Cash Cows and Stars
When you manage a business portfolio that includes several business industries, you have to decide which ones you will invest in more, less, and not at all (or to liquidate). You have probably already seen the matrix below, developed by the Boston Consulting Group. This matrix makes it possible to classify the organization’s business portfolio according to four categories:
1. Dogs – Businesses in a low-growth market, where we have a small market share
2. Cash Cows – Businesses in a mature, slow-growing market, where we have a large market share
3. Question Marks – Businesses in a high-growth market where we only have a small market share in for the time being
4. Stars – Businesses in a high-growth market where we have a large market share
BCG Matrix – Dogs, Cash Cows, Question Marks, and Stars
When the market is mature and slow-growing – If we don’t have a significant presence in it (dog), do not invest in it. It’s best to liquidate the business, which probably isn’t profitable. On the other hand, when the market is mature and we are among the leaders in it (Cash Cow) it is better to continue with the business (which is probably profitable), and to reap handsome profits (in other words, to “milk” the market).
When the market is still in its infancy and slow-growing – If we don’t have a significant market share in it (question mark) we must check it carefully, and decide whether we can achieve a significant market share in it within a reasonable time frame, and by wisely investing our resources. When the market is fast-growing and we are leading it – we must continue to invest so that we can pick the fruits expected to ripen later.
In order to maintain continuous growth in the long term, our money should flow from the Cash Cows to the promising Question Marks and Stars. We should “milk” the Cow. In other words – invest less in it and amass the profits to feed investments in growing markets – in suitable Question Marks and Stars. This is where the theory ends.
In practice, it is very difficult to implement, mainly because we are
emotionally attached to the Cow, to our profitable and well-established business industry, which is our source of pride. Most of our employees – in sales, service, operations and marketing, are accustomed to nurturing the Cow. Our reputation is mostly associated with the Cow. Most of our customers, with whom we have developed important relationships, are only with us because of the Cow. How can we invest less in the Cow? How can we milk it and the customers that are attached to it? How can we invest the Cow’s milk in industries that we have not yet established our success in, where our revenues are still small, where we do not yet have a lot of customers, experience, or a reputation? Even if these steps make some business sense for the long term, they go against our intuition and extensive experience.
For example, many local companies considered leaders in Israel, encounter immense difficulties when they try to expand their business to other countries. These companies have an established reputation and extensive experience in Israel, good relationships with customers, strong brands, high revenues and reasonable profitability. Even if the market in the target countries abroad is much larger, faster growing and more profitable, these companies need to invest a great deal of resources to succeed there. The transition from a situation where the majority of sales are in Israel to one where the majority are abroad, is generally an investment with an uncertain outcome. For example, it will be very difficult to convince the local marketing manager to reduce his marketing budget to free up budgets for the investments required abroad.
In the interim, when the organization is starting to export but has not yet attained significant success abroad, the chairperson, the company management, and especially the CEO and CFO, must allocate appropriate and realistic resources for business abroad. If they do not have available sources of funding, they must insist on doing it at the expense of the local market, to “milk the cow”, and to persist until the desired change occurs, until the Question Mark turns into a Star, and even afterward (since Stars also require investment). Only when approx. 50% or more of the sales and revenues come from abroad will the internal mood of the organization change, knowledge will be gained, significant connections and experience abroad will be secured, and everyone will start feeling that developing the markets abroad justified the effort and the investment.
In summary: You will definitely need to milk the Cows so that you can reach the Stars and keep on growing. This is neither easy nor simple. You will have to overcome internal resistance but that’s how it is when you want to change, develop, and grow. Success has a price. No pain, no gain….