Problem Child: What it Means, How it Works

What Is a 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 BCG Growth-Share Matrix, a management tool introduced by Boston Consulting Group in 1968 to help companies decide which business units or products to invest in and which to sell.

The growth-share matrix is also called the BCG Matrix or Boston Matrix and the problem child designation may also be referred to as a "question mark".

Understanding a Problem Child

The concept behind the BCG Matrix is to help companies with sprawling business interests quickly classify and prioritize different business lines for capital infusion or liquidation. 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).
• The problem children have high growth prospects but a comparatively low market share
• Dogs have small market shares in mature industries.

The BCG 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.

Dealing With a Problem Child

Problem children are particularly challenging, as they consume more cash than they generate. The question that 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 the name suggests, problem children require management attention. Problem children should not be invested in unless there is real potential for growth, and it is management's responsibility to judge those prospects. If the prospects look good, then management may need to invest heavily to raise the problem child to star status. If, however, management misjudges this, then they may be left with a dog in the end that will sell for less than they could have realized if they divested early.

Problem Children and the BCG Matrix Today

Matrices like the BCG Matrix were quite fashionable for a while when companies tended to hold a lot of business lines, acquire more and divest rarely. So they tend to be more suited to conglomerates in their 1970s heyday. The 1980s brought a lot more corporate discipline through the disruptive influences of raids, hostile takeovers, and leveraged buyouts (LBOs). Since then, it is rare to find a company that doesn't regularly evaluate all its business lines on a monthly basis with a strict set of key performance indicators. Moreover, 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. If corporate culture shifts once more to conglomeration—something that still hangs on in regions like Asia—then we may see the BCG matrix and others come back into vogue.