Product life cycle and the BCG matrix

Accounting Ahead | Original study resource | accountingahead.com.au

Product life cycle and the BCG matrix

MODULE 1 | PART E.2 | STUDENT COMPANION

Organisations hold a portfolio of products to spread risk, just as investors hold a portfolio of shares. Product

risks include uncertain demand, volumes, prices, investment needs, competitors and substitutes, and

obsolescence.

The product life cycle

Introduction Growth Maturity Decline

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Sales Cash flow (dashed) Illustrative shapes, not real data

Most useful for consumer products with short to medium lives (electronics, cars); less useful for commodities

such as iron ore or oil.

Each stage at a glance

Stage Market Cash flow and profit Typical strategy

Introduction Risky; high prices, low

demand; no guarantee of

acceptance

Heavy cash investment; losses

likely

Price high to recover R&D, or

penetration pricing to build

dominance

Growth Rapid expansion; competitors

enter; prices fall

Investment in capacity and

marketing; can be the most

profitable stage

Build share and capacity

Maturity Growth slows; brands settle;

consolidation; price

competition

Little new investment; cash

flows rise; profits start to fall

Defend share; harvest cash

for new products

Decline Saturation, obsolescence,

substitutes; weaker suppliers

exit

Revenue falls; cash flow may

turn negative (warranty, parts,

service)

Manage the run-down; meet

service obligations

STRATEGIC MANAGEMENT ACCOUNTING | M1 PART E.2 | STUDENT COMPANION

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Case note: Nintendo Wii

Nintendo's Wii went on sale at the end of 2006 and was hard to find in shops for months because demand

outran production. It sold more than 100 million units over its life. As the market saturated, sales slowed; its

successor, the Wii U, launched in late 2012, and Wii production in Japan ended in 2013. Nintendo had the next

product ready as the old one declined: portfolio thinking in action.

Sources: Engadget and Fortune/CNN reporting on Wii shortages, 2007; lifetime sales as reported from Nintendo results (about 101.6

million units); Wii U launch, November 2012.

The BCG growth share matrix

Star

Protein bars: market

leader; market growing

18% a year

Invest to keep up with

growth

Question mark

Seaweed crisps: 4%

share; market growing

22% a year

Invest to build share, or

withdraw

Cash cow

Salted peanuts: market

leader; market growing

1% a year

Harvest the cash to fund

others

Dog

Rice crackers: small

share; market barely

growing

Consider removing

(check what depends on

it)

High Low

Relative market share

High

Low

Market

growth

Coastline Snacks (imagined)

High relative share sits on the left in the classic drawing.

Relative market share compares a product's share with its

strongest rival's.

Cash cows fund question marks and stars. Dogs usually

cannot support investment elsewhere.

A snapshot: unlike the life cycle, the matrix has no time

element.

Should Coastline drop the rice crackers? Not automatically. If supermarkets stock Coastline's range

because it is complete, dropping a dog could cost shelf space for the stars. The matrix starts the

discussion; it does not end it.

Life cycle versus BCG matrix

Product life cycle BCG matrix

Tells a story over time A snapshot with no time element

Assumes products are born, grow, mature and decline Does not assume every product grows and matures

Explains cash and profit by stage Uses market growth (external) and relative share

(internal)

STRATEGIC MANAGEMENT ACCOUNTING | M1 PART E.2 | STUDENT COMPANION

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Practice questions

MODULE 1 | PART E.2 | TRY THESE BEFORE THE WORKED ANSWERS

Question 1 - Which life cycle stage?

Situation Stage and one reason

(a) Sales are still rising slowly; most buyers already own one; rivals

cut prices to hold share

(b) A brand-new product with few buyers, a high price and heavy

launch spending

(c) Sales fall each year; the company still honours warranties and

supplies spare parts

(d) Sales are doubling each year and several new competitors have

entered

(e) A product whose price has fallen sharply as manufacturers

achieve economies of scale

Question 2 - Place the products in the matrix

Product Market growth Our share vs strongest rival Quadrant and strategy

Kids' smartwatch 25% a year We hold 5%; leader holds 30%

Desk lamp 1% a year We lead: 35% vs 15%

Wireless earbuds 20% a year We lead: 28% vs 20%

Fax machine -8% a year We hold 3%; leader holds 40%

STRATEGIC MANAGEMENT ACCOUNTING | M1 PART E.2 | STUDENT COMPANION

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Question 3 - Only stars?

A company's portfolio consists entirely of stars. Explain why this could be dangerous, using both the life cycle

and the BCG matrix.

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Worked answers

MODULE 1 | PART E.2 | WORKED ANSWERS - ATTEMPT THE QUESTIONS FIRST

Question 1 - Which life cycle stage?

Situation Answer

(a) Maturity: slow growth, saturation, price competition

(b) Introduction: risky, high price, low demand, heavy investment

(c) Decline: falling sales, ongoing service obligations (cash flow may be negative)

(d) Growth: rapid market expansion and new entrants

(e) Growth: prices fall through competition and economies of scale

Question 2 - Place the products in the matrix

Product Answer

Kids' smartwatch Question mark (low share, high growth): invest to build share or withdraw

Desk lamp Cash cow (high share, low growth): harvest cash

Wireless earbuds Star (high share, high growth): invest to keep pace

Fax machine Dog (low share, shrinking market): consider removal, after checking dependencies

Question 3 - Only stars?

Stars need heavy investment to keep up with market growth, so a portfolio of only stars may run short of cash.

There are no cash cows to fund them. In life cycle terms, all products are in the growth stage together, so they

may also mature and decline together, with nothing in development to replace them. A balanced portfolio mixes

new and mature products so that mature products fund the next generation.

STRATEGIC MANAGEMENT ACCOUNTING | M1 PART E.2 | WORKED ANSWERS

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