We've Heard This Before

American capitalism is going through one if its periodic episodes of gargantuan infatuation. The analysis is familiar: "XYZ Corp is so big and so dominant that no one can possibly compete with it for the foreseeable future. It has the most money, it attracts the brightest people and ploughs $billions into R&D. Legions of lawyers and lobbyists protect its interests. Customers flock to it for its reputation of being the biggest and best, etc. etc."

(Graphic From Management Study Guide)

In the mid-1970's your humble blogger was introduced to the Boston Consulting Group matrix.

According to BCG businesses can be classified according to four types: stars, cash cows, question marks, and dogs.

Stars- Stars represent business units having large market share in a fast growing industry. They may generate cash but because of fast growing market, stars require huge investments to maintain their lead. Net cash flow is usually modest. SBU’s [Strategic Business Units] located in this cell are attractive as they are located in a robust industry and these business units are highly competitive in the industry. If successful, a star will become a cash cow when the industry matures.

Cash Cows- Cash Cows represents business units having a large market share in a mature, slow growing industry. Cash cows require little investment and generate cash that can be utilized for investment in other business units. These SBU’s are the corporation’s key source of cash, and are specifically the core business. They are the base of an organization. These businesses usually follow stability strategies. When cash cows loose their appeal and move towards deterioration, then a retrenchment policy may be pursued.

Question Marks- Question marks represent business units having low relative market share and located in a high growth industry. They require huge amount of cash to maintain or gain market share. They require attention to determine if the venture can be viable. Question marks are generally new goods and services which have a good commercial prospective. There is no specific strategy which can be adopted. If the firm thinks it has dominant market share, then it can adopt expansion strategy, else retrenchment strategy can be adopted. Most businesses start as question marks as the company tries to enter a high growth market in which there is already a market-share. If ignored, then question marks may become dogs, while if huge investment is made, then they have potential of becoming stars.

Dogs- Dogs represent businesses having weak market shares in low-growth markets. They neither generate cash nor require huge amount of cash. Due to low market share, these business units face cost disadvantages. Generally retrenchment strategies are adopted because these firms can gain market share only at the expense of competitor’s/rival firms. These business firms have weak market share because of high costs, poor quality, ineffective marketing, etc. Unless a dog has some other strategic aim, it should be liquidated if there is fewer prospects for it to gain market share. Number of dogs should be avoided and minimized in an organization.

High-market-share companies, whether they are cash cows or stars, are very difficult to dislodge because, in general, their costs are lower than smaller competitors' and they have more reinvestable cash flow to maintain their dominance.

Today the evidence seems to suggest that the biggest companies are pulling away from, not regressing back to, the field: [bold added]

The biggest companies in every field are pulling away from their peers faster than ever, sucking up the lion’s share of revenue, profits and productivity gains...But new data suggests that the secret of the success of the Amazons, Googles and Facebook s of the world—not to mention the Walmart s, CVSes and UPSes before them—is how much they invest in their own technology.

IT spending that goes into hiring developers and creating software owned and used exclusively by a firm is the key competitive advantage. It’s different from our standard understanding of R&D in that this software is used solely by the company, and isn’t part of products developed for its customers.

Just like the "old" IBM, AT&T, Microsoft, GM and GE, the tech giants Amazon, Google, and Facebook appear to have unassailable positions in their respective sectors. Everyone else is at best a "question mark" and has to invest $billions just to be an also-ran. Everyone else may as well give up.