Many organizations use additional analysis to evaluate their products and portfolios. A popular methodology was developed by the Boston Consulting group in the 1970s, and is also known as the BCG model. This model helps companies analyze their businesses and product lines and ranks their products on the basis of relative market share and growth rates using a 2x2 matrix as shown in the following diagram. The analysis group's products into four different categories (Cash Cows, Dogs, Questions Marks/Problem Children, and Stars) based on these variables:
Figure 3.7: Growth share matrix
Cash Cows are where a company has a high market share in a low or slow growing industry. These products typically are in a mature market and require little investment, resulting in cash generation well in excess of the amount of investment required to maintain the products. The term is derived from the concept of "milking" these products as they require little investment and yield good returns, if not great, returns.
Dogs are products with low market share in a mature, slow growing market. These products typically do little better than "break-even" and are often identified as potentials for divesture through selling off the product family, or killing the product altogether. Occasionally, these products do serve as a benefit to the organization as they provide a future migration path for current customers who can be moved to better performing products.
Question Marks (or Problem Children) are products operating in high growth markets, but have low market share. Question Marks have the potential to increase market share and become Stars, or if the market slows, can very easily turn into Dogs. Often times, these are the starting points for new businesses and must be monitored carefully to gauge whether they have the potential to become Stars and deserve additional funding to grow their market share, or whether they will ultimately become Dogs depleting the organizations limited resources from where they could be used more effectively.
Stars are products that enjoy high market-share in a rapidly growing industry. These are often innovative, new products that require higher funding to fight evolving competition and maintain their growth rate. The iPod and iPhone are examples of products that were Stars when they were released. As the industry growth rate slows, Stars who have been able to maintain their market leadership develop into Cash Cows. Those that cannot ultimately become Dogs due to low market share in a slow growth market.
The natural cycle for new products is they start their lives as a Question Mark. If they are able to capitalize on a rapidly growing market they turn into Stars, and if not they turn into Dogs. Stars ultimately become Cash Cows and over time also become Dogs.
As BCG stated,
"To be successful, a company should have a portfolio of products with different growth rates and different market shares. The portfolio composition is a function of the balance between cash flows. High growth products require cash inputs to grow. Low growth products should generate excess cash. Both kinds are needed simultaneously. They went on to say that a balanced portfolio has Stars whose high share and high growth assure the future; Cash Cows that supply funds for that future growth; and Question Marks to be converted into Stars with the added funds."
The BCG matrix helps managers and product leaders make resource allocation decisions once different products are classified. Depending on the product, an organization might decide on a number of different strategies for it. One strategy is to build market share for a business or product, especially a product that might become a Star. Many companies invest in Question Marks because market share is available for them to capture. This process is often used as a means to help Question Marks become Stars by taking money from Cash Cows and diverting the investment into Question Marks in hopes of them ultimately becoming Stars.