4 A “problem child” or “question mark” (upper right quadrant) has a high growth rate and low market share—this business demands high rates of investment to grow the business but does not command the position in the market that might justify the investment.
A chart such as this can be used to depict the position of the units within a corporation for the purpose of assisting resource allocation decisions, as well as of competitors within an industry.2 Also, one could prepare this chart based on current conditions and again based on expected performance over the next two- to five-year horizon—this before-and-after presentation would give a sense of competitive dynamics within the industry. The advantages of this chart are its strong graphic presentation and its appeal to marketers and strategists. On the other hand, the growth-share matrix relies heavily on historical data (rather than forecast data) and says nothing about the capabilities necessary for success in the various businesses. The model implies that market power matters most and that market power is driven by size, share of market, and growth. Yet theories of valuation and value creation indicate a broader set of drivers than market power alone. Stewart and Glassman (1999) criticized the growth-share matrix, writing, “A company’s cash cows were supposed to fund the growth of promising businesses (‘question marks’) into highly performing ‘stars.’ By making a company self-funding and self-perpetuating, the BCG approach appealed to corporate managers because it circumvented the monitoring processes of the capital markets. In reality, the poorly performing “dogs” ate the cash while the “question marks” were either starved, overmanaged, or were acquired for obscene premiums.” (Page 628)
DRIVERS OF INDUSTRY ATTRACTIVENESS (PORTER MODEL): HOW ATTRACTIVE WILL THIS INDUSTRY BE? Drawing on research in the subfield of economics, called industrial organization, Michael Porter (1980) presented a framework that characterized industry structure and competitive conduct as drivers of competitive success in an industry. His framework highlighted the role of five factors as driving economic attractiveness of an industry:
1 Barriers to entry. In theory, if an industry offers high returns, new entrants will be attracted into it, thus driving returns to a more normal level. But barriers may exist (or may be constructed) that prevent this from happening and enable current players in an industry to enjoy sustained high returns. Classic examples of entry barriers include regulatory restrictions (e.g., you must have a banking or broadcasting license from the government to compete), brand names (hard to develop and/or imitate), patents (illegal to exploit without ownership or license), high capital requirements (you must build a large greenfield plant to become a viable competitor), and unique know-how (Wal-Mart’s “hot docking” technique of logistics management). Porter highlighted the role of accumulated experience as a potential barrier—this learning curve effect is illustrated in Exhibit 6.6 and consists in reducing one’s cost of production as know-how accumulates. The effect of learning is apparent, for instance, in the substantial decline in the price of semiconductors over time: Unit costs decline by about 20 percent with each doubling of accumulated production. The learning curve gives a competitive advantage to the first or early mover. This benefit can be achieved in either of two ways. First, one can accumulate experience faster than one’s competitors can (e.g., through higher volume production or more rapid product changes) and thus get farther down the common learning curve faster. Second, one can try to steepen the slope of learning through larger leaps in internal development or the acquisition of know-how from outside the firm. Exhibit 6.6 shows the dramatic effects on unit cost of differing rates of cost reduction. Abernathy and Wayne (1974) discuss the impact of experience in various industries.
2 Customer power. Powerful customers can strongly influence prices and product quality in an industry. Examples are Wal-Mart and Federated Department Stores for consumer goods, and the U.S. government for the U.S. defense industry. Weak customers, on the other hand, are likely to be mere price-takers—examples would be consumers of filmed entertainment, cigarettes, and education. In those industries, the suppliers have been able to sustain prices increases well ahead of the rate of inflation.Slope Base Cost Cumulative Unit Production10% Cost Reduction 0.1 $100.0020% Cost Reduction 0.2 $100.0030% Cost Reduction 0.3 $100.000$100.00$100.00$100.0010$ 90.00$ 80.00$ 70.0020$ 81.00$ 64.00$ 49.0040$ 72.90$ 51.20$ 34.3080$ 65.61$ 40.96$ 24.01160$ 59.05$ 32.77$ 16.81320$ 53.14$ 26.21$ 11.76EXHIBIT 6.6 Illustration of Learning CurveSource: Author’s analysis.
3 Supplier power. Similarly, powerful suppliers (e.g., monopolists) can extract high prices from firms in an industry. Weak suppliers can be a source of positive value to an industry—through most of the 1990s, the U.S. auto industry extracted material price reductions and quality improvements from its suppliers.
4 Threat of substitutes. Substitutes limit the pricing power of competitors in an industry. For instance, the price of coal quoted to electric power generators is influenced by the prices of Btu (British thermal unit) substitutes such as oil and natural gas.
5 Rivalry conduct. This final force captures the effects of dynamic competition among players in an industry. Investment in new product or process innovation, opening new channels of distribution, and entry into new geographic markets can alter the balance of competitive advantage. Cartel agreements (banned under the antitrust regulations in most countries) create industries with few adverse surprises for its players. At the other extreme, predatory pricing aimed at driving peers out of business can produce sharp variations in profitability. Porter noted that rivalry may be sharper where the players are similar in size, the barriers to exit from an industry are high, fixed costs are high, growth is slow, and products or services are not differentiated.
STRATEGIC MAP AND STRATEGIC CANVAS: HOW DOES OUR STRATEGY COMPARE WITH OTHERS? Assessing the industry and comparing the market shares of the players tells little about how they got there, and where they might be headed next. It is necessary to profile the strategies of competitors as a foundation for developing a strategy for your own business. Two tools are particularly useful here:
The first is a strategic map that, like a growth-share matrix, positions the players in an industry on the basis of size and two other dimensions that are strategically meaningful. Exhibit 6.7 gives an example of competing brands of sporty cars in the U.S. market, mapped on the basis of size, price/quality/image, and geographic market coverage. A map such as this helps to reveal niches of competition or strategic groups of competitors, as well as gaps in the competitive field where a firm might find unserved demand and/or a relatively safer haven from competition. In the example one observes two clusters: (1) high price/quality/image with small size and restricted geographic base and (2) medium price/quality/image with larger size and geographic base. Porter (1980) discusses the import of strategic group analysis at more length.
The second tool is a strategic canvas that illustrates in graphic form the similarity or difference among competitors’ strategies. Exhibit 6.8 gives an example of a strategic canvas for two retailers, Brooks Brothers (a high-end primarily men’s apparel retailer) and the Big & Tall Men’s Shop (a mass-market men’s apparel retailer). The exhibit shows that the two retailers’ strategies vary markedly. Writing about the strategic canvas, Kim and Mauborgne (2002) said, “It does three things in one picture. First, it shows the strategic profile of an industry by depicting very clearly the factors that affect competition among industry players, as well as those that might in the future. Second, it shows the strategic profile of current and