What’s it: A star is a product with a significant market share and is in a high-growth market. It is one of four categories in the Boston Consulting Group Matrix (BCG matrix). The other three are:
- Cash cow – a product with a large market share and being in a low-growth market (mature stage). This category has successfully dominated the market and requires relatively little investment. Hence, a cash cow is a potential source of cash in for the company.
- Question marks – a product with a low market share and operating in a high growth market. This category, indeed, still has the potential to become the next cash cow. But, it requires a higher investment than the star category. The strategy’s primary focus is to increase market share and shift the position of the current market leader.
- Dog – a product that has a low market share and is in a low-growth market. The more reasonable option is to stop or divest this category.
Two variables you will need to create a BCG matrix: market share and market growth.
The BCG matrix becomes a tool helping to develop strategies. It tells how the company should focus on strategy and investment in managing its product portfolio. In a broader application, the matrix is also useful for business unit management.
How the star affects company’s strategy
The star category provides a substantial revenue stream. A large market share means that the star has a strong market position and generates a high volume of sales.
But, the star also requires a significant investment. The high market growth indicates its position is still vulnerable. Competitors may adopt aggressive and effective strategies to shift its position.
So, unlike the cash cow category, the company may not reap the considerable cash flow from the star category yet. Despite the high revenue, but, it also consumes high costs to maintain its position.
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Companies must invest and design effective marketing and advertising strategies. This category is usually the focus of the company. Management should develop more effective distribution, build loyalty, and add features to maintain their continued appeal. That way, the star continues to dominate the market in the long run, at least until the market reaches a mature stage.
If the investment is successful, the company still keeps a strong position as it reaches a slow growth phase (mature stage).
Indeed, in the mature stage, growth, the intensity of competition may still be tight. The players each try to grab market share from other competitors. However, a stronger position gives it more of an edge than other competitors.
What happens if the investment fails
Failure to hold onto a position results in the star becoming a dog. The company cannot compete, market share falls and competitors take the position of a market leader. At the same time, the market growth slowers as it has reached a mature stage. In this situation, trying to reclaim a position is more complicated and requires more resources.
Such situations often occur in dynamic industries, such as technology. Innovative products continue to replace old ones. Take the case of Nokia’s failure to maintain its position because it could not adapt to the market. Consumer needs are dynamic, but companies rely too much on past success as a basis for competitiveness. Finally, its position was shifted by players like Samsung. Nokia previously had a market share of 50.9% of global mobile phone shipments as of Q4 2007. However, that percentage fell and only reached 3.1% in Q2 2013.
How companies manage their product portfolios
Ideally, the company has a balanced product portfolio between cash cow, question mark, and star. A focus on cash cows alone can create problems in the long run. Indeed, at present, the cash cow is the company’s primary source of money. Still, the market’s low growth may only last for a short time. Then, the market enters a decline stage where the potential money inflow falls immediately.
Companies also need new products such as stars, which can become the next cash cow. They can take advantage of current cash cows to generate funds to increase the question mark category’s position and maintain the star position. That way, the money will continue to flow to the company in the future.