The Cash Cow where market growth is low but market share high.
These are the rising stars of previous times and the business will wish to extend their life as long as possible through product development, branding and promotion. Investment needs to be strong but, in this case, always from cash generated.
Finally Dogs where both market growth and market share are low.
These could be a failed problem child or simply products which failed to win the competitive game. Dogs should be avoided if at all possible by early divestment, possibly to the winning businesses, or subjected to managed decline minimising the final impact on cash flow. A third approach is to build a “kennel” of dogs by acquiring other competitive products and thereby increasing market share to become a cash cow. The dream scenario would be to build on the skill base and reinvent the product line into an entirely new market opportunity and become a rising star.
I like to add a fifth category of test tube baby, which is products still in development.
The strictly growth business should have a number of these ready on the shelf for launch when market conditions are right. These may include second generation products used to extend the life of cash cows or entirely new products waiting for the right market conditions prior to launch.
BUILDING THE PORTFOLIO
There are many ways of building the product portfolio over time The chart above shows how this might be accomplished. The four quadrants of the Boston Matrix are expanded to provide space for the possible activities and the way in which products can be moved through, and between the different stages.
Rising Stars should be fed to fuel their growth. The finest possible result for a product is for an in-house invention to move immediately into rising star status.These require strong investment in capacity, marketing and product development. Unit costs need to be steadily reduced and as much added value built in as possible. The relationship with the customer base has to be developed and secured.
Rising stars that stall in their growth can be returned to problem child status for further consideration.
Another means of initiating a rising star is through acquisition.
Steady growth as a rising star will inevitably result in the product moving into the cash cow category.
The Problem child needs to be nursed along.This implies a limited amount of attention and cost. When it is deemed that the chance of life is minimal the product should simply be ditched. Products with potential have to be further developed to initiate growth and movement into the rising star category.
Cash cows are milked to generate cash for development of products in the other categories. The product life has to be extended as long as possible and the competitive position continually secured through steady investment. Selective reductions in some resources might be made to increase the margin. Cash cows can be converted back into rising stars through development of added value.
Acquisition to improve market share is also a viable approach for cash cows.
Aging cash cows will move towards dog status as the market declines.
Dogs have to be starved.There are a variety of ways dogs can be removed from the business. As a last resort they are simply closed down, but this often has heavy closure costs. Acquisition is a viable approach to increase the overall market share and thereby convert the dog into a cash cow. Divestment is the reverse of acquisition as another business improves market share of their product range.
Finally a dog can sometimes be re-invented and moved into rising star status by using the existing resources for an entirely new product venture.
REVIEWING THE STRATEGY AND THE PRODUCT LIFE CYCLE
The Product Life Cycle identifies four stages in the life of any successful product.
Early users or experimenters are the consumers prepared to take the risk of trying the product soon after it is launched. The growth stage occurs after demand takes off with many users and repeat purchase. The maturity stage kicks in when demand depends solely on repeat purchase and finally decline as the product loses its appeal as other new products starting up.
Typically products which began as test tube babies are launched and might become a problem child if not successful, or transform into rising stars before being cash cows. In practice they can move into almost any category at any time.
If products are unsuccessful they might simply die soon after launch or become low volume lines dependent upon repeat purchase by the early users or a succession of experimenters, who never repeat purchase.
The vital issues to get right are the change points in the Product Life Cycle when there are paradigm shifts in the pattern of demand. The business needs to react fast to these and take appropriate action ahead of competition.
The Chairman and CEO need to continuously assess the position of the business and its products in the product life cycle.They must be seeking to test the bases upon which the CDSV depends and identify significant changes in product market dynamics.
There are five critical points on this curve when paradigm shifts in demand occur that require immediate review; invention, launch, take off, onset of maturity and irredeemable decline.
The invention of the product will require investment in time and resources. The business needs to be satisfied that there is a latent market need for this idea. The amount of cash allocated will relate to the size of the potential opportunity or threat.
The launch of the product is designed to tempt experimenters to try it out. Launching automatically assumes the business is ready to commit itself to the strategic investment that will be needed to drive growth once the product is proven to be a success. Launching reveals the product to the competition with the threat of early copying or, even worse, improving.
As soon as the market takes off strategic investment is invariably needed to provide the capacity to fuel market growth. Strategic investments are based on market activity rather than financial justification. The business will have to make the financial and human resources available, possibly ahead of cash flow. This will be the time to appoint the very best executives suited to the risks inherent in running a business or product for fast growth.
The onset of maturity will trigger a new set of tactics designed to maximise the cash generation and extend the useful life of the product for as long as possible. This may well entail the development or launch of a second generation product. This may also initiate a change in the top team to less growth oriented and more profit oriented executives to reflect the move from being a “rising star” to becoming a “cash cow” with its greater expectation for cash generation.
Finally the start of irredeemable decline demands either harvesting through selling the business, acquisition of competitors to minimise margin decline, or reinvention.
These are all critical stages either in a product life or the life of the entire business. It is often difficult to know where you are on the product life cycle, but there should be adequate resource to improve the chances of success.
The CEO is likely to have a marketing officer intimately involved in the preparation of the next growth projects. He will be constantly reviewing the competitive position and in a good position to spot changes to market dynamics. The CEO with his top executives will also be close to market issues.
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