Developing Corporate Level Strategy Using the Growth/Share Matrix

Competitive Strategy – Techniques for Analyzing Industries and Competitors by Michael E. Porter

The growth/share matrix provides a framework for charting or categorizing the different businesses in a firm’s portfolio and determining the implications for resource allocation. This portfolio analysis technique is best used in developing corporate level strategy and in corporate review of business units. The growth/share matrix can also be used for competitor analysis, if the competitor also uses the growth/share matrix in its strategic planning.

The Growth/Share Matrix

The growth/share matrix is based on the use of industry growth and relative market share as proxies for (1) the competitive position of a firm’s business unit in its industry and (2) the resulting net cash flow required to operate the business unit. This formula reflects the underlying assumption that the experience curve is operating and that the firm with the largest relative share will thereby be the lowest cost producer. These premises lead to the growth/share matrix where each of a firm’s business units can be plotted. Although the cut-offs in terms of growth and relative market share are arbitrary, the growth/share portfolio chart is usually divided into four quadrants. The key idea is that business units located in each of these four quadrants will be in fundamentally different cash flow positions and should be managed differently, which leads to some implications for how the firm should try to build its overall portfolio.

Businesses with high relative share in low-growth markets will produce healthy cash flow, which can be used to fund other, developing businesses.
Businesses with low relative share in low-growth markets will often be modest cash users. They will be cash traps because of their weak competitive position.
Businesses with high relative share in high-growth markets usually will require large amounts of cash to sustain growth but have a strong market position that will yield high reported profits. They may be nearly in cash balance.
Businesses with low relative share in rapidly growing markets require large cash inflows to finance growth and are weak cash generators because of their poor competitive position.

Following the logic of the growth/share portfolio:

1. Cash cows become the financiers of other developing businesses in the firm. Ideally, cash cows are used to make question marks into stars. Since doing so requires a great deal of capital to keep up with rapid growth as well as to build market share, the decision about which question marks to build into stars becomes a key strategic one.

2. Once a star, a business eventually becomes a cash cow as its market growth slows.

3. Question marks that are not chosen for investment should be harvested (managed to generate cash) until they become dogs.

4. Dogs should either be harvested or divested from the portfolio.

A firm should manage its portfolio, according to BCG, so that this desirable sequence occurs and so that the portfolio is in cash balance.

Limitations

The applicability of the portfolio model depends on a number of conditions, some of the most important of which are summarized below:

  • The market has been defined properly to account for important shared experience and other interdependencies with other markets. This is often a subtle problem requiring a great deal of analysis.
  • The structure of the industry and within the industry are such that relative market share is a good proxy for competitive position and relative costs. This is often not true. Market growth is a good proxy for required cash investment. Yet profits (and cash flow) depend on a lot of other things.

Use in Competitor Analysis

In view of these conditions, the growth/share matrix by itself is not very useful in determining strategy for a particular business. A great deal of analysis of the sort described in the book Competitive Strategy is necessary in order to determine the competitive position of a business unit, and to translate this competitive position into a concrete strategy. Once this front-end analysis has been done, the value added of the portfolio plot itself is low.

However, the growth/share matrix can be one component of a competitor analysis when combined with the other kinds of analysis described in Chapter 3 of Competitive Strategy. A firm can plot, as best it can, the corporate portfolio for each of its significant competitors, ideally at several points in time. The portfolio position of the business unit against which the firm competes will give some indications about the questions raised in Chapter 3 of Competitive Strategy and about the goals the competitor’s parent may be expecting it to meet and its vulnerability to various types of strategic moves. For example, a business being harvested may be vulnerable to attacks on its market share. The comparison of competitors’ portfolios over time can identify even more clearly shifts in the position of a competitor’s business unit relative to others in its company, and it can provide further clues about the strategic mandate being given to the competitor. If the competitor is known to use the growth/share portfolio approach in planning, the predictive power of portfolio analysis is all the greater. However, even if a competitor does not formally use the technique, the logic of the need for broad allocation of resources may mean that the portfolio provides useful clues.