Contrary to the conventional wisdom in management, companies need not pass through a life-cycle. Rather, individual opportunities pass through a life-cycle beginning with the start-up stage, followed by scaling the business, maturity, and decline. It is more accurate to view firms not as a monolithic entity, but as a portfolio of opportunities at various points in their individual life-cycles. How can executives visualize the businesses in their portfolio to manage them more effectively?
The standard method for evaluating a firm’s portfolio is to array them using a two-by-two matrix, such as the Boston Consulting Group’s popular growth-share matrix. The vertical axis of this matrix measures the growth rate of the market, and indirectly cash usage, since faster growing markets typically require more investment to keep pace. The horizontal axis measures market share, and indirectly cash generation, under the assumption that businesses with a higher share of the market tend to throw off more profits. Combining these axes generates the familiar quadrants of the matrix, including the cash cows (low growth, high share), stars (high share, high growth), dogs (low on both dimensions), and question marks denoting businesses with low share of a growing market.
The matrix provides executives with a snapshot to consider resource allocation among units, identifying cash cows, for example, that could fund investments in rising stars, while looking to disinvest from dogs and puzzle over question marks. Although portfolio planning using the BCG and related matrices took hold in many companies, laboratory experiments and empirical studies find no evidence that these tools improved performance, and suggest on the contrary they lead to sub-par performance. Portfolio matrices suffer from three major limitations:
- These matrixes assume that increasing volume builds experience in the sector and scale economies, and that these scale and learning economies drive success. The Boston Consulting Group matrix focuses on market share and growth-two as the two variables that drive volume. Toyota’s recent recalls, however, illustrate the risk of unbridled pursuit of volume, which can undermine quality. In other markets, such as luxury goods or specialist professional services, volume is not the best measure of market success.
- Matrices provide a static picture that fails to convey how a business unit might evolve over time. Opportunities–and the business units the corporations create to pursue them–evolve over time, passing through predictable stages. A matrix captures a snapshot view of an opportunity in motion.
- Lacking a sense of time, portfolio matrices also omit the critical inflection points as an opportunity pass through the lifecycle. In pursuing the opportunity to sell My M&M’s, which customers personalize with their own message, executives at the Mars corporation had to navigate difficult questions as they moved from one stage of the lifecycle to the next: Should they scale this product instead of other promising opportunities? How would they integrate My M&M’s with established businesses? A static model neither raises nor answers these questions.
My next post presents an alternative approach to plotting opportunities throughout the stages in the life-cycle.