The Boston Consulting Group has suggested that market growth is closely related to cash usage and that relative market share is a “good” indicator of cash generation.
Low-growth markets, it has been argued, are typically mature markets requiring little cash, whereas high-growth markets necessitate high investments to develop the markets and to fight the increasing competition that is attracted to these markets.
On the other dimension, relative market share has been used as an indicator of the ability of a business to generate cash. This relative market share is usually computed as the market share of a product divided by the market share of its largest competitor. The argument used to justify the relative market share variable is that a business with a higher share enjoys more experience in terms of cumulative production than its competitors. This enables it to produce at a lower cost and to generate higher margins. The rationale for the value of relative market share rests, therefore, on the existence of an experience effect.
The typical growth/share matrix defines two levels (low and high) for each variable and develops the four well-known cells of cash cow (high relative market share in low-growth market), star (high relative market share in high-growth market), dog (low relative market share in low-growth market), and question mark (low relative market share in high-growth market). See a sample portfolio on Figure 16.
Let us consider the problem of assigning the cut-off delimiting the low and high levels of each variable (market growth and relative market share). There are several definitions of relative market share. The one used in Markstrat involves dividing the business market share by the industry leader’s market share if the business analyzed is not the leader or, if it is, dividing the business leader’s share by that of the next closest competitor (with the next highest share). In that case, a natural cut-off point is a relative market share of 1.0. However, this is rather constraining because only one competitor per industry will be in a cash cow or star position. Some companies prefer to use a lower cut-off point of 0.7 or 0.8. Other firms want to give a product a cash cow or star position only if it has a significantly dominant position and use a higher cut-off point of 1.2 or even 1.5.
For market growth, the cut-off point is usually determined on the basis of the average growth of the mix of markets in which the firm is present. One can, however, decide on a higher level to develop a more aggressive approach in the search for new market opportunities or a lower level to emphasize the possibility of growing with established products.
In fact, the cut-off for each variable is rather subjective. Therefore, the portfolio analysis should consider this issue, find a justification for the value selected in a given application and compare different definitions.