Boston Matrix

 Background

The Boston Consulting Group developed the Boston matrix in the early 1970s. It is a tool for clarifying how resources are best spent on the company's products to achieve the highest revenue.

A company must continuously look at how its business areas are doing. A business area is also called an SBU, which stands for the Strategic Business Unit, which is an area of products that have independent management and marketing. The model is part of a portfolio analysis, which means analyzing the company's products. The Boston matrix is well suited to looking at how these business areas are doing in the company's overall product offering to see if some products need more marketing or whether there are product groups that should go out of the range. One of the assumptions in the model is that the position of the company's products changes over time in the market. The reason may be new consumers, new trends, new technology and changes in society in general. An SBU may consist of a product or product group. Nestle and Samsung have many SBUs. Both companies are spreading their SBU's across all fields of the model. There are also companies that have only one SBU. Start-ups often offer only one product and thereby only have one SBU.

About the model The Boston matrix consists of two dimensions. On the X-axis, we find the relative market share and the y-axis are the market growth in percentage. Market share is an indicator of the extent to which the product can generate revenue — relative market share measured as compared to the largest competitor in the business area. The axis is read from the center of the figure, where 1X is the same size. So, one's business area has as much share as one's biggest competitor. To the left from 1x, one's relative market share grows relative to the largest competitor, and 2x means one has twice the market share of the biggest competitor. Correspondingly we get less market share when we move right along the axis, and 0.5x means we have half the market share of our largest competitor. Therefore, the arrow on the x-axis goes from low on the right side too high on the left side - the opposite direction to what we would normally expect on the x-axis. Market growth on the Y-axis refers to the market the company is in - and growth is measured as a percentage with low in the bottom and rising to high in the direction of the vertical arrow. High market growth means that many consumers are demanding the product, making it an attractive market for the company to be in. The growth rate of an industry and the market share of a respective business relative to the largest competitor present in the industry are taken as the basis for classifications, for that reason, the BCG Matrix is also called Growth-Share Matrix.

The Matrix is used by organizations to classify their business units or products into four different categories. The four categories are Question marks; Stars; Cash cows and fourth and last – Dogs. The products or SBUs are placed in relation to their relative market share and the market growth rate in the industry in one of these four categories. The position of the company's product is marked with a circle. The size of the circle depends on how much revenue is in the business area in relation to the company's total revenue.

Question marks are products that are in a market with high growth but with a low relative market share. Question marks are typically brand-new products unknown to the market, where the company must struggle to gain market share. It usually requires a lot of investment. They are known as problem children; they can be turned into stars or end up as dogs. Examples you can find down at the grocery store. Nestle is continuously launching new products; some become classics; others quickly disappear again.

Star is a product that is located in a high growth market and has a high relative market share. The promotion of the question mark was so successful that its market share has increased significantly, and the product has thus become a star. It is expensive to maintain Stars in their position in this market as it requires costly investment in sales and marketing. So, the star may not be a good business for the company in the short run. But it is essential to have stars that are incorporated as good brands with consumers so that they can eventually do without so much promotion. An example is Nescafe. In a lot of markets around the world, Nestle is promoting Nescafe as a brand. The brand has moved from question mark to star.

The cash cow is a product that is characterized by having a relatively high market share in a market with low growth. It is a product that everyone knows and buys. It is a popular product. For the company, the cash cow is nice to have, as it quietly makes money without having to spend as much effort in sales and marketing when compared to products that are question marks and stars. However, growth opportunities are limited. An example is Coca-Cola – one of the best-known brands in the world.

A product in the dog field is in a market with low market growth and little relative market share. For example, it may be a Cash cow that is no longer attractive to consumers. A dog is typically phased out of the portfolio as it is not profitable for the company. They are a drain on resources and cash. Examples are products like Walkman or DVDs. The lifetime of products in the electronics industry is, in general, very short.

Criticism of the model. Many believe that the Boston model is too simple because it focuses on only two factors, namely market growth and relative market share. Critics, therefore, believe that the model lacks some of the other essential elements such as market size, industry coverage, competitive strength, employee creativity and motivation. Although the Boston model has received some criticism, it still makes good sense to use the model if you know how to use it. The Boston model is a tool designed to force corporate management to analyse and decide which marketing strategies to use for each product.