Using the BCG matrix
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Using the BCG matrix leads to a range of strategic options, which have been summarised in marketing literature through the use of agricultural analogies. These strategic approaches include:
- Sow: heavy investment in research and development and in significant promotion to raise customer awareness.
- Nurture: maintain heavy investment to develop greater market share and to expand distribution into new markets.
- Harvest: using healthy cash flows to fund the development of other products in the product portfolio.
- Plough or divest: either stopping sales or production of the product or selling the product to another business.
These approaches can then be applied to products in the four quadrants of the BCG matrix.
- Question marks: The likely strategic approaches are to sow or plough (divest). If research indicates that the product has been received well by the market and gaining customer loyalty, cash may be invested to increase market share and distribution networks. The firm may seek new markets and/or distribution channels. These Question Marks are, therefore, high cash users.
However, if sales are stagnant and the product does not seem to be satisfying customers, the firm may decide to pull the plug on the product altogether before it drains the finances of the firm further. Alternatively, if the product has a future, but the firm cannot, or does not want to make the required investment it may choose to sell the patent, brand name or design to another firm.
- Stars: Stars have the potential to become Cash Cows, but require further investment to gain further market share. Firms will nurture these products through expenditure on marketing initiatives such as advertising campaigns, joint ventures with other firms and penetrating new markets. Revenues are high, but so are costs.
- Cash Cows: Cash cows have high market share and customer loyalty. Sales are high, and there is less marketing support required because customers have a good understanding of the product and are often loyal. The high sales provide significant economies of scale so average unit costs are relatively low. Profit margins, as a result, are likely to be high and the product is a major cash generator. These funds can be harvested to fund investment into research and development and question marks.
Cash cows may remain in the maturity stage for many years but eventually they will begin to decline. The firm will have to decide at that stage, whether to introduce extension strategies. These strategies may be expensive
- Dogs: Sales revenues from Dogs tend to be low, although cash expenditure may be low as well, making them essentially cash neutral. However, revenues may become so low that the product is making losses and the firm may be wise to plough it - in other words to drop it completely from their portfolio. If there is some value left in the product the firm may seek to sell the rights to it to another firm or at least sell some of the assets used in the production process, such as tooling and equipment. This process is known as divestment.