The Boston Matrix
Your current cash-cows may seem obvious to you now, but what about tomorrow? A popular model of business and product portfolio management, The Boston Matrix helps businesses to create and maintain profitable products.
Also known as the ‘Growth/Share Matrix’, this framework was created for the Boston Consulting Group by Bruce Henderson in 1968. Using the system, business managers are well-placed to identify important market changes which will usually help them to maintain future profitability.
The matrix uses graphical representations of a company’s products and services in an effort to demonstrate which of its offerings should be kept, sold, or requires further investment.
Construction of the Matrix
Remember that this tool makes a series of key assumptions:
- Investment in marketing can increase market share
- Market share gains lead to cash surpluses
- Cash surpluses are generated when the product is in the maturity stage of its product life cycle
- The best opportunity to build a dominant market position is during the growth phase
The matrix divides products and services into four quadrants. Managers must assess each of their products and place them into the appropriate quadrant.
The Quadrants of the Boston Matrix
Products in high growth markets with a high market share. They are generally considered market leading products and require substantial investment to sustain growth and retain their position. These products will generate income due to the strength they have in the market, but can quickly become Cash Cows if market growth begins to decline.
Products in low growth markets with high market share. They are mature, successful products that require the least investment because competitive pressure has subsided. Cash cows must be managed for continued profit in order to generate the strong cash flows that the company can then use to invest in its Star products.
Products in high growth markets with a low market share. These products have potential but may require substantial investment to grow market share at the expense of larger competitors. Such products can prove quite tricky to manage, and so are often referred to as the ‘Problem Child’. Managers need to study its competitors and consider what they might be doing wrong and where investment might be necessary.
Products with a weak market share in an unattractive, low growth market. These products are likely to be making a loss or a very low profit and, therefore, are rarely worth investing in. The management must consider whether the investment that goes into keeping these products alive could instead be spent on increasing the profitability of another product.
Using the Matrix to Strategise
The Boston matrix helps businesses to understand where each of their products stands and allows them to evaluate these objectively. There are a handful of potential strategies that a business can follow based on the results of their matrix analysis. These include:
- Build – Increase investment in a product in order to increase market share (e.g. to push a Question Mark product into a Star.)
- Hold – Hold a product in its current quadrant if a business cannot afford to invest further
- Harvest – Reduce investment in order to take out the maximum cash flow from a product (e.g. when trying to increase the profitability of a Cash Cow).
- Divest – Release the amount of money trapped in the business (e.g. terminate the production of a Dog product)
Effective Use of the Matrix
A business should aim to have products in every quadrant in order to achieve a balanced portfolio of products, maintain a healthy cash flow and secure the future of the business. Remember that the market moves quickly and businesses are advised to continuously analyse their offerings using this tool as well as others, such as the Ansoff Matrix. Having a handful of Question Mark products readies a business to quickly act on the next trend; Cash Cows need to be milked efficiently owing to the fact that they can rapidly fall out of favour.
The Boston Matrix isn’t suitable for every business. Some companies don’t have a wide range of products and, therefore, cannot fill each quadrant. Other companies struggle to achieve the steady movement of products among the quadrants as they progress through each stage of their product life cycles.
Consultants might advocate other business tools that offer more categorisation options and don’t measure products according to market share. However, applying alternative frameworks and then comparing the results can reveal hidden insights that might generate increased growth for a business.