We come now to what might be called the BCG era.

BCG stands for Boston Consulting Group, and

Boston Consulting Group was indeed the star of this particular set of ideas.

I should note that these eras that we're talking about are not discrete.

There are not clean breaks between them, but they overlap.

But there is a rough succession of ideas,

that as one set of ideas runs out of steam, the other gains prominence.

And so after the set of ideas that we've been talking about in lesson two,

we see the rise of the BCG era.

We see BCG developing two ideas,

two big ideas that were considered killer apps of the strategy world.

We're gonna take a close look at those.

The first of these two big ideas is called the growth share matrix, or

sometimes it's simply called the BCG matrix,

named after the consulting firm that promoted it and invented it.

We'll take a look here at the growth share matrix.

You can see on the vertical axis they have the growth potential of a business.

Now it's important to understand that by a business here they mean a sub

part of a company's activities.

They mean a particular product line or service line, and

a company is assumed to have multiple businesses in its portfolio.

So on the vertical axis we see we can have either high growth potential for

a business, or low growth potential for a business.

On the horizontal axis, we have the current market share of the business.

That too can be either high or low.

That's how well the business is performing today.

The growth potential is how well it has the potential to perform in the future.

If we look now at each of the quadrants and

what they're labeled, let's start with the one on the lower right.

Now this is the quadrant that's labeled low growth potential.

It's also labeled low current market share of business.

This is a business that's not performing now and

really doesn't have much potential to perform in the future.

We call that kind of a business, in an insult to domestic pets everywhere,

we call it a dog.

A dog is something to avoid in business.

That's the simplest quadrant to talk about.

If we moved in to the lower left,

we have a line of business that we might call a cash cow.

Now what do we mean by a cash cow?

Well, a cash cow has high current market share.

It's running very well right now, but

it doesn't have very much potential in its future.

It's plateaued, it's leveled off.

But it's throwing off today a lot of cash.

And we can use that cash to invest in other parts of our business.

One of the very good places to invest that cash would be in

the upper right of this matrix, in a problem child.

Now, a problem child, as you can see from the matrix, has low current market share.

It's not performing very well today.

But it's judged to have very high growth potential.

So somehow we have to fire up this problem child and

get it going and make it move and fulfill its full potential.

If, by investing the cash from the cash cow into the problem child,

if we are successful, we can turn it into a star.

This is on the upper left of the matrix.

You can see that a star has high growth potential, and

it's also performing very well today.

This is the best of all worlds, high performance today,

probably high performance tomorrow.

This is throwing off a lot of cash, and

we're gonna reinvest in this as long as it continues to work well.

However, it's not gonna keep going forever, nothing ever does.

Anything that grows fast eventually levels off, eventually plateaus.

So, in time, a star will become a cash cow.

And then we begin the cycle again.

We use the funding from that cash cow to finance another problem child,

and so on and so on.

We repeat the cycle.

As you can see, this is a simple idea.

It's an elegant idea, and there are some

particularly key ideas that we wanna keep in mind as we use a matrix like this.

First of all, and this may seem pretty obvious, you need to avoid the dogs.

You wanna kill them off.

If your judgment is that a line business is a dog,

you want to stop investing in it.

You wanna kill it as soon as possible, that's principle number one.

Principle number two, you need to maintain a healthy mix of cash cows,

problem children, and stars.

You don't want all of your business initiatives to be at the same

stage at the same time because you need cash cows to fund your problem children.

And you need some stars to make your business perform well, and

to create the potential for future cash cows.

So it means that effective strategy is about maintaining the mix

between those different categories.

Skillful strategy is then moving business initiatives along,

initiatives that are at different stages of their individual life cycle.

And moving them in sequence through those three different generic strategies,

cash cow, problem child, star.

One important thing to notice in using the BCG matrix

is the importance of market share.

Market share is all-important in the BCG approach, and we'll see this again in

a moment, when we introduce the second of the two big ideas that BCG introduced.

BCG believed that market share was the Holy Grail of effective strategy.

High market share throws off cash that you can use to fund future growth.

Growth in turn delivers more market share.

But no market can grow forever.

So we need to cycle through new ideas,

funding rising initiatives with mature initiatives which will eventually decline.

So again, an elegant cycle, an elegant idea, and

it all hinges on the idea of market share.

The second big idea to arise in the BCG era is called the BCG Experience Curve,

and as we'll see, it also has a lot to do with market share.

Let's take a look.

On the vertical axis of the BCG Experience Curve, we see per unit cost to produce.

It could be per unit cost to produce anything,

whatever it is that the business is producing.

On the horizontal axis, we see the cumulative number of those units produced.

How many units does it add up to over time,

and of course that number is increasing over time.

The experience curve purports to express an empirical relationship,

something that's in the data that they observed at BCG

from data of lots of different companies.

And what it says is that the more units you produce,

the lower unit cost to produce each item.

This is a learning effect.

It says in effect, that you get better and better, and cheaper and

cheaper in producing things as you produce more of them.

So the idea then is that you want to

race down the experience curve as fast as you can.

A company that's able to ramp up volume quickest

will benefit from a cost advantage.

So the way you get in an advantage situation in an industry

is to be first in and first to reach high volume.

Because that will allow you a permanent cost advantage,

one that you can use to stay ahead of your rivals.

Another important idea here related to market share is that if you

establish market share early, it's gonna be an all important advantage.

And it may be worth taking extreme measures to achieve early market share

advantage.

Another implicit assumption that underlies this diagram and this approach is that

cost advantage obtained in this manner is the best source of sustainable advantage.

As we'll see later, cost advantage is not the only source of sustainable advantage.

But, this was the one that was the most important if you paid attention

to the BCG Experience Curve.

Now as you might imagine, and

this has been part of our story of the history of strategy-making so far.

There are problems with this approach.

Let's take the matrix first.

First of all, the matrix turned out to be overly simple.

If you think about the dimensions of it, then the vertical axis

expresses something about the external environment.

And the horizontal axis expresses something about

the internal capabilities of the firm.

So together, these are a lot like the two dimensions of SWOT analysis.

What are the strengths and weaknesses?

That would be the horizontal axis.

And what are the opportunities and threats?

Those are characteristics of the external environment.

And that would be the vertical axis.

But, very importantly, it's only one dimension,

one aspect of the external environment and internal capabilities.

And that turned out to be too simple in the long run.

The kinds of business lines that existed in each of the four quadrants in

the matrix turned out to be much more complex.

And have more going on than the simple and elegant story of cash cows funding

problem children, becoming stars, and then eventually becoming cash cows again.

So for example, cash cow business units were often not selling just one product or

service, and so, sometimes they also needed reinvestment.

And in the BCG way of thinking,

you would never reinvest in a cash cow because it no longer has growth potential.

You're just using it to fund initiatives with greater growth potential.

That's the problem with the matrix.

So what about the experience curve.

What are some of the problems with this?

Well, like the matrix, it turned out to be overly simple.

It tended to focus companies on volume at the expense of everything else.

Volume, market share became the be-all and the end-all, an end in itself.

And companies would do quite radical things to achieve early market share lead.

One of the things they often did is cut prices dramatically

often to below the level of cost in order to grab market share

on the assumption that they would later be able to reduce cost dramatically.

If the cost they expected didn't materialize or

if they weren't large enough, then the companies might have ended up or

did end up with small margins and small profits.

And so, although we might have used cash from a cash cow to fund a problem child,

it didn't ultimately turn into a star, or

at least not a star that shone very brightly.

In the final analysis, the ideas of the BCG era turned out to be too simple.

They looked simple and powerful, and that's a good thing.

But they turned out to be simple-minded, and that's not a good thing.

As with strategic planning, people became at first very excited,

then somewhat disappointed, and

then entirely disillusioned before setting the ideas aside.

So you see, our sad tale continues,

this sad story of the history of past mistakes in strategy.

What we see repeatedly is people get excited, people get disillusioned,

people set aside a set of ideas.

In the next lesson we're gonna see that pattern repeat again, but

in its most recent version, the most recent chapter that brings us up to date.

We'll be back in a minute.

The BCG Matrix and Growth Curve

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