Recently I was thinking about which of my competing priorities should I be focused on to make sure it matters in the end. I was reminded of the BCG matrix that I had read about many years ago.
I wanted to think about whether I should focus on the standard stuff or put more priority on new ideas which perhaps had a better future. The BCG (Boston Consulting Group) matrix as most people already know, is such a tool meant for organizations to decide on which products to fund. The matrix used to be popular, till people thought the recommendations made no sense and suggested an incorrect strategy. As I found out, not quite so.
The matrix defined 4 project types based on the four cells in a 2X2 matrix. On the vertical axis was Growth Potential, and on the horizontal axis was Market share potential. The top left quadrant indicated the initiatives that provided high growth potential as well as high market share potential.
To explain, each of the quadrants starting from top left and proceeding anti-clockwise were:
1. Stars (top left) : These are projects/ products which have a high growth potential and a high market share. ( I would also add mind share within organizations)
2. Cash cows (bottom left): These were products in high market share segments but low future growth potential. Think of these as things that are successful for today, but new investment may not produce new growth.
3. Dogs (bottom right) : These are projects and products that are frankly not going anywhere. Also called cash traps.
4. Problem children or question marks (top right): Finally is the category of things that have a lot of growth potential, but are relatively nascent. They have low market and mind share currently.
The traditional interpretation of this matrix, which was also surprisingly echoed by the author, Bruce Henderson, in his original writing was to kill the dogs, milk the cows to fund the stars.
Essentially, it implies that people should take the benefit (cash flows) from the high market share and low growth initiatives, to fund high growth and and high market share potential initiatives. This of course people found objectionable after some time, as it meant to divert cash from low growth segments to high growth segments, almost like a parasitic existence of one on another. This was something that was not sustainable unless the cash outflows (read benefits) from the low growth segment was large enough to sustain the growth in the new segment.
However, this needs to be interpreted in context of other equally important concepts presented by the same author in his other writings. With these in mind, he himself may have not explained himself fully.
First, the author said that market share and not margins is the most important thing to focus on. The rationale was that in the author's view based on analysis of many companies in the late sixties and seventies, margins improve as the entity becomes more experienced in a certain market and product. However these margins are only sustained and improved as long as the company is able to maintain market share. In absence of market share, margins become impossible to defend. Putting it in perspective of the matrix, the left half of the quadrant is where one should focus.
In a separate piece of writing, the author also said that building market share requires new investments to fund growth. In high growth segments, the market share cannot be sustained unless continuous investment is made. So there is a propensity for Stars to become Question marks unless funding can be sustained that is proportional to the growth of the market.
On the other hand, projects that are deemed as pets (they don't have market share or growth potential ), should either be killed or should be invested in to such an extent that they become market leaders in terms of market share. Bottom line, according to the author, entities need to maintain market share at all costs, irrespective of growth potential of the market and let margins take care of themselves.
These, in my personal humble opinion, are very important insights that apply equally to companies building product portfolios as well as individuals when deciding on where to focus.
I wanted to think about whether I should focus on the standard stuff or put more priority on new ideas which perhaps had a better future. The BCG (Boston Consulting Group) matrix as most people already know, is such a tool meant for organizations to decide on which products to fund. The matrix used to be popular, till people thought the recommendations made no sense and suggested an incorrect strategy. As I found out, not quite so.
The matrix defined 4 project types based on the four cells in a 2X2 matrix. On the vertical axis was Growth Potential, and on the horizontal axis was Market share potential. The top left quadrant indicated the initiatives that provided high growth potential as well as high market share potential.
To explain, each of the quadrants starting from top left and proceeding anti-clockwise were:
1. Stars (top left) : These are projects/ products which have a high growth potential and a high market share. ( I would also add mind share within organizations)
2. Cash cows (bottom left): These were products in high market share segments but low future growth potential. Think of these as things that are successful for today, but new investment may not produce new growth.
3. Dogs (bottom right) : These are projects and products that are frankly not going anywhere. Also called cash traps.
4. Problem children or question marks (top right): Finally is the category of things that have a lot of growth potential, but are relatively nascent. They have low market and mind share currently.
The traditional interpretation of this matrix, which was also surprisingly echoed by the author, Bruce Henderson, in his original writing was to kill the dogs, milk the cows to fund the stars.
Essentially, it implies that people should take the benefit (cash flows) from the high market share and low growth initiatives, to fund high growth and and high market share potential initiatives. This of course people found objectionable after some time, as it meant to divert cash from low growth segments to high growth segments, almost like a parasitic existence of one on another. This was something that was not sustainable unless the cash outflows (read benefits) from the low growth segment was large enough to sustain the growth in the new segment.
However, this needs to be interpreted in context of other equally important concepts presented by the same author in his other writings. With these in mind, he himself may have not explained himself fully.
First, the author said that market share and not margins is the most important thing to focus on. The rationale was that in the author's view based on analysis of many companies in the late sixties and seventies, margins improve as the entity becomes more experienced in a certain market and product. However these margins are only sustained and improved as long as the company is able to maintain market share. In absence of market share, margins become impossible to defend. Putting it in perspective of the matrix, the left half of the quadrant is where one should focus.
In a separate piece of writing, the author also said that building market share requires new investments to fund growth. In high growth segments, the market share cannot be sustained unless continuous investment is made. So there is a propensity for Stars to become Question marks unless funding can be sustained that is proportional to the growth of the market.
On the other hand, projects that are deemed as pets (they don't have market share or growth potential ), should either be killed or should be invested in to such an extent that they become market leaders in terms of market share. Bottom line, according to the author, entities need to maintain market share at all costs, irrespective of growth potential of the market and let margins take care of themselves.
These, in my personal humble opinion, are very important insights that apply equally to companies building product portfolios as well as individuals when deciding on where to focus.
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