A business with a range of products has a portfolio of products. However, owning a product portfolio poses a problem for a business. It must decide how to allocate investment (e.g. in product development, promotion) across the portfolio.
A portfolio of products can be analysed using the Boston Group Consulting Matrix. This categorises the products into one of four different areas, based on:
Market share – does the product being sold have a low or high market share?
Market growth – are the numbers of potential customers in the market growing or not
How the Boston Matrix is Constructed
The Boston Matrix makes a series of key assumptions:
Market share can be gained by investment in marketing
Market share gains will always generate cash surpluses
Cash surpluses will be generated when the product is in the maturity stage of the life cycle
The best opportunity to build a dominant market position is during the growth phase
How does the Boston Matrix work? The four categories can be described as follows:
Stars are high growth products competing in markets where they are strong compared with the competition. Often Stars need heavy investment to sustain growth. Eventually growth will slow and, assuming they keep their market share, Stars will become Cash Cows
Cash cows are low-growth products with a high market share. These are mature, successful products with relatively little need for investment. They need to be managed for continued profit - so that they continue to generate the strong cash flows that the company needs for its Stars
Question marks are products with low market share operating in high growth markets. This suggests that they have potential, but may need substantial investment to grow market share at the expense of larger competitors. Management have to think hard about “Question Marks" - which ones should they invest in? Which ones should they allow to fail or shrink?
Unsurprisingly, the term “dogs" refers to products that have a low market share in unattractive, low-growth markets. Dogs may generate enough cash to break-even, but they are rarely, if ever, worth investing in. Dogs are usually sold or closed.
Ideally a business would prefer products in all categories (apart from Dogs!) to give it a balanced portfolio of products.
The main values of using the Boston Matrix include:
A useful tool for analysing product portfolio decisions
But it is only a snapshot of the current position
Has little or no predictive value
Does not take account of environmental factors
There are flaws which flow from the assumptions on which the matrix is based
However, the model can be criticised in several ways:
Market growth is an inadequate measure of a market's attractiveness
Market share is an adequate measure of a products ability to generate cash
The focus on market share and market growth ignores issues such as developing a sustainable competitive
Before founding tutor2u with twin brother Geoff, Jim was a director at Thomson Travel Group Plc and a Corporate Finance and Strategy specialist at PwC. Jim is graduate Economist, a Fellow of the ICAEW and has a MBA (Distinction) from Bradford Management School.
Join Graham Prior and Jim Riley for a resource-packed CPD day which will help you accelerate your planning and lesson preparation for the new AQA A Level Business. We've packed this day with resources to help teach the new spec content. We also consider how best to approach the challenges of a linear Business course.