The Hindu Business Line : Cow, dog matrix

The success or popularity of a product is reflected in the share of the market that it commands. Companies battle for a share in the overall market for their products especially in the competitive environment of today, as higher the market share is, greater are the cash flows and profitability arising from the products. Market share is not a static figure and should keep pace with the rate at which the market itself grows. And, the relative market share is also of interest to companies within the industry as it is a guide to the competitive strength of each company.

Most companies would prefer to be involved in an industry that is constantly growing rather than one which is in decline. The rate of market growth is of great importance to all companies as it represents the level of attractiveness of the industry itself. In the development of strategic as well as marketing plans, the management is very much influenced by the life cycle of its products. According to the theory of product life cycle, there are four main stages in the economic life of a product — development, growth, maturity and decline.

The Boston Consulting Group (BCG) has developed a matrix based on the product life cycle which links the organisational performance to these four stages of the product life cycle through which its products will move.

These four stages are classified as Star, Cash Cow, Dogs and Problem Child and it is likely that, at any particular time, the product portfolio of a company will have products in all these categories. Briefly, if a product is classified as Star, the rate of market growth as well as the relative market share are both high.

A Cash Cow product is expected to generate positive cash flows with a relatively high market share even when the rate of market growth is low. A product which is a Problem Child, on the other hand, is one which has a low market share even when the rate of market growth is on the rise. Dogs are products which have relatively low growth rates both in market growth and in market share. This will be better appreciated from the accompanying matrix.

This growth share matrix, a model developed by BCG, plots the market growth of strategic business units (SBUs) and the market share relative to their largest competitors. The model seeks to analyse the balance of a company's product portfolio and has been adopted by many commercial organisations.

In the evolution of the product life-cycle, today's star product will become a problem child once the product enters the stage of a terminal decline in its growth. It is at this stage that the company should think of introducing alternative products so as to sustain demand and retain the existing market share. Each stage of the life cycle could, however, be an exceptionally long one depending upon the brand and the product category to which it belongs.

Thus, Coca-Cola and Pepsi have been in the growth or maturity stages for decades as also, Horlicks, which has been going strong for well over a century spread across countries without any perceptible decline in the demand for, or growth of, these brands.

A threat to a company's market share arises from changes in the market forces that have significant effect on its product demand. Porter has identified five forces that affect the current level of competition and these are:

the existing level of competition;

the threat of new entrants;

possible substitute products;

the negotiating power of customers; and

the negotiating power of suppliers.

Besides these, the company's pricing policy, the means of distribution employed or its promotional activities vis-à-vis other companies within the industry also have a significant effect on the market share commanded by its products.

A look now at the options available to a company which is a market leader when it is threatened by a competitor either with the launch of a new product or by stepping up the promotional activities for an existing product. One strategy would be to match or improve on the quality or features of the product threatened by the competitor or to improve the distribution methods employed, the price and the promotional activities.

It is not uncommon for the market leader to lower its prices and accept a lower level of profit during the period of the confrontation. But if the competitor also reduces its prices, even as a temporary measure, both the companies will then be in a worse position.

The second strategy would be to extend the geographical spread and gain share in new markets where the competitor has not yet entered, thus pre-empting the competitor's move into these markets. Also, extending the attack to several fronts — such as the introduction of newer products, lower prices, increased promotional offers or alternative forms of distribution — would enable better focusing than aiming at all the markets, many of which could be unprofi table owing to locational and logistic disadvantages.

If the competitor is a smaller company with a constraint on resources, the market leader could introduce the element of surprise for making inroads into the competitor's market share with a series of small, intermittent attacks with selective price-cuts, selective attacks on the other products of the competitor so as to unnerve the latter who will be hard put to sustain the share already achieved.

Where a company's growth in volume sales does not keep pace with the rate of growth of the overall market itself, it is the first indication of a fall in market share and calls for some of the strategies indicated above. Likewise, sustaining market share in a stagnant market where there are several companies involved is as much critical in order to sustain profitability and cash flows.

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