Relationship Between BCG Matrix and Product life Cycle (PLC)

 Relationship Between BCG Matrix and Product life Cycle (PLC)

BCG Matrix Created by the Boston Consulting Group, the BCG matrix – also known as the Boston or growth share matrix – provides a strategy for analyzing products according to growth and relative market share. The BCG model has been used since 1968 to help companies gain insights on what products best help them capitalize on market share growth opportunities and give them a competitive advantage.

In this four-quadrant BCG matrix template, market share is shown on the horizontal line (low left, high right) and growth rate is found along the vertical line (low bottom, high top). The four quadrants are designated Stars (upper left), Question Marks (upper right), Cash Cows (lower left) and Dogs (lower right).

Place each of your products in the appropriate box based on where they rank in market share and growth. Where you choose to set the dividing line between each quadrant depends in part on how your company compares to the competition.

Here is a breakdown of each BCG matrix quadrant:

• Stars: The business units or products that have the best market share and generate the most cash are considered stars. Monopolies and first-to-market products are frequently termed stars. However, because of their high growth rate, stars consume large amounts of cash. This generally results in the same amount of money coming in that is going out. Stars can eventually become cash cows if they sustain their success until a time when a high growth market slows down. A key tenet of BCG strategy for growth is for companies to invest in stars.
  
  
• Cash Cows: A cash cow is a market leader that generates more cash than it consumes. Cash cows are business units or products that have a high market share but low growth prospects. According to NetMBA, cash cows provide the cash required to turn a question mark into a market leader, cover the administrative costs of the company, fund research and development, service the corporate debt, and pay dividends to shareholders. Companies are advised to invest in cash cows to maintain the current level of productivity or to "milk" the gains passively.
  
  
• Dogs: Dogs, or pets as they are sometimes referred to, are units or products that have both a low market share and a low growth rate. They frequently break even, neither earning nor consuming a great deal of cash. Dogs are generally considered cash traps because businesses have money tied up in them, even though they are bringing back basically nothing in return. These business units are prime candidates for divestiture.
  
  
• Question Marks: These parts of a business have high growth prospects but a low market share. They consume a lot of cash but bring little in return. In the end, question marks lose money. However, since these business units are growing rapidly, they have the potential to turn into stars in a high growth market. Companies are advised to invest in question marks if the product has the potential for growth, or to sell if it does not. 

Product life Cycle (PLC) “The life-cycle of a product has many points of similarity with the human life cycle; the product it born, grown lustily, attains dynamic maturity, then enters its declining years.”

Stages in Product Life Cycle:

Stages	Characteristics
1. Market introduction stage	1.costs are very high 2.slow sales volumes to start 3.little or no competition 4.demand has to be created 5.customers have to be prompted to try the product 6.makes no money at this stage
2. Growth stage	1.costs reduced due to economies of scale 2.sales volume increases significantly 3.profitability begins to rise 4.public awareness increases 5.competition begins to increase with a few new players in establishing market 6.increased competition leads to price decreases
3. Maturity stage	1.costs are lowered as a result of production volumes increasing and experience curve effects 2.sales volume peaks and market saturation is reached 3.increase in competitors entering the market 4.prices tend to drop due to the proliferation of competing products 5.brand differentiation and feature diversification is emphasized to maintain or increase market share 6.Industrial profits go down
4. Saturation and decline stage	1.costs become counter-optimal 2.sales volume decline 3.prices, profitability diminish 4.profit becomes more a challenge of production/distribution efficiency than increased sales

 

The concept of the product life cycle is fundamental to understanding how product portfolios will evolve over time through the quadrants of the BCG matrix.

Conceptually, the product life cycle, suggests that most product portfolios will categories will progress through different stages of rates of growth – from introduction to growth to maturity and then to eventual decline.

 Introduction is very early growth, while a mature market should also have a small level of growth, usually almost in line with increases in GDP.

This second diagram highlights the typical product life-cycle pattern – however, there are variations of this pattern for fads (short-term products), style and fashion products as well as products that are essentially reinvented for the consumer and then go from maturity into another period of growth. However, for the purposes of understanding the BCG matrix, we will concentrate on the typical product life-cycle curve only.

As you can see, stars and question marks only occur in the introduction and growth stages. While cash cows and dogs exist during times of maturity and decline. Therefore, new product portfolios categories will start off as either a star or as a question mark and then in the longer term will progress downwards (to either a cash cow or a dog).

In today’s market, many new products and technology breakthroughs are being adopted by the market much faster than previously, which then indicates the period of time that a product portfolio will remain as a star or as a possible question mark is decreasing.

Sources : www.marketingstudyguide.com