DEFINITION of Problem Child
A problem child is a business with a small market share in a rapidly growing industry. It is one of the four categories in the growth-share matrix, a management tool introduced by Boston Consulting Group in 1970 to help companies decide which businesses units or products to invest in and which to sell. These matrices were quite fashionable for a while. But it is more suited to conglomerates in their 1970s heyday. Besides, market share is no longer a direct predictor of sustained performance. Today, the ability to adapt to change is an even bigger driver of competitive advantage.
BREAKING DOWN Problem Child
Problem children are plotted on the growth-share matrix, along with other business units. The x-axis shows relative market share (or the ability to generate cash) and the y-axis shows the rate of market growth (or the need for cash).
- Cash cows are businesses that have a high market share (and generate lots of cash) but low growth prospects (and therefore a low need for cash). They are often in mature industries that are about to fall into decline.
- Stars have high growth prospects (need a lot of cash) and a high market share (and generate lots of cash).
- Problem children have high growth prospects but a comparatively low market share
- Dogs have small market shares in mature industries.
This framework suggests that surplus cash should be transferred from a conglomerate's cash cows to the stars and the problem children, while the dogs should be divested. Problem children are particularly challenging, as they consume more cash than they generate.
The question management faces is whether investing in a problem child's business will increase market share enough to turn it into a star. A problem child could still turn into a dog, even after burning cash on marketing and sales. The technology sector, for example, has lots of problem children, because it is so competitive and dynamic. As a rule, problem children should not be invested in, unless there is real potential for growth.