Your products are the most important element of your business. Without products, you have nothing to sell and therefore have no market or customers. Even if you only have one product, in order to succeed you must still target that product into the right market. You must also continue to develop and enhance that product in order to meet the changing demands of the market.

As part of that development you will need to take decisions on quality, features and benefits, together with branding and packaging. Some of these decisions will, of course, also overlap into your decisions on promotion techniques considered in Chapter 11.

USING THE BOSTON CONSULTING GROUP (BCG) MATRIX

The Boston Consulting Group was established in the 1960s specifically to provide strategic marketing advice. As a result of their research they developed a matrix that analysed the product portfolio of a business in relation to the market.

This matrix classifies products according to cash usage and cash generation compared with relative market share and growth rate.

The BCG Matrix

‘Star’ products	‘Question Mark’ products
These have a high market share and high growth rate.	These have a high growth rate although they only have a low market share.
They also generate a large cash inflow although this is fully offset by the cash they require for production.	Cash generated is minimal against cash used, the net cashflow is negative.
‘Cash Cow’ products	‘Dog’ products
These have a high market share although a low potential growth rate.	These have a low market share and low potential growth rate.
They generate a high cash inflow against minimal cash required for production.	They generate minimal cash inflow which is fully matched by the cash they require for production.

From the above you can see that following introduction into the market, your products will move through a cycle represented in chronological order by ‘Dog’, ‘Question Marks’, ‘Stars’, and then ‘Cash Cows’. The cash generated by the ‘Cash Cows’ is used to invest in the ‘Stars’ and a select few from the ‘Question Marks’.

It is important that you also understand the potential dangers of misusing the BCG matrix. When conducting your product audit, you may find that a large number of products are in low growth markets, i.e. ‘Dog’ products. It is essential, therefore, that you establish the relationship that this product has within the overall market.

It may be that one such product was the initial product introduced by you that established your brand name and reputation in the market. It would be very unwise to remove that product from your product range, even if it does now only have a low market share. It is likely that if it is a manufactured product it will share the same production and distribution facilities with other new products. As such, despite the low market share, it will still remain a profitable product.

There are also limitations in using the BCG matrix as the sole form of analysis.

• Only two factors, market share and market growth, are taken into consideration but this can over-simplify the position.
• Cash flow rather than profitability is used to measure performance.
• Classification of individual products can be difficult.
• Products can move very quickly from one segment to another.
• It does not cater for the introduction of new products.
• It does not deal with markets that are experiencing decline.

The BCG matrix can be a very powerful tool to aid your product planning, especially if you link it together with the life cycle concept. This will give the matrix a new dimension and bring together the key components of products and markets.

THE PRODUCT LIFE CYCLE CONCEPT

This concept is based on the assumption that products are similar to all life forms and therefore have a finite time in the market. This means that from the initial development and introduction phase the product will experience a period of growth. It then enters a period of maturity until it starts to decline and eventually die.

The Product Life Cycle Concept

The amount of time in which a product moves through the cycle can be extremely variable. Some products will have a long life and others, perhaps those that can best be described as ‘fads’ or ‘crazes’, may have a very limited life.

Linking the Product Life Cycle to the market

Using a simple framework you can link together the product life cycle to the market conditions you are likely to encounter at each individual stage. This will also give you an indication of the potential profitability in addition to the probable effect upon your cashflow.

	Introduction	Growth	Maturity	Decline
Market Growth	Uncertain	High	Slow	Contracting
Competition	Very few	Increasing	Strong	Declining
Sales	Low	Rapid growth	Peak with high share	Contracting if low share
Profits	Marginal	Depends on strategy	Peak and declining	Low
Cash flow	Negative	Building	High	Low

USING THE PRODUCT LIFE CYCLE FOR PRODUCT DEVELOPMENT

By combining the product life cycle with the BCG matrix you can formulate a strategy for product development. Ideally you will want to have a range of products within your portfolio, all of which are at different stages in the life cycle process.

A product’s position within the life cycle is determined by a number of factors including:

• market growth rate
• potential for further market growth
• the number of competitors
• the spread of market share among competitors
• any barriers for entry into the market.

Only by considering all of the market factors can the position of the product be established within the life cycle. You must also remember that not all products will have the same life cycle profile. In addition, not all products will enter a decline phase. They may become ‘necessities’ and as such will always be required in one form or another. They may, however, require refinement in some way in order to stay ahead of other similar competitors.

The main point to remember is that you must have a range of products with the mature, profitable products producing cash for further product development. This means that you must be able to identify those products that in life cycle terms are at the mature stage, and in BCG matrix terms are ‘Cash Cows’.

In terms of product development you have two basic choices:

• proactive product development
• reactive product development.

Proactive product development

This is a very risky option. You will be introducing brand new products and there is therefore a high risk of failure. Balancing that risk, however, is the high reward that could be achieved. If you are the first company to develop a new product and the market is receptive to you, you could quickly gain a high share of the new market. This would make it difficult for any other competitors to enter the market unless they had a better product. This, of course, could take them some time to produce.

Reactive product development

For obvious reasons, this strategy carries a substantially reduced risk. You are letting others lead the way and subsequently take all the risk. Only at the point when you can see that the new product is in demand will you attempt effectively to copy the competition. Having said that, you obviously need to ensure that you do not impinge on any patent or other legal protection that may have been registered. If you are fast enough, and can offer some extra innovation to the original product, you stand a good chance of being just as well placed in the market as the original introducer.

USING THE ANSOFF MATRIX TO CONSIDER PRODUCTS AND MARKETS

The Ansoff matrix defines two key factors for marketing – what is sold and who it is sold to. It therefore relates only to products and markets and gives you four alternative courses of action:

• selling existing products to existing markets
• extending existing products into new markets
• developing new products for existing markets
• developing new products for new markets.

These four options are set out in a four-box matrix that plots your existing and potential products against your existing and potential markets as follows:

• Market penetration – increasing the existing share in the existing market to facilitate further growth.
• Market extension – taking existing products into new markets, for example expanding sales from purely the domestic market into the European market.
• Product development – offering new products or modifying existing products into the existing markets.
• Diversification – either with related products and markets or unrelated products that are totally unconnected with the existing products and markets.

You can now start thinking about your marketing objectives by using the Ansoff matrix in conjunction with the analysis of your products that you completed in the life cycle analysis. You can also consider your markets using the Ansoff matrix in conjunction with the BCG matrix.

TARGETING THE RIGHT PRODUCT INTO THE RIGHT MARKET

Using the Ansoff matrix you will understand that you only have four choices to make concerning products and markets. What you need to consider is the element of risk in each proposed option. For example, introducing new products into new markets would carry a significantly higher risk than expanding existing products into existing markets. The degree of risk involved will also be affected by two other factors:

• How new the product is.
• How new the market is.

Existing products into existing markets

The overall aim of this strategy is to increase the market penetration of your products. In a naturally growing market this could be relatively easy, but where the market is effectively saturated or static this could be much more difficult. In a static market you will need to improve your competitive position by, for example, improving the quality of the product.

This strategy can also be beneficial in increasing profits in the short-term. When compared to the BCG matrix, the products most likely to succeed will be the ‘Cash Cows’ and the ‘Stars’. This strategy also carries the lowest level of risk.

Existing products into new markets

Often referred to as market development, this strategy carries the next level of risk. Whilst retaining the relative security of the existing market for your products, it is an attempt to expand the business by entering new markets. The most obvious example is exporting for the first time.

As an alternative, during the course of segmenting the market you may have identified different market segments for your products. It is also possible that, if you have previously concentrated on a small local geographic area expansion can be achieved on a national basis.

New products into existing markets

Next on the scale of risk comes product development. This takes the form of either brand new products or the modification of existing products to meet the changing demands of the market. A good example is the development in personal computers over the last ten years. Virtually as soon as one product in this market is introduced it is made obsolete by the introduction of another higher-specification model.

With these sorts of fluctuating markets, where the life of a product may not be very long, ongoing product development will be essential, possibly leading to ongoing research and development to retain competitive advantage.

New products into new markets

Diversification with new products into new markets is the riskiest of the four strategies. In many ways this can be likened to starting a business all over again. The research and analysis of your target market will be crucial because you are entering uncharted waters. Because of this diversification must be considered as a long-term strategy, as it may be difficult to reap any rewards in the short term. There are two main forms that diversification can take:

• Related diversification – the development of new products that are complementary to the existing product range.
• Unrelated diversification – products that take the business outside of the industry in which it normally operates.

UNDERSTANDING PRODUCT MANAGEMENT

Product management is a critical function for all businesses. It relates to the overall brand image of your product. Getting this right could make or break your business. Brand image can take many forms. It could simply be the name of the business, as in ‘Dell Computers’. Alternatively, it could be the name of the product, for example ‘Branston Pickle’. Or it could be that it is the overall name for a range of products, such as the ‘George’ clothing range sold through Asda stores.

It is clear that brand image is closely linked to competitive advantage. It is essential that your brand is easily identified and your choice of name obviously must be very carefully considered. In addition, you must take all available steps to protect the reputation of your brand. It will not matter whether your brand relates to your entire business or a single product – once tarnished it may affect your competitive advantage.

Many businesses, especially new start businesses, do not consider the importance of brand image from the outset. This is a fundamental mistake. All businesses, no matter how large they are now, probably started from very small beginnings. Brand image can only be built up over time, it does not happen overnight.