R E P R I N T

The Experience Curve -ReviewedIV. The Growth Share Matrix orThe Product Portfolio

Many businesses requirefar more cash input thanthey can ever generate.

A few businesses generatefar more cash than they canprofitably reinvest.

A few businesses are self-sufficient in cash flow. Overtime they will become muchlarger and also large netgenerators of cash.

Most businesses, however,generate very little cash eventhough they use little. Thereported earnings must bereinvested and probablyalways will. These businessesare cash traps.

Between these categories isan unstable situation thatrarely persists for long. Com-petitors of equal size in a pro-duct-market segment rarelystay of equal size.

The use of cash is proportional to the rate ofgrowth of any product. The generation of cash is

a function of market share because of the expe-rience curve effect.

The growth share matrix is a diagram of thenormal relationship of cash use and cash genera-tion.

Stars are in the upper left quadrant. They growrapidly and therefore they use large amounts ofcash. However, since they are leaders, they alsogenerate large amounts of cash. Normally, suchproducts are about in balance in net cash flow.Over time all growth slows. Therefore, stars even-tually become cash cows if they hold their marketshare. If they fail to hold market share, theybecome dogs.

Cash cows are in the lower left quadrant. Growthis slow and therefore cash use is low. However,market share is high and therefore comparativecash generation is also high. Cash cows pay the divi-dends, pay the interest on debt and cover the cor-porate overhead.

Dogs are in the lower right quadrant. Bothgrowth and share are low. Dogs often report a pro-fit even though they are net cash users. They areessentially worthless. They are cash traps.

Question marks are the real cash traps and the realgambles. They are in the upper right quadrant.Their cash needs are great because of theirgrowth. Yet, their cash generation is very lowbecause their market share is low.

N 1 3 5

THE BOSTON CONSULTING GROUP 1

CASH GENERATION(Market Share)

CASH USE(Growth Rate)

High

High

Low

Low

?

N 1 3 5

THE BOSTON CONSULTING GROUP 2

Left alone question marks are sure losers. Theycan require years of heavy cash investment. Yet, ifthey do not develop a leading market positionbefore the growth slows, they become just bigdogs.

Yet question marks are very difficult to convertinto stars. Increase in market share compoundscash needs. The cost of acquiring market sharedoubly compounds the cash needs. Question marksare sometimes big winners if backed to the limit.But most question marks are big losers.

The growth share matrix is directly derivedfrom the experience curve. The experience curveis the means of measuring probable competitivecost differentials. A difference in market share of 2to 1 should produce about 20 percent or more dif-ferential in pretax cost on value added. This isequivalent to 5-25 percent and more after-tax diffe-rential on revenues depending on asset turnoverand percent value added.

The cash flow reference is to the largest compe-titor in the product. The growth share matrix canbe drawn with market share shown in this way.

Only one competitor can be on the left of 1.0.All others are smaller by definition.

Characteristically, a normal experience curveslope will produce cost ratios to the largest compe-titor like these.

When the cost differential is less than this, it isusually because of shared experience. Failure toachieve this differential can also be caused byinadequate investment or poor management.Sometimes the segment itself has been improperlyidentified, and the market share being measured isnot the relevant market.

Growth can be shown in terms of the capitalopportunity alternatives.

Growth which is less than the company invest-ment threshold cutoff rate means that the presentcash generation is more valuable than the futureequivalent. Growth which is more than this meansthe payoff grows faster than the available alternateinvestments.

All of the products of a company can be shownon a single growth share matrix as a product port-folio. Each product can be plotted on its owngrowth and share coordinates. The size of the pro-duct can be indicated by a circle in proportionalscale.

The Experience Curve - Reviewed

R E P R I N T

4.0Ratio to market share of largest competitor

2.0 1.0 .5 .25

Growth 10%

.64 .80 1.00RELATIVE COST

Relative Share to LargestCompetitor in Specific Segment

1.25 1.55

4.0 2.0 1.0 0.5 .25

N 1 3 5

THE BOSTON CONSULTING GROUP 3

R E P R I N T

If all products are plotted on a single matrix,then the company's whole portfolio can be shownon a single display. Nothing should be in the upper sector in which

industry growth exceeds your growth. This isdeath valley. Either manage for net cash flow andget out or gain market share.

Typically most products have less market sharethan the leading competitor. Yet, it is typical alsothat the weighted average market share of mostcompanies exceeds 1.0 on such a display.

Such a single chart with a projected positionfive years out is sufficient alone to tell a company'sprofitability, debt capacity, growth potential, divi-dend potential and competitive strength.

However, great care must be taken in product-market segmentation before drawing such charts.It is quite possible for a company to be the largestin the industry and be a leader in no single seg-ment.

Growth share matrices and related charts arevery valuable tools for analyzing strategic posi-tions and options.

Bruce D. Henderson

The Boston Consulting Group, Inc. 1973

The Experience Curve - Reviewed

20%

A TYPICAL SUCCESSFUL DIVERSIFIED COMPANY

10%

IndustryGrowth Rate

Your Growth Rate

10% = Current

= Projected

2.0 1.0Relative Weighted Average Share

VS Largest Competitor

.5

This can be combined with a display to showthe direction in which each product is moving.