What is a Dog?
A dog is one of the four categories or quadrants of the BCG Growth-Share matrix developed by Boston Consulting Group in the 1970s to manage different business units within a company. A dog is a business unit that has a small market share in a mature industry. It therefore neither generates the strong cash flow nor requires the hefty investment that a cash cow or star unit would (two other categories in the BCG matrix).
- The term dog may also refer to a stock that is a chronic underperforming stock, and hence a drag on the performance of a portfolio.
- Dogs of the Dow is the name of a long-term investment strategy. It uses the 10-highest dividend–yielding blue-chip stocks in DJIA.
- There are four categories in the BCG growth-share matrix; dog is one of them and cash cow is another.
- In the investment world, a dog stock one year may become a cash cow another year if a company improves its profitability and profile.
How a Dog Works
Since a dog ties up valuable capital and resources that can be more effectively deployed elsewhere in the company, it is a logical candidate for sale or divestment. However, a dog may sometimes have a broader role to play within a company; for instance, it may offer products that complement those offered by other business units in the company, or it may be a portal that gets customers interested in the company’s other products. In such cases, management would have to decide whether the synergies and intangible gains offered by this business unit justify the capital tied up in it.
In the majority of cases, since a dog typically operates in a mature industry, management would not be justified in allocating more capital to it in a bid to expand market share.
If the unit’s long-term prospects are bleak, the best course of action might be to sell or divest the business as soon as possible, since its deteriorating prospects would make it harder to sell with time. In the business world, a dog is very unlikely to ever return to its glory days as a star or cash cow. In the world of investments, however, a stock that is a dog one year can eventually become a star, if management executes a turnaround that improves the stock’s profitability and prospects. This is the basic premise behind the “Dogs of the Dow” strategy, which buys the highest dividend yielders in the DJIA based on the notion that these stocks can outperform the index over time as they improve their operating performance and financial results.
It might seem sensible for a business to harvest and exit the dog quadrant of the BCG matrix. In reality though, such a move probably won't make sense because dogs have such low value and will distract management during the sale process. Frequently their weak competitive position leaves them incapable of being “harvested” either—if investment is reduced, they may just disappear. Instead, consider setting them up to operate with minimal resource drain on the rest of the portfolio, as the best people and all discretionary resources are diverted to more attractive businesses. Over time, they will become a diminishing portion of the portfolio.