In our fast paced world today, there are many businesses that tend to diversify and produce more than one product. Surely, it is easy to decide whether to keep producing each one of those many products through a basic Managerial Accounting concept of Segment margin, but there is a lot we miss out this way. A Boston matrix is a matrix that represents a product with Market Share against Market growth.
The display above shows 4 statuses, 2 for Market Share and 2 for Market growth. First, what you need to do is collect the statistics of all your products and see which product lies in what category.
I have a Cash cow; should I be happy?
A Cash cow usually gets a lot of attention, the reason is that It has a high market share and low growth. Which means that the product is at its Saturation point and is yielding a lot of money. It is always good to have 2/5 of your products as Cash cows. The reason being the fact that they are at last stage of their life cycle. At this point, the sales will remain steady and you can enjoy high profits for them. These profits can be used as investment in new products, once the life span of the Cash Cows come to an end. Another strategy can be to apply “Extension”. The profit generated from Cash Cow could be invested back in the same product every once in a while. This will help to keep the product at a very high point, however, this technique cannot be applied forever. After sometime, people will give up the idea of this product.
I have a star, no worries right?
Star is the one which gets the most attention because it already has a high share and is still growing, however it will soon reach its peak and the growth will stop. It will then become a cash cow. A star is mostly the best product that a company has. It is good to have at least 1/5 stars in your business. Most likely, your star will be in a lower part of Market share: High category. The reason is obvious, otherwise it can be impractical.
Oh no, it is a Dog!
If you have products falling on the left side, then you should be worried. A dog, which is Low Market Share and Low growth is simply the product you need to shut off. Although it is first important to analyze the reasons and how long it has been in the market. Generally, if the product remains a dog for more than 4-5 months, it is time to turn down the shutters. 1/5 Dogs is not bad, but any more than that can put you in trouble.
A question mark?
A Question market, which is low market share but high growth is more like a problem child. This is something you need to worry about. Naturally, it makes no sense. High growth, yet low market share, why? It may take a long series of analysis, and research to understand the problem but again 1/5 Question mark is also decent.
Generally, I recommend you to have 1/5 products that are Dog or Question Mark. The reason is that these products are often there to just help cover up Common Fixed costs and keep the customers aware of the fact that you have a Diverse Business with more than 1 product. Sometimes, it is also good to maintain a good relation with competitors, supplies and help you get loans from the Bank. Of course too much of these can be a problem, but managing 1 is not much of an issue.
This matrix will give you a good idea about what kind of products your business has and my explanation will help you make the decisions with regards to this Matrix. The category of the product really matters because you do not want to waste advertisement money on a Cash cow or a Dog, nor would you want to reduce supplies of a Star. Of course, this is not the only analysis and there are many tools that can help in Decision making whether your business is Diverse or not.