Products and Services by Geoff Lancaster©
The full text of Geoff's notes is displayed below without diagrams. You can download a full copy of the notes in Word format (which should display diagrams correctly) by clicking here (181k).
For a marketing plan to be successful it is essential that all elements of the marketing mix should support each other. Marketing mixes will change between products, services and market situations and indeed this is what makes marketing dynamic; it is the skill of the individual marketing person in manipulating the individual mixes that can make a product or service a success or a failure. Different emphases to individual elements in the marketing mix are often called for. However, the product or service is particularly important in this calculation for this is the tangible element that will appeal to customers and it is upon this that customers’ purchases and repeat purchases are based. This is what must provide the end satisfaction for this, after all, is the practical application of the marketing concept.
A study of products and services is concerned with, amongst other things, design, appearance, length of time it will last and how is perceived by customers and non-customers alike.
1 Defining the product
People purchase what marketing practitioners term a ‘bundle of satisfactions’. This includes obvious things like the physical product itself or a less tangible service offering. If asked to state what they have purchased most customers will simply mention the product or service in its simplest terms. However, there is much more to a purchase than simply this.
It is the task of marketing to take a more expansive view of what constitutes an augmented product or service, and then combine the marketing mix in such a way as to present consumers with the ‘bundle of satisfactions’ that marketing research has identified as being most pertinent to their requirements. This augmented product concept is sometimes called the extended product, and this definition includes the total marketing effort. Thus a view of the product or service is rather broader than the mere object or service offering; it is the utility or a ‘bundle of satisfactions’ that provides satisfaction.
2 Categories of products
Given the background that has been presented, we are now in a position to present a formal classification system for products and services. This is needed in order that marketing planners can more easily formulate and design their strategies and tactics.
Industrial goods are separated from consumer goods as the first part of this categorisation.
2.1 Industrial goods
The mention of industrial goods conjures images of components and raw materials, but not all industrial goods are as tangible as this. A number of additional items and services are important to ensure the smooth running of a factory. A classification exists to describe categories of industrial goods and services:
- Installations include the plant and machinery required for a company’s manufacturing processes. These are very critical purchases and usually involve complex purchasing decision making processes with price not necessarily being the deciding factor when making such purchases.
- Accessories are also capital items but are less critical and depreciated over a shorter period of time. They include items like office equipment and materials handling equipment.
- Raw materials re the most obvious of industrial goods and this is the major task in a modern purchasing department. Here, buyers are specifically looking for a keen price coupled with quality and reliability of delivery.
- Component parts and materials are items that are required in the production process, but are not part of the finished product. It includes such items as packaging, greases and oils.
- Supplies include items like cleaning and maintenance materials and stationery. Buying here tends to be more routine and it is often a matter of simply reordering with price being the major criterion consistent with a standard specification of quality.
This classification is linked to organisational buying behaviour where the fact that buyers are dealing with larger sums of money and larger quantities tends to make it a more professional and organised process than in consumer goods purchasing.
2.2 Consumer goods
These are the types of products and services with which we, as individuals, are familiar. Unlike industrial products, more irrational and emotional motives tend to be connected with their purchase and it is upon this factor that many manufacturers base much of their marketing effort. As with industrial goods, they also lend themselves to a number of sub-categories.
- Convenience goods are everyday items whose purchase takes little effort on the buyer’s part. They can be classed as everyday necessities, purchased on a regular basis. Advertising plays an important role in terms of attempting to persuade the consumer to take a particular brand. Staple convenience goods are purchased routinely for consumption and it is more difficult to differentiate one product from another and no pre-planning goes into their purchase. Many such products are delivered to the door like milk and newspapers.
- Shopping goods is the term used to describe durable products and their purchase tends to be at infrequent intervals. More planning goes into their purchase on the part of buyers and buyer behaviour is more complex. The purchasing cycle is much longer and more complex models of buyer behaviour apply. Further classifications relate to homogeneous shopping goods that are standard items like toasters and kettles and heterogeneous shopping goods that are non-standard and where personal choice plays a more important role.
- Speciality goods are major purchases made at infrequent intervals. Here, much probing in the market-place is undertaken by customers. Many more purchasing motivations are involved in the final decision and quite often the final purchase is a compromise decision between a number of purchasing criteria. Examples of such purchases are motor cars and a major item of relatively expensive clothing.
- Unsought goods are ones that the purchaser has not actively considered buying. Techniques used in their marketing are often rather dubious and this has led to much criticism of marketing. Consumers usually have to be persuaded that they need such products, as it would never occur to them to go out and actively purchase. Insurance typifies such a service - particularly life assurance - where the potential customer does not necessarily see an immediate need for this service. Methods of selling such goods and services tend to use more directly targeted approaches like direct mail, telephone selling and door-to-door.
3 Product management
3.1 Organisational considerations
Larger organisations, especially those that produce consumer durables and fast moving consumer goods (fmcg) often have what is termed a ‘product management’ system of managing single products or a line of similar products. In fmcg companies, the term used tends to be ‘brand manager’ whose responsibility it is to manage the image and the marketing (but not the selling) of a single product line. This person acts as a liaison between the advertising agency and the company and is responsible for the ‘image’ of the product and will commission marketing research when it is needed.
This kind of system has been criticised on the grounds that product managers have to rely upon others, especially the sales force, to carry out their ideas. This has the potential for conflict, particularly on the part of the field sales force who have to be sold the promotional idea with which they may, or may not, agree.
Where a system of product management is in operation, the typical organisation of the marketing function is that the marketing manager is in overall control and is directly under the managing director. Under the marketing manager is the overall products manager and under the products manager come individual brand managers. Alongside the products manager comes the sales manager and under the sales manager comes the sales team organised by various kinds of geographical or functional split.
3.2 Strategic considerations
Under this heading of product management it is appropriate to discuss the strategies that are open to product managers when devising strategies for their product portfolios. Igor Ansoff first introduced his idea of a simple matrix in 1957 and it is described in Figure 1:
|NEW MARKETS (1)||EXISTING MARKETS (2)|
|NEW PRODUCTS (1)|| |
|EXISTING PRODUCTS (2)|
Figure 1 Ansoffs matrix
Each of the decisions is looked at in turn under their respective headings:
- 1/1 decision takers are the true innovators, but the strategy is perhaps rather risky in terms of expenditure costs and the high failure rate of new products. This strategy is referred to as ‘diversification’.
- 1/2 decisions (new products into existing markets) comprise producers who like to stay ahead of their competitors or are able to provide some sustainable advantage that makes their product unique in the minds of consumers. This is a strategy of ‘product development’.
- 2/1 decisions (existing products into new markets) relate to manufacturers who are seeking to expand their total sales volume by moving into an entirely new (to them) marketplace. An example might be an industrial adhesives manufacturer who decides to target the office stationery market by modifying the existing range of industrial adhesives. This strategy is known as ‘market development’.
- 2/2 decisions are taken by manufacturers who play safe. Arguably, it lacks imagination and there is a possibility of such manufacturers being left exposed if their particular market hits recessionary times. This is a strategy of ‘market penetration’.
4 New products
Different companies have different policies in relation to this subject. Many let others taking risks and follow when new products are launched and proved. They are, however, very important for the thrusting innovative company, but there are risks attached in terms of damage to the company’s reputation if the new product fails plus the attendant costs of development and launch. The product or service is the main component of marketing as it provides revenue. Before the formal development programme is discussed, a listing of the types of new product categorisation used by marketing people is now described:
- Innovative products are completely new to the marketplace.
- Replacement products are ones that provide a different slant on a traditional theme and might include well-known items, but with a new design and functions.
- Imitative products are quite common once an innovative product has become successfully established. Marketing slang refers to them as ‘me too’ products. There is, of course, less risk involved in their launch.
- Relaunched products happen when an original product has gone into decline, but the company anticipates that there is sufficient potential sale if the image of the product is altered through manipulation of the marketing mix.
4.1 Organisation for new product development
How new product development is managed is a critical factor in relation to potential success or failure. There are a number of different organisational alternatives in this respect:
- New product managers are given the sole task of developing new products. Sometimes this task is part of the duty of a product manager or brand manager in a smaller organisation.
- New product committees receive new product ideas from marketing or research and development or indeed from any other source within the organisation and assess their viability in terms of potential success.
- New product departments exist in large innovative companies and their work cuts across a number of departments. When a new product idea looks to be viable they appoint a ‘product (or project) champion’ to see the development through from its design and development to its market launch.
- New product venture teams comprise people from different parts of the organisation who are brought together on an ad hoc basis in order that different views can be incorporated in new product decision making. Their task is to develop products within predetermined budget and time constraint parameters.
4.2 The process of new product development
The process of new product development goes through a logical series of steps from the inception of the idea to the actual launch of the product. These steps are now explained:
- Idea generation can come from a variety of sources. In innovative companies, such ideas tend to be research driven. The notion of marketing orientation tells us that we should look to our customers first (through marketing research) before embarking upon new product development. In the case of companies producing ‘breakthrough’ products this might be difficult as customers will not necessarily be able to envisage what they require. However, as we shall see later in this section, ideas are not simply generated and made into products that are then marketed. Marketing research does come into the equation, but more through procedures like product testing come later in the process. A culture should exist within the organisation that encourages new product ideas amongst more than simply the Research & Development function. The sales force should be a regular source of new product ideas, and such data can be gathered from the company’s marketing information system. Brainstorming is a good method of producing new product ideas as long as it is chaired competently, but regular meetings of planning committees should have this at the head of their agenda. Venture teams can then be set up to progress likely ideas.
- Screening is the first stage of sifting viable ideas from less viable ones and obvious issues are addressed at this stage in terms of potential demand, the company’s capability in terms of development and production and the profit potential. This is an important stage at which ‘Go’ or ‘Drop’ decisions are made. This screening process should have due regard to whether or not the new product will fit into range of products that the company markets. To start a completely new venture might mean expensive investment in not only production capacity and skills, but a completely new marketing team might be required.
- Business analysis is where the new product idea’s financial viability is appraised. By this phase only ‘serious’ contenders will remain and here a critical stage has been reached. Such analysis needs to take into consideration total costs rather than simply development and production costs.
- Product development is the point at which the company has committed itself and indeed this is when costs start to increase sharply. Where appropriate, prototypes will be developed and these can be assessed by marketing research through product appraisal tests. It is also here that product refinement and modification will be possible through feedback from marketing research. It might also be the point at which the product is abandoned if expectations do not match up to reality, rather than risk a ‘high exposure’ failure in the marketplace.
- Test marketing is the penultimate stage. This might be appropriate where the product is a fast moving consumer good when it can be tested in test towns or a television test areas before going ‘national’, but this is not always appropriate for more durable products. Here, product placement tests with members of the general public are probably more appropriate. The only problem with full scale test marketing is that it allows you competitors to see what you are doing, so clearly this disadvantage must be weighed against the advantages of simulating a National launch before full scale commitment. This indeed is why product testing, rather than higher profile test marketing, is better in terms of confidentiality.
- Commercialisation is where the product is to be launched on the market. All of the various filters have taken place, but even at this stage success is not guaranteed. However, there is a far greater likelihood of success if the procedure just described has been undertaken.
An American firm of consultants, Booz, Allen and Hamilton first put forward the notion of the decay curve of new product ideas which is illustrated in Figure 2:
|Ideas or concepts|
Figure 2 Decay curve of new product ideas
In their original research Booz, Allen and Hamilton found that it took 58 new product ideas to produce one potentially successful product. However, even during the ‘commercialisation’ stage there was still a 50/50 chance that the product would not be successful. Later research that they undertook suggested that it took considerably fewer new product ideas to produce a successful product.
4.3 Factors for successful innovation
McKinsey & Co conducted research in 1980 that investigated a number of large multi-national organisations. The research examined factors that were deemed to be essential in their successful operation and eight factors were highlighted:
- a bias towards action
- simple line and team staff organisation
- continued contact with customers
- productivity improvement via people
- operational autonomy and the encouragement of entrepreneurship
- simultaneous loose and tight controls
- stress on one key business value
- an emphasis on sticking to what it knows best
This research has stood the test of time and it is still cited today as being the critical success formula for successful international enterprise.
5 Product mix and product line
The above terms are used a lot within product management in addition to the terms ‘depth’ and ‘width’ of the product mix (or product assortment). This latter description means all of the product lines and items that a company offers for sale. Basically, the product line is a group of closely related product items. The width of the product mix denotes the number of product lines carried. The depth of the mix denotes the range of items within each line and is calculated by dividing the total number of items carried by the number of lines. There is another term that is ‘consistency’, and this relates to the closeness of items in the range in terms of product and marketing characteristics. By attempting this analysis, product management can look more objectively at its overall product mix and decide whether or not certain lines should be lengthened, shortened or deleted.
6 Product life cycle
The notion of the product life cycle is almost as old as the subject of marketing. Various stages are proposed which show that a product passes through a number of stages in its life from the time it is conceived (the development phase) to the time it is deleted during the decline stage. Marketing people have found it to be a useful planning tool and this point is expanded shortly.
The principal problem with this theory is that it is so neat as to be totally ‘believable’ and some product managers tend to expect that every product will fit this neat curve. Marketing academics (notably, Dallah and Yuspeh) have, therefore, criticised the concept on the basis that when a product is launched it is often killed off prematurely because sales suggest that it has gone into a quick decline, whereas the reality is that what they are is probably only a slight hiccup in the growth curve of the product.
Figure 3 shows the theoretical curve of product life cycle. On this diagram is superimposed the revenue curve which shows the product recovering its costs of development and launch and then moving into profitability. Naturally, all products will behave differently, but as a tool of planning this theory has much to commend it.
Figure 3 The product life cycle
The shape of the curve can alter and this is useful in illustrating the effect of different marketing conditions. Different patterns are suggested in Figure 4 with explanations, but more combinations are possible.
Figure 4 Different shapes of the product life cycle
In the above diagram the first diagram represents a ‘fad’ product which comes quickly into the marketplace and is never seen again. The second diagram represents a ‘fashion’ product whose sales might go in cycles. The third diagram represents a product that passes through a number of phases, but where the product manager does not allow the product to become ‘stale’ after it has entered maturity. This is done by introducing a modification that builds upon the success of the original product.
As has been mentioned, the concepts as outlined in Figure 4 can be used as planning tools and the shapes of curves can be hypothesised that can fit almost any marketing situation. It is useful as a tool of product planning.
The product life cycle is influenced by the nature of the product, changes in the competitive environment, changes on the part of consumers who might display different preferences as the product moves through its life cycle. The shape of the curve, from an individual manufacturer’s viewpoint, can also be altered as a result of competitive actions. The product life cycle can thus be applied to the industry as a whole (which will include a summation of all manufacturers’ sales who are marketing that particular product) or it can apply only to the sales of a specific product for an individual company.
The time span of the product life cycle can range from say a fashion season to many years. In this latter case the maturity and saturation stages will be considerably lengthened. It is now acknowledged that different categories of life cycle exist. We have used soap and shoes as our illustrations, so the curve is applicable within one of the following groups:
- product category life cycles describe a generic product like soap or shoes. Life cycles here tend to be long or infinite.
- product form life cycles describe the type of product like perfumed soap or plastic shoes. Here the life cycle is shorter.
- brand life cycles describe the various manufacturers’ brands of perfumed soap or plastic shoes. This might, in the case of plastic shoes, be linked to a single fashion season with a new brand coming out shortly afterwards, so this kind of life cycle is the shortest of all.
7 Strategies suggested by each life cycle stage
Successful use of the product life cycle concept is being able to identify the passage from one stage to another. This requires that the company makes use of marketing research and marketing intelligence which form part of the company’s marketing information system. The product life cycle can thus be used strategically and impart an anticipated course of product development for which strategies can be planned and which will ensure the company’s long terms growth in the marketplace.
Marketing actions are now suggested which are normally appropriate to each of these separate stages.
- Development is of course the pre-launch phase and it is during this period that confidentiality will usually have to maintained in terms of keeping information away from competitors. In many larger organisations the research and development function is housed entirely separately from the main production unit. In fact, in a lot of cases research and development is on an entirely different site. As the research and development process progresses from experimentation to the tangible product, so, in a marketing orientated organisation, the involvement of marketing research will tend to increase. This is not to say that marketing research should not be involved at the earlier stages. For instance, focus groups/group discussions would be appropriate in terms of testing out the concept on groups of the general public at an early stage in the process before too much has been committed in terms of research and development expenditure.
- Introduction is the launch period and the product is slowly gaining acceptance. There are few (indeed sometimes zero) competitors at this stage, but this is where a number of new products fail. Figure 2 indicated that even after a new product idea had gone through its various filter stages there is still an even chance that it might fail. The product is seen to be innovative at this stage and potential buyers must me informed at to what it will do, so advertising tends to be of an informative nature. Buyers tend to be what are known as ‘innovators’ and this is explained later in this chapter. The product is new and can normally sustain a high initial price (skimming) as there are few or no competitors. Indeed, the product will probably have been expensive to produce and the costs of creating awareness prior to, and during, its launch might have been high, so this is an opportunity to recoup as many of those costs as the market will sustain. Distribution is not widespread at this stage and is often exclusive within a particular geographical location. Even now, the product may not be totally appropriate in the marketplace in terms of its performance or design features, so product modifications tend to be more frequent at this stage.
- Growth is the period during which competitors will start to appear with similar offerings. Indeed, they might well have been conducting parallel research and development, but have been slower in launching their innovative products. Even now, the product is still exposed to failure, perhaps through competitive activity, as competitors have been able to learn from your mistakes during your launch. They will know your price and might undercut, and they will know the perceived weaknesses of your product, so they can emphasise the strength of theirs. Although it might seem that being in the market first is a good policy, it is also a high risk policy. Unless the company is large enough to sustain a costly failure at this stage, or has other products to fall back upon, then such a policy is very high risk indeed.
This growth phase is sometime termed ‘exponential’ and it is during this period that sales begin to take off. If the company is small, then it might possibly be acquired by a large company. Such acquisitions are normally done on a mutually advantageous basis, but they can be aggressive if the company that has developed the new product is a public limited company, and a larger company seeks acquisition through direct offers to shareholders, whilst the management disagree with the takeover terms.
During this phase promotion tends to change from one of creating awareness to one of attempting to create an identifiable brand. Promotional expenditure is probably still quite high. Distribution too is important during this phase. There are two parallel forces at work here. The first is in terms of powerful retail buyers attempting to rationalise the total number of lines they sell. The second is in terms of manufacturers attempting to secure as many distribution outlet possibilities as possible, as the product has now lost its innovative appeal. In distribution terms they move from exclusive, then to selective and finally to intensive distribution. The philosophy of the latter is that maximum exposure at the point of sale is probably as important as brand awareness.
- Maturity and saturation are dealt with together, because the ‘maturity’ phase is the phase where the product’s sales level off to a gradual peak over a longer period (often years or decades). The ‘saturation’ phase is from its peak, gradually downwards to the phase where sales start to decelerate towards the ‘decline’ phase. In fact, many marketing authors miss out the ‘saturation’ phase altogether and class all of this phase as ‘maturity’.
During this phase sales slow down and repeat purchases are prevalent. There are attempts to ‘differentiate’ products through the addition of ‘features’. Price competition is at its maximum as other manufacturers enter the market. These manufacturers come in with ‘me too’ products which have not had to sustain the heavy costs of research and development and promotional costs associated with their launch. Although their brands might not carry the same weight as the well-established brands, price is the main competitive weapon, and price ‘wars’ between the established brands and these newer competitors is now uncommon. By now, the ‘mystique’ surrounding the product has dissipated and consumers feel confident in purchasing a product that bears a relatively unknown brand label. There is an increasing trend among retailers to trim their inventories, so unless the product can offer a sustainable product, brand or price advantage then there will be reluctance to stock.
As market growth has ceased, marketing management must attempt to at least retain market share in the face of increased competition and it is at this stage than a number of manufacturers withdraw from the marketplace. If the brand is a sustainable brand name then advertising will be necessary to keep this in the mind of consumers and to keep them loyal to the brand. Promotion to the trade is also important, as manufacturers will wish to retain their distribution outlets. Joint manufacturer/trade promotions are developed with costs being shared on an equitable basis. There is generally a move away from a ‘pull’ strategy of promotion towards a ‘push’ strategy.
- Decline is signalled by steadily and sustained falling sales after the ‘saturation’ phase. Marketing research should have told the company that this was due to happen in order that they could concentrate upon developing new product lines. However, company management quite often refuses to accept that its products are about to enter the decline phase and stay with it in the hope that the inevitable might not happen. Such a decline might be a function of a change in customer preferences, but more likely it is a function of a new product or process supplanting the existing one.
The phase is characterised by competitive intensity and price-cutting and sales falling continuously. Many producers decide to abandon the marketplace, or are forced to abandon because of financial difficulties. Thus, the decision to abandon the marketplace is a critical one and as can be seen from Figure 3 this should theoretically come when the product moves from a positive to a negative revenue situation.
However, a number of manufacturers do stay in business during the decline phase. It is only in relatively few cases that a product will decline completely and never appear again. There will usually be a residual or continued demand, but at far less volume than before. A good example is solid fuel that has largely been supplanted by gas and electricity and to a lesser extent oil for home heating purposes. However, there is still demand for solid fuel and as most of the solid fuel processors have now departed from the marketplace there is a vibrant market left for those who have remained.
7 Product diffusion and adoption
The notion of product diffusion and adoption was first put forward by Everett Rogers. Diffusion processes relate to the speed and extent of take-up of a new product and it considers the people who are the ultimate target of marketing efforts, rather than the marketplace itself that is the function of the notion of the product life cycle. The diagram that forms the model suggested for the diffusion curve is very much like the model for the product life cycle, and indeed there are similarities between them both. In the case of this theory, consumers do not necessarily fall into the same category for all purchases, and the theory very much describes consumer behaviour in relation to their individual needs and preferences. The theory is explained in Figure 5.
|Sales to first-time adopters|
|Early majority |
|Late majority |
|Early adopters |
Figure 5 The product adoption process/diffusion of innovations
Figure 5 represents the rate at which the product is purchased for the first time by single individuals who are categorised into adopter categories, depending upon when in the cycle of time the purchase was made for the first time. The process is termed the ‘diffusion of innovations’.
- Innovators tend to be opinion leaders who are the first to purchase and these are basically the same purchasers as those who purchase at the introduction phase of the product life cycle. They are likely to be younger and better educated from reasonably affluent, high social status, family backgrounds. Their knowledge of the product tends to come more from their own feelings than from the efforts of marketing people. They represent the first 2.5% of the entire market - which is two standard deviations to the left of the mean.
- Early adopters possess similar characteristics to the innovators, but they are slightly more cautious and less gregarious. They tend to belong more to ‘local’ groups, but as opinion leaders they are influential. These comprise 13.5% of the entire market.
- Early majority purchasers tend to rate slightly above average in terms of their social class and now that the product has become more established, they rely principally upon marketing information before making their purchases. This group represents 34% of the market.
- Late majority purchasers tend to be more cautious, but are more prone to social pressures to adopt the product for the first time. This group comprises 34% of the total market.
- Laggards are the final 16% category and they make up the cautious group. They tend to be older and more conservative, generally coming from a lower socio-economic class.
Diffusion is of course closely related to the adoption process of individual customers and it has been found that five particular facets of products will lead to a more rapid and wider adoption:
- Relative advantage in terms of the greater the perceived advantage of the new product to customers the faster it will diffuse.
- Compatibility relates to the greater the extent to which the new product is compatible with existing products, the faster it will diffuse.
- Complexity is a disadvantage, because the more complex the new product is, the more difficult it will be to understand in the marketplace and the diffusion rate will thus be slower.
- Divisibility means the greater the ability of the new product to be used or tried on a limited scale before full commitment on the part of the purchaser, the faster it will diffuse.
- Communicability means an ability of the new product to be demonstrated or communicated by early purchasers to later potential purchasers, then the quicker will be the rate of diffusion.
In the context of buyer behaviour, the adoption process is very closely allied to the process that was cited in Figure 5. Indeed, it links in very neatly in terms of the decision-making processes that take place prior to making the purchase of a new innovatory product or service.
The adoption process can be described as:
It is related to the diffusion of innovations in that this is typically the process through which purchasers must go before making a major new product purchasing decision; more so in this particular case as they have never tried the product before.
Although Figure 5 adds up to 100% this is not to say that everybody will ultimately purchase the product or service. If we consider home telephones as an example it could probably be said that the country has reached saturation in terms of new subscribers. However, a number are not subscribers because they like privacy and are not listed in the directory or have some other personal reasons for not wanting a telephone. A minority, of course, would like a telephone, but cannot afford one. In any case, the market for home telephones will never be 100% of all households. Those categories who never purchase are termed ‘non-adopters’.
8 Portfolio models
The first documented use of portfolio analysis was done by Alan Zakon in the late 1960s who was then working with the Mead Paper Corporation in the USA. He proposed a matrix as shown in Figure 6:
Figure 6 Zakon’s matrix
The formula was very simple. Savings account meant no cash flow but growth; sweepstake meant speculative products; bonds were some cash flow and some growth and mortgage meant large cash flow but no growth. Products, or SBUs, were simply assessed on a qualitative basis and then placed in an appropriate box. However, what the matrix did to was to allow management to look objectively at SBUs in terms of their current situation and allow management to make decisions as to their future.
However, since this first model, which is now more for historical interest than for practical application, many models have been developed, the most important and well known of which are now described and evaluated in more detail.
8.1 Boston Consulting Group (BCG) matrix
The BCG matrix (sometime referred to as the ‘Boston box’) was an ‘overnight success’ as it had much to commend it, not least of which was the fact that it was underwritten by the Harvard Business School. It did, however, have much backing in terms of research that came principally from the Profit Impact of Marketing Strategy (PIMS) study that incorporated 57 large companies and 620 subsidiary companies in its database in 1974. By linking market share with profitability, the PIMS study was found to closely correlate with the notion of the BCG matrix. It was also popular in that it was simple and by concentrating on the criteria of market growth and market share it was a tool to which the user could instantly relate. The BCG matrix is described in Figure 7:
|RELATIVE MARKET SHARE (log scale)|
Figure 7 BCG Matrix
Each of the circles represents the size of the overall market and the segment taken out of that circle represents the company’s share of that total market.
Each of the quadrants is now explained:
- Stars are SBUs with a high market share in a high growth industry and it has a good earning potential. However, at what is probably an early stage in its life cycle, the product is probably costly to maintain in terms of having to engage in aggressive marketing effort and this probably means high advertising costs.
- Cash cows have a high market share but have probably matured in a slow, or zero, growth market. They are typically well established with loyal customers and product development costs are relatively low as the initial research and development expenditure has been recovered. These are profitable ‘safe’ products and a strong company has many in its portfolio. Generally, stars move into this position when the overall market has stabilised.
- Question marks are sometimes referred to as ‘problem children’ or ‘wildcats’. Here, market growth prospects are favourable, but they have a relatively low market share, so the SBU has only a weak foothold in an expanding, but probably highly competitive, marketplace. If the SBU is to become a star then substantial marketing or research and development expenditure might be needed and this is a problem that marketing management must address.
- Dogs are sometimes referred to as ‘pets’ in this respect and this is an SBU characterised by low market share and low growth. These are SBUs for potential liquidation, but as the ‘pet’ term implies they are probably still there for nostalgic reasons on the part of management. Indeed, when companies are in difficulties and creditors take over the first thing that is done is to prune the dogs from the portfolio. It is accepted that in some circumstances the retention of dogs might be necessary in order that the company can provide a comprehensive portfolio of products that it offers as part of its overall product mix.
In practice companies tend to have a balanced portfolio, but those with a preponderance of ‘dog’ products are clearly in difficulty. Stronger companies will have a preponderant mixture of ‘stars’ and ‘cash cows’. It does not follow that SBUs must progress around each of the boxes in a sequential manner. However, the matrix is dynamic and will change over time as market conditions get better or worse and indeed as products move through their product life cycle stages. Marketing management must attempt to ensure that ‘star’ and ‘cash cow’ SBUs remain in their respective positions for as long as possible, for these are the ones which provide most of the company’s profits and such SBUs are indeed the company’s insurance for the future. Clearly ‘question marks’ must be looked at in terms of pushing them into the ‘star’ category through marketing actions. ‘Dogs’ clearly need careful evaluation to see whether any pruning of the range is needed.
8.2 The General Electric (GE) business screen
This matrix was developed by the management consultants, McKinsey & Co, for General Electric (USA). It was an attempt to try to overcome some of the difficulties encountered when attempting to apply the BCG matrix by using a broader range of company and market factors when assessing the position of a particular SBU. The technique uses market attractiveness and business position as its two criteria. Different weights are attached along each axis along the parameters of ‘low’, ‘medium’ and ‘high’. For the ‘market attractiveness’ axis, measurements like market growth rate, market size, difficulty of market entry, number of competitors, profit margins and technological requirements should be considered. For the ‘business position’ axis, this considers matters like the size of the SBU, the strength of its position compared to that of the competition, capabilities of the organisation in relation to production and research and development and the strength that is displayed within the management of the SBU. The matrix uses nine boxes and is described in Figure 8:
Figure 8 General Electric (GE) matrix
Similar to the BCG matrix, the circles represent the size of the overall market, and the segments within each of the circles represents that SBU’s share of the total market.
8.3 Porter’s generic strategies and the industry/market evolution model
In 1980 Michael Porter identified three generic strategies for achieving success in a competitive market:
- Overall cost leadership which means producing a standard product at low cost to undercut competition or through engaging in heavy advertising.
- Differentiation which is selling at a higher price than average, something that consumers will then see as having some unique feature of quality or image or design.
- Focus which concentrates on a specialist product range or a unique segment of the market or a combination of them both.
Figure 9 illustrates the profitability implications of these strategies. It can be seen that financial success does not necessarily mean that a company has to have a high market share to be successful.
Figure 9 Porter’s generic strategies
Fig 9 illustrates the profitability implications of the three strategies. It can be seen in this model that financial success does not mean that a company has to have a high market share. Companies can have a small market share and still be profitable (upper left) through specialised offerings. The upper right sector is profitable as products can be differentiated or they may have a large market because of economies of scale reflected in lower prices. Companies ‘stuck in the middle’ have problems as a result of low profits and a modest market share.
In 1985 Porter developed a model which furthered this earlier research. His model was based upon three broad stages in the evolution of and industry/market:
- Emerging industry that is portrayed by hesitancy on the part of buyers over the likely performance of products, the function of these products, and the possibility of obsolescence as manufacturers leapfrog each other in terms of technological improvements at the early stage of the life of the industry and the products that are being produced.
- Transition to maturity is distinguished by reduced profits throughout the industry and a general slow down in growth. Customers become more confident with their purchases as they are more familiar with the range of products and manufacturers. The industry settles down in terms of technological breakthrough and most product offerings are relatively similar. Emphasis moves away from product features towards non-product features like branding and advertising.
- Decline is where substitute products begin to make inroads into the marketplace, customer needs change because of social or demographic reasons. The product is basically becoming ‘stale’.
Each of these stages were then looked at in terms of whether the company was a leader or a follower in the industry, and the matrix is illustrated in Figure 10 which also suggests strategies for each individual sector:
(transition to maturity)