Page 634 - Encyclopedia of Business and Finance

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Product Mix

2. Low opportunity but a strong current market posi- opportunity areas (stars or problem children).
tion will generally result in the company’s attempt- Strategies for cash cows should be designed to sus-
ing to maintain its position to ensure current tain current market share rather than to expand it.
profitability. An expansion strategy would require additional
3. High opportunity but a lack of ability to exploit it investment, thus decreasing the existing positive
results in either (a) attempting to acquire the neces- cash flow.
sary resources or (b) deciding not to further pursue • Problem children: These products have low relative
opportunity in these markets. market share but are in a high-growth situation.
4. Low opportunity and a weak market position will They are called “problem children” because their
result in either (a) avoiding these markets or (b) eventual direction is not yet clear. The firm should
divesting existing products in them. invest heavily in those that sales forecasts indicate
might have a reasonable chance to become stars.
These options provide a basis for the firm to evaluate Otherwise divestment is the best course, since prob-
new and existing products in an attempt to achieve bal-
lem children may become dogs and thereby candi-
ance between current and future growth. This analysis
dates for deletion.
may cause the product mix to change, depending on what
management decides. • Dogs: Products in the category are clearly candidates
for deletion. Such products have low market shares
The most widely used approach to product portfolio
and unlike problem children, have no real prospect
analysis is the model developed by the Boston Consulting
Group (BCG). The BCG analysis emphasizes two main for growth. Eliminating a dog is not always neces-
sary, since there are strategies for dogs that could
criteria in evaluating the firm’s product mix: the market
growth rate and the product’s relative market share. BCG make them profitable in the short term. These
uses these two criteria because they are closely related to strategies involve “harvesting” these products by
profitability, which is why top management often uses the eliminating marketing support and selling the prod-
BCG analysis. Proper analysis and conclusions may lead uct only to intensely loyal consumers who will buy
to significant changes to the company’s product mix, in the absence of advertising. However, over the
product line, and product offerings. long term companies will seek to eliminate dogs.
The market growth rate represents the products’ cat-
As can be seen from the description of the four BCG
egory position in the product life cycle. Products in the alternatives, products are evaluated as producers or users
introductory and growth phases require more investment
of cash. Products with a positive cash flow will finance
because of research and development and initial market-
high-opportunity products that need cash. The emphasis
ing costs for advertising, selling, and distribution. This on cash flow stems from management’s belief that it is bet-
category is also regarded as a high-growth area (e.g., the
ter to finance new entries and to support existing products
Internet). Relative market share represents the company’s
with internally produced funds than to increase debt or
competitive strength (or estimated strength for a new equity in the company.
entry). Market share is compared to that of the leading
Based on this belief, companies will normally take
competitor. Once the analysis has been done using the
market growth rate and relative market share, products are money from cash cows and divert it to stars and to some
placed into one of four categories. problem children. The hope is that the stars will turn into
cash cows and the problem children will turn into stars.
• Stars: Products with high growth and market share The dogs will continue to receive lower funding and even-
are known as stars. Because these products have high tually be dropped.
potential for profitability, they should be given top
priority in financing, advertising, product position-
CONCLUSION
ing, and distribution. As a result, they need signifi-
Managing the product mix for a company is very
cant amounts of cash to finance rapid growth and
frequently show an initial negative cash flow. demanding and requires constant attention. Top manage-
ment must provide accurate and timely (BCG) analysis of
• Cash cows: Products with a high relative market
their company’s product mix so the appropriate adjust-
share but in a low growth position are cash cows. ments can be made to the product line and individual
These are profitable products that generate more products.
cash than is required to produce and market them.
Excess cash should be used to finance high- SEE ALSO Marketing Mix

ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION 611