintain the status quo (do nothing).
- Harvest: Reduce the investment (enjoy positive cash flow and maximise profits from a Star or a Cash Cow).
- Divest: For example, get rid of the Dogs, and use the capital you receive to invest in Stars and Question Marks.
If you operate in a smaller business, you might like to substitute “Professional Skills” for Market Share – thus allowing you to plot your abilities and make sure you leverage your most valuable resource in the best way!
The Boston Matrix is an effective tool for quickly assessing the options open to you, both on a corporate and personal basis.
With its easily understood classification into Dogs, Cash Cows, Question Marks and Stars, it helps you quickly and simply screen the opportunities open to you – and identify where best to invest the finite amount of money, time, and effort you have available.
Why not give it a try?