Long term sustainable growth of a product is based on its ability to generate increased cash flow. Cash flow of a product is determined by its position in the market. According to the Boston Matrix, there are four positions a market can occupy namely:
Cash cows:
Products with high market share and slow growth are called cash cows. Cash cows generate large amounts of cash in excess of the re-investment required to maintain market share.
Dogs:
Products with low market share and slow growth are called dogs. These products may maintain an accounting profit which must be reinvested to stay afloat. All products eventually become cash cows or dogs. The key is dominating the market before growth slows down.
Problem children:
Low market share and high growth products are problem children. These products require large cash investments. Problem children are liability and if market leadership is never achieved, they become dogs at the end of their life cycle.
Stars:
High growth, high market share products are stars. Stars do not always generate their own cash but eventually become cash cows at the end of the life cycle.
Maintaining a balanced portfolio of products is crucial for long term sustainable growth. Every product has a life cycle and no product can grow indefinitely. Growth payoff must come at the end of a product’s life cycle or it never comes. This is because at this point the amount of cash generated by the product is below what is needed to maintain market share. When products become cash cows, the excess cash should not be reinvested into the product because every dollar invested has a diminishing return. Rather, invest the excess cash in other products.
Business Growth
For long term sustainable growth, a company should have a portfolio of products with different growth rates and market shares. A balanced portfolio generates the cash for a business to truly capitalize on other growth opportunities. Market share can be obtained by:
- Earning it: developing new markets or stealing market share from competitors
- Buying it: acquiring and merging with similar business
Market share determines the profits and cash generated by a product. The bigger the market share, the higher the margin. Knowing your products position in the market allows you to plan for growth accordingly