Strategic development and marketing planning
5.4 Tools for strategy development
5.4.2 Selecting the product portfolio
Diversification
Diversification tends to be a more risky strategy, as it involves an organization moving into new products and new markets. Pure diversification may be relatively unusual in financial services, but the development of bancassurance represents a form of diversification as established banks move into the provision of insurance- related products. Similarly, the decisions by traditional banks to offer Islamic bank- ing products can also be seen as a form of diversification.
cut-off point. Products are positioned in the matrix as circles with a diameter proportional to their sales revenue. The BCG matrix relies on the assumption that a larger market share results in lower costs and thus higher margins.
The appropriate strategy for a particular product will depend upon its position within the matrix. The question mark (or problem child) has a small market share in a high-growth industry. The basic product is popular, but customer support for the specific company versions is limited. If future market growth is anticipated and the products are viable, then the organization should consider increasing marketing expenditure on this product. Otherwise, the possibility of withdrawing the product should be considered.
The star has a high market share in a high-growth industry. By implication, the star has the potential to generate significant earnings currently and in the future.
At this stage it may still require substantial marketing expenditures to maintain this position, but can be regarded as a good investment for the future. By contrast, the cash cow has a high market share but in a slower-growing market. The traditional bank current account probably falls into this category. Product develop- ment costs for the cash cow are typically low and the marketing campaign is well established, so the cash cow will usually make a reasonable contribution to overall profitability.
Finally, the dog represents a product with a low market share in a low-growth market. As with the cash cow, the product will typically be well established, but it is losing consumer support and may have cost disadvantages. The usual strategy would be to consider withdrawing this product unless cash flow position is strong, in which case the recommended strategy would be to cut back expenditure and maximize net contribution.
The BCG matrix is potentially useful, but its recommendations must be interpreted with care. In particular, it is important to recognize that it focuses only on one aspect
Markets
Existing New
High
Star
10%
1x
Market share relative to competition
Low High
Low
Market growth rate
Dog Cash cow
Question mark
Unit trusts Credit cards
Current accounts
Figure 5.3The BCG matrix.
of the organization (market share) and one aspect of the market (sales growth).
The GE matrix works on similar principles, but concentrates more generally on trying to measure the attractiveness of the market (rather than just measuring market growth) and competitive strength (rather than just market share). This means that the GE matrix gives a broader picture of the strengths and weaknesses of the product portfolio, although it is often more difficult to construct.
Best (2005) suggests using the GE matrix to guide the choice of offensive versus defensive strategies, as shown in Figure 5.4. Comparing market attractiveness and competitive strength results in a series of recommendations about the most appro- priate way for the organization to compete in its market. These strategic options are classified as either offensive or defensive.
Offensive strategies include: invest to grow, improve position, and new market entry. These are very similar to Ansoff’s growth strategies. Invest to grow involves marketing expenditure to grow market share or even to grow the overall market.
It is essentially equivalent to a market penetration strategy. Improve position involves investing resources to enhance the value offered to consumers relative to the value offered by competitors. Such an approach is analogous to a product development strategy. New market entry, as the description suggests, is effectively equivalent to market development and diversification strategies.
Defensive strategies are classified as: protect position, optimize position, mone- tize, and harvest/divest. A strategy of protect position is appropriate where an organ- ization has a currently strong position in an attractive market, and the aim is to discourage new entrants and limit the expansion potential of other competitors.
In a market where growth is slowing down, optimize position involves focusing attention on maximizing the return on marketing investment. Typically, such an approach would involve trying to focus attention on the profitable customers and controlling marketing expenditure. Trying to persuade less profitable customers to make more use of low-cost channels (such as the phone and Internet) and less use of high-cost channels (such as the branch) is one example of an optimizing strategy.
New market entry Improve position 100
80 60 40 20 0
0 20 20 60
Competitive advantage
80 100
Market attractiveness
Invest to grow Improve position Project position Improve position
Optimize position Harvest
Improve position Optimize position
Invest to grow Project position Optimize position Monetize, harvest or divest Monetize,
harvest or divest Harvest or
divest
Invest to grow Project position
Figure 5.4Offensive and defensive strategies (adapted from Best, 2005).
Monetize is a more aggressive version of optimize, and focuses on maximizing cash flow without actually preparing to exit from the market. Finally, a harvest/divest strategy goes a stage further and involves maximizing cash flow from a product prior to exiting the market. If there is no opportunity to maximize cash flow, then an early market exit would be preferred.
The product lifecycle
The product lifecycle (PLC) is widely used as a tool for market planning, in that it can be employed to guide an organization both in the determination of the appro- priate balance of products and in the development of a suitable strategy for the mar- keting of those products. Its usefulness has been regularly challenged, and clearly there is a risk that the PLC could oversimplify the evolution of a product. While rec- ognizing these limitations, it remains a potentially helpful way of thinking about the strategic management of products.
The product lifecycle, as shown in Figure 5.5, suggests that a given product or service will pass through four basic stages: introduction, growth, maturity and, eventually, decline. The role of marketing is generally considered to be one of prolonging the growth and maturity phases, often using strategies of product mod- ification or product improvement, which are frequently regarded as less risky than developing completely new products.
Assessing the existing product range according to lifecycle position can give some indication of the balance of the existing product portfolio. Furthermore, according to stage in the lifecycle, the organization can obtain some guidance as to the appro- priate marketing strategy.
Introduction Growth Maturity Decline
Time Sales
Figure 5.5The product lifecycle.
Detailed stages of the lifecycle are as follows:
1. Introduction. A period of slow growth and possibly negative profit, as efforts are being made to obtain widespread acceptance for the service. Cash flows are typ- ically negative and the priority is to raise awareness and appreciation of the prod- uct, with the result that the marketing mix will place a high degree of emphasis on promotion. Mobile banking is one example of a service in the introductory stages of its lifecycle.
2. Growth. Sales volumes increase steadily, and the product begins to make a significant contribution to profitability. Increases in sales can be maintained by improvements in features, targeting more segments, or increased price competitiveness. It is at this stage that the new service will begin to attract significant competition. Growth services currently include telephone banking, and the more sophisticated types of ATM. Unit trusts and other related types of investment product have probably also reached the growth stage of the product lifecycle.
3. Maturity. Sales growth is relatively slow, and the marketing campaign and prod- uct are well established. Competition is probably at its most intense at this stage, and it may be necessary to consider modification to the service and the addition of new features to prevent future decline. Many bank current accounts are prod- ucts that can be seen as having reached maturity, and in many cases are being modified in attempts to prolong their lifecycle.
4. Decline. Sales begin to drop away noticeably, leaving management with the option of withdrawing the product entirely – or at least withdrawing marketing support. In the financial services sector product withdrawal may be difficult, as some products (such as life insurance) cannot simply be withdrawn because some customers will still be paying premiums. Endowment policies (life insurance based savings) are probably now in the decline phase of a lifecycle.
The use of the product lifecycle in marketing planning can provide some guidelines for the allocation of resources among service products, enabling the organization to attach high priority to growth products and medium priority to mature products, and to consider possible withdrawal of declining products.
However, as with the BCG matrix, the recommendations should be interpreted with care and not simply followed without question. In particular, it is important to rec- ognize that lifecycles will differ very dramatically across product types – they may be very short or very long. Some products may appear never to reach the decline phase, while others may never get past the introduction stage. The lifecycle for a product class (e.g. bank accounts) will typically be much longer than the lifecycle for a specific brand. Moreover, the marketing recommendations must be interpreted with care to avoid the potential for the lifecycle to become a self-fulfilling prophecy – for example, if a product looks as though it has reached maturity and possibly started to decline, the reduction of marketing support will tend to ensure that the predicted actually occurs. Finally, it is essential not to think only of a product’s position in the lifecycle. As Hooley (1995) has shown, strategy and performance may be driven as much by market position (specifically, market share) as by life- cycle stage.