- Question Marks – These are new products or projects that require lot of cash and investment to make them profitable. Think of a pharmaceutical company introducing a new drug. There is R&D, product development, marketing and various other costs involved in bring this product to the market. And when the product does come to the market, it can either be a very successful product (very high margins – a Star) or it can flop (divest – a Dog)
- Star – These are the successful products that are still enjoying low competition and therefore have high growth rates. A company should continue to invest in these products (or services) to capture as much market share as possible before the competition comes in or the market becomes saturated. If in the process the company establishes competitive advantage that allows it to earn higher margins than the competition (for example, a good brand, or a monopoly position, or a better cost structure due to economies of scale), then as the market matures, these products will turn into Cash Cows. If a sustainable competitive advantage cannot be established, the company will see eroding margins over time and commoditization of the business. At some point, these products will have to be divested (Dogs)
- Cash Cows – When the market for a product matures, the market leader is often a company that is able to generate better margins then the competition. A strong brand allows a company to charge higher prices than the competition. In regulated markets, there is often a barrier to entry that stops the competition to enter. Or in case of a product like Microsoft Office, the wide acceptance of the product by itself creates a barrier to entry because the switching costs are too high for the customers. A company that has a Cash Cow product should continue to “milk” the cash cow. These products require little investment and generate tremendous cash flows that can be used to fund new Question Marks or grow Stars.
- Dogs – The products that are unsuccessful or were once successful and were later commoditized are the Dogs that need to be divested. Dogs may still have economic value and can often be sold, spun off or assets repurposed. It is not always necessary to shut them off.
- They will be acquired by a larger company for assets and I will make a premium, or
- They will fix the business and the stock will appreciate, or
- They will lose more money in which case someone will decide it is better to close the company and return the cash to the shareholders