Relative Market Share
According to the proponents of the BCG (Herndemson
1972), It captures the relative market share of a business unit or product. But that is not all! It allows the analysed business
unit be pitted against its competitors. As earlier emphasized above, this is due to the sometime correlation between relative
market share and the product’s cash generation. This phenomenon is often likened to the experience curve paradigm that
when an organisation enjoys lower costs, improved efficiency from conducting business operations overtime. The basic tenet
of this postulation is that the more an organisation performs a task often; it tends to develop new ways in performing those
tasks better which results in lower operating cost (Cipher 2006). What that suggests is that the experience curve effect requires
that market share is increased to be able to drive down costs in the long run and at the same time a company with a dominant
market share will inevitably have a cost advantage over competitor companies because they have the greater share of the market.
Hence, market share is correlated with experience.
A case in point is Apple Computer’s flagship product called the iPod, which occupies a dominant 73% share the portable music player market (Cantrell
2006). Analysts believe it is the impetus for Apple's financial rebirth 40% of Apple's sales is attributed to the iPod product
line (Cantrell 2006). Similarly, Dell’s PC line shares the same market dominance theory as the iPod. The PC manufacture giant occupies a worldwide market
share of 18.1%, which is commensurate to its large market revenue above its competitors (see figure 2).
Figure 2: Source: Reuters 2006
Market growth axis, correlates with the product
life cycle paradigm, and predicates the cash requirement a product needs relative to the growth of that market. A fast growing
market is generally considered attractive, and pulls a lot of organisation’s resources in an effort to increase gains.
A case in point is the technological market widely consider by experts as a fast growing market, and tends to attract a lot
of competition. Therefore, a product life cycle and its associated market play a key role in decision-making.
These products are said to have high profitability,
and require low investment for the fact that they are market leaders in a low-growth market. This viewpoint is captured by
the founders themselves thus:
The cash cows fund their own growth. They pay the
corporate dividend. They pay the corporate overhead. They pay the corporate interest charges. They supply the funds for R&D. They supply
the investment resource for other products. They justify the debt capacity for the whole company. Protect them (Henderson
According to experts (Drummond & Ensor 2004;
Kotler 2003; McDonald 2003), surplus cash from cash cow products should be channelled into Stars and Questions in order to
create the future Cash Cows.
Stars are leaders in high growth markets. They
tend to/should generate large amounts of cash but also use a lot of cash because of growth market conditions. For example,
Apple Computer has a large share in the rapidly growing market for portable digital music players (Cantrell 2006).
Question Marks have not achieved a dominant market
position, and hence do not generate much cash. They tend to use a lot of cash because of growth market conditions. Consider
Hewlett-Packard’s small share of the digital camera market, behind industry leader Canon’s 21% (Canon 2006). However, this is
a rapidly growing market.
Dogs often have little future and are big cash
drainers on the company as they generate very little cash by virtue of their low market share in a highly low growth market.
Consider Pfizer’s Inspra (Gibson 2006): “Pfizer launched this drug in Q4 2003 and continues to pump money into this problem child, despite anaemic sales of roughly $40 million
in the $2.7 billion heart-failure market dominated by Toprol-XL (metoprolol). It was thought to gain market share and become
a star, and eventually a cash cow when the market growth slowed. But, according to industry’s experts, Inspra is likely
to remain a dog, despite any amount of promotion, given its perceived safety issues and a cheaper, more effective spironolactone
in the same Pfizer portfolio. Because Pfizer invested heavily in promotion early on with Inspra, the drug's earnings potential and positive cash flow is elusive at best.
A portfolio analysis of Pfizer's cardiovascular franchise would suggest redeploying promotional spend on Inspra to up-and-coming stars like Caduet (amlodipine/atorvastatin)
or torcetrapib to ensure those drugs reach their sales potential.”