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It is common for medium to large enterprises to have multiple revenue-generating products and offerings that enable them to compete effectively. Balance and synergy within the product portfolio are things to consider. To maintain that balance, the market growth rate and market share of all the products offered are variables to pay attention to. These two variables will enable;
Product analysis - to determine which product(s) receive more or less investment
Growth strategies for new markets
Decisions on markets to exit
Image: Corporate Finance Institute
Question Marks
These have a high market growth rate, a low market share, and are cash-absorbing. Question marks are investment centres, and it is not certain they will be successful in the foreseeable future.
Products in the question mark quadrant are in a high-growth market, but your services have a low market share. Question marks are the most managerially intensive products and require extensive investment and resources to increase their market share. Question marks are usually funded with cash flows from the cash cow quadrant.
In the best-case scenario, the business would want to turn question marks into stars. If question marks do not successfully become market leaders, they end up as dogs when market growth declines.
The strategic decision for such markets is to build.
Stars
These products have a high market growth rate, significant market share, and are cash-neutral.
Products in the star quadrant are in a market that is growing fast, and the service has a high market share. Stars are market-leading products that require significant investment to retain their market position, boost growth, and maintain a competitive advantage.
Stars consume a significant amount of cash but also generate large cash flows. As the market matures and the products remain successful, stars will migrate to become cash cows. Stars are a company’s prized possession and are top-of-mind in a business’s product portfolio.
The strategic decision for such markets is to hold or maintain them.
Cash Cows
These products have low market growth, high market share, and are cash-generating.
Products in the cash cow quadrant are in a market that is growing slowly and where the service has a high market share. They are considered product leaders in the market and do not require significant further investments to maintain their position.
Cash flows generated by cash cows are high and are generally used to finance stars and question marks. Cash cows are to be “milked”. The business can invest as little cash as possible while reaping the profits generated from the products.
The strategic decision for Cash Cows is to harvest.
Dogs
These have low market growth, low market share, and are cash-neutral.
Products in the dog quadrant are in a market that is growing slowly and where the service has a low market share. Products in the dog quadrant are typically able to sustain themselves and provide cash flows, but they will never reach the star quadrant. Businesses typically phase out markets in the dog quadrant unless the products are complementary to existing product(s) or used for a competitive purpose.
The strategic decision for dogs is to divest.
Boston Matrix Decision-Making Flow
Only a diversified company with a balanced portfolio can use its strengths to capitalise on its growth opportunities. A balanced product portfolio should have:
Stars whose high share and high growth assure the future
Cash cows that supply funds for future growth
Question marks that can grow into stars with the added investments
Image: Boston Matrix Decision Flow
It is imperative to pay attention to these variables and evaluate how well your products are performing in the market.
Other strategic decisions could involve:
Revenue allocation models (inputs for this include sales history and market share)
Investment appraisals on products (NPV, PBP, cash flow, profitability index, accounting rate of return)
Product management strategies (using the product life-cycle method)
As usual, if you need to talk to an expert about your portfolio or business needs, Nitalia Consulting is just a click away.
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