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How to decide where to play
Strategic decisions involve choice: deciding what to do and, importantly, what not to do.
This leaves businesses facing a conundrum. CEOs and managers understand the power and importance of focus, but what should they focus on, and what should they ignore?
You may have heard about cash cows. The Boston Consulting Group created a business analysis model in 1970 known as the Growth-Share Matrix. The model invites us to map products against market share and market growth. It slots businesses into four categories: cash cows (high market share in a slow-growing market), dogs (low share in a mature market), question marks (low share in a fast-growing market) and stars (high share in a fast-growing market).
This leads to some important considerations.
If the market is growing and you enjoy a high share, invest enough to maintain your position, but no more. With some profit growth, this scenario may be cash neutral.
If the market is growing, but you have a low share, tough decisions are required. Invest if you are confident of improving your market share or consider exiting the market.
In more mature markets that are no longer growing, it is best to opt out if your share is low and save your investments for growth markets.
And finally, the cash cow. If the market has matured and growth is low, but you enjoy a high share, celebrate your success and take the cash. Use it to fund high-growth opportunities.
The BCG matrix is a useful portfolio-management tool but it has some major deficiencies as a decision-making aid for new product markets. For example, a market that is growing strongly seems attractive. But if this market is only small and has intense competition, it becomes less desirable.
Corporate giant GE and the McKinsey & Company consulting firm have teamed up to evolve the BCG model into a more general-purpose decision-making tool. Their Portfolio Planning matrix, which considers the most attractive markets and the strongest products, is a simple but powerful model allowing businesses to make complex decisions.
With these tools in mind, here are some practical steps to assess product markets:
List all the reasons why one market is more attractive than another, and pick the five best answers.
Do the same for strengths: what are the five factors that best describe why you are strong in one product market and weak in another?
Identify the managers in your business with a strong knowledge of markets. Explain your rating system (maybe 1-5) carefully, and ask managers to independently rate each product market. Then collect the scores.
After the debate about the scores subsides, you will be surprised at the clarity of the picture that emerges in relation to your market options. Use this vision wisely: select product markets in which you should invest heavily and cull those you have been advised to quit.
Such portfolio analysis is a simple, but powerful, way to collect the opinions of many well-informed managers. It will help you make decisive calls on where to bet your business's cash and resources. Try it and you will thank your lucky stars - and cash cows.