Problem children
Problem children have a relatively low market share in a market that is growing quickly, often due to the fact that these are new products/services, or that they are yet to receive recognition by prospective purchasers. In order to realise the full potential of problem children, management needs to develop new business prudently, and apply sound project management principles if it is to avoid costly disasters. Gross profit margins are likely to be high, but overheads are also high, covering the costs of research, development, advertising, market education, and low economies of scale. As a result, the development of problem children can be loss-making until the product moves into the rising star category, which is by no means assured. This is evidenced by the fact that many problem children products remain as such, while others become tomorrow’s dogs.
Note: Problem children are also known as question marks.
Stars
Stars are products which are in the high market share and growing market quadrant. As a product moves into this category it is commonly known as a rising star. While a market is strong and still growing, competition is not yet fully established. Since demand is strong, and market saturation and over-supply is not an issue, the pricing of such products is relatively unhindered, and therefore these products generate very good margins. At the same time, costs per unit are minimised due to high volumes and good economies of scale. These are great products, and worthy of continuing investment for as long as they have the potential to achieve good rates of growth. In circumstances where this potential no longer exists, these products are likely to fall vertically in the matrix into the cash cow quadrant (fallen stars), and their cash generating characteristics will change. It is therefore vital that a company has rising stars developing from its problem children in order to fill the void left by the fallen stars.
Cash cows
A cash cow has a relatively high market share in a mature/low growth market and should generate significant cash flows. This somewhat crude metaphor is based on the idea of ‘milking’ the returns from a previous investment that established good distribution and market share for the product. Activities to support products in this quadrant should be aimed at maintaining and protecting their existing position, together with good cost management, rather than aimed at investment for growth. This is because there is little likelihood of additional growth being achieved.
Dogs
A dog has a relatively low market share in a mature/low growth market, might well be loss making, and therefore have negative cash flow. A common belief is that there is no point in developing products or services in this quadrant. Many organisations discontinue dogs, but businesses which have been denied adequate funding for development may find themselves with a high proportion of their products or services in this quadrant. A dog product that forms an integral part of a portfolio may also be retained to ensure complete coverage – eg a furniture reseller may have some dog products but does so in order to remain a ‘one-stop-shop’ for all customer furniture needs and not lose customers.
Limitations of the Boston Consulting Group matrix
The popularity of the matrix has diminished a little as the criteria it is based on – market share and market growth are no longer reliable predictors of long-term success. Other models have been developed from it – with further criteria added (these are outside the scope of APM, however). It was also very useful when conglomerates were much more common, and these companies needed to review their portfolios of SBUs to ensure that effort/funds are focused on the correct markets. Management should therefore exercise a degree of caution when using the matrix. Some of its limitations are detailed below:
- The rate of market growth is just one factor in an assessment of industry attractiveness, and relative market share is just one factor in the assessment of competitive advantage. The matrix ignores many other factors that contribute towards these two important determinants of profitability.
- There can be practical difficulties in determining what exactly ‘high’ and ‘low’ (growth and share) can mean in a particular situation.
- The focus upon high market growth can lead to the profit potential of declining markets being ignored.
- The matrix assumes that each SBU or product/service is independent. This is not always the case, as organisations often take advantage of potential synergies.
- The use of the matrix is best suited to SBUs as opposed to products, or to broad markets (which might comprise many market segments).
- The position of dogs is frequently misunderstood, as many dogs play a vital role in helping SBUs achieve competitive advantage. For example, dogs may be required to complete a product range (as referred to earlier in this article) and provide a credible presence in the market. Dogs may also be retained in order to reduce the threat from competitors via a broad portfolio.
Notwithstanding these limitations, the Boston Consulting Group matrix provides a useful starting point in the assessment of the performance of products and services and, more importantly, of SBUs. Although when conducting a BCG assessment an organisation will need to consider:
- how to measure each of the categories in the matrix and how reliable those measurements are
- how to manage the different categories identified to mitigate their influence on the organisation’s future performance
- what performance indicators are required as a result of the BCG categorisation, how those indicators link into both overall organisational performance and individual performance.
Now that the model has been explained and demonstrated we will move on to look at how it can be examined in APM. An analysis using the model may be asked for, however often this will be done for you in the question and the requirements will focus on how these SBUs can be managed and what performance measures may be required. You may also be expected to evaluate the use of BCG matrix as a performance management system. This section of the article will provide advice about answering several types of requirements. In the examples, only extracts from the requirements and answers are provided, to keep the article to a sensible length.
Illustration
EXAMPLE 1 – Using the model to perform the analysis
FNI is a large, diversified entertainment business based in Zeeland. It has a main objective of maximising shareholder wealth and is made up of four divisions: