Strategic Management

A Project Report on

Submitted to: Submitted by:

Prof. R J Masilamani Piyush Gupta 18DM144
Pooja Singh 18DM148
Prakhar Hazrati 18DM150
Pranshu Kesarwani 18DM152
Pratyus Panda 18DM156
Ria Gupta 18DM167
Table of Contents

BCG Classics Revisited: The Experience Curve ........................................................................................ 3

Two Types of Experience .................................................................................................................... 3
Experience in Shaping Demand in Practice......................................................................................... 5
What balance of experience in fulfilling and shaping demand is required in our industry? .............. 6
Do we have the right disciplines and capabilities to develop and leverage experience in fulfilling
demand? ............................................................................................................................................. 6
Do we have the right disciplines and capabilities to develop and leverage experience in shaping
demand? ............................................................................................................................................. 6
Do we have the right metrics in place for both types of experience? ................................................ 6
Do we have the right approach to balancing and combining experience types?............................... 6
BCG Classics Revisited: The Rule of Three and Four ............................................................................... 7
Testing the Rule of Three and Four..................................................................................................... 7
Implications for Decision Makers........................................................................................................ 9
BCG Classics Revisited: Time-Based Competition ................................................................................. 10
BCG Classics Revisited: The Growth Share Matrix ................................................................................ 13
The BCG Matrix in a Changing World................................................................................................ 15
The Continued Relevance of the BCG Matrix ................................................................................... 15
BCG Matrix 2.0 in Practice ................................................................................................................ 16
Accelerate. .................................................................................................................................... 16
Balance exploration and exploitation. .......................................................................................... 16
Select rigorously. ........................................................................................................................... 17
Measure and manage portfolio economics of experimentation. ................................................. 17
What’s BCG?
Boston Consulting Group partners with leaders in business and society to tackle their most
important challenges and capture their greatest opportunities. BCG was the pioneer in
business strategy when it was founded in 1963.

To succeed, organizations must blend digital and human capabilities. BCG’s diverse, global
teams bring deep industry and functional expertise and a range of perspectives to spark
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across the firm and throughout all levels of the client organization to deliver results that help
our clients thrive.

BCG Classics Revisited: The Experience

Curve
 The experience curve theory, which focuses on the relationship between production
experience and costs, has been a valuable predictor of competitive dynamics in the
1970s.
 The theory remains valid today, particularly in relatively stable, cost-sensitive,
competitive and high-output industries.
 Today, however, many companies need to gain additional type of experience - shaping
demand - to create and maintain a competitive advantage.

The experience curve is one of BCG’s signature concepts and arguably one of its best known.
The theory, which had its genesis in a cost analysis that BCG performed for a major
semiconductor manufacturer in 1966, held that a company’s unit production costs would fall
by a predictable amount—typically 20 to 30 percent in real terms—for each doubling of
“experience,” or accumulated production volume. The implications of this relationship for
business, argued BCG’s founder, Bruce Henderson, were significant.

Experience of the type addressed by the experience curve is still necessary—often critically so,
depending on the industry. But we argue that most companies today need an additional kind of
experience if they hope to create and sustain competitive advantage.

Two Types of Experience

The type of experience referred to by the traditional experience curve, namely the ability to
produce existing products at lower cost and to deliver them to an ever-expanding audience, can
be considered as an experience to satisfy demand. This type of experience remains very
important in many sectors, especially those that are relatively stable, cost-sensitive, competitive
and high-output.
Hard drives, for example, experienced a cost reduction of about 50% for each doubling of
aggregate output from 1980 to 2002, bringing the average cost per gigabyte from $ 80,000 in
1984 to $ 6 in 2001.

Exhibit 1 is a visual representation of both types. The experience of demand satisfaction is

represented by the classical experience curve: it shows a reduction in costs as a function of the
cumulative volume (which is a straight line in a log-log scale). The experience of demand
generation is represented by repeated "jumps" from one experience curve to another, which
represents the ability of a company to pass from generation to generation of product to repeated
production and successfully. The relationship between the two types of experience could also
be visualized as an infinite version of the popular Snakes and Ladders board game. To maintain
their competitive edge, companies must both "slide down snakes" (ie, meet demand) and "scale
up" (i.e, shape demand). The relative importance given to each depends on the particular
situation of society

Both types of experience are intrinsically different, as are the ways in which they are
accumulated and the benefits they confer. The demand-fulfilment experience is gained through
a logical deductive process: enter your cost data, analyse it, identify opportunities for
improvement, implement changes, iterate. The main features of the learning process are
repetition and gradual improvement, both explicit and implicit. On the other hand, the
experience of the formation of the demand is obtained by an inductive process: to sample the
behaviours of the consumers, formulate a hypothesis on unmet needs or imagine the
possibilities offered by the new technologies, test the hypothesis with a new offer, close the
test or develop it on empirical results, formulate new hypotheses based on the latest empirical
results, repeat.

It should be noted that no single type of experience has ever been sufficient to provide a long-
term competitive advantage. Both have always been necessary. What has recently changed is
that the speed required to cycle between the two has increased dramatically. We call this
ambidexterity this ability to develop and exploit both existing and new product knowledge, or
to effectively switch between them over time.
Experience in Shaping Demand in Practice

Experience in shaping demand—which can be gauged by a company’s product-introduction

“clock speed” or by the percentage of sales derived from new products or services—can be a
powerful competitive weapon, particularly when paired effectively with experience in fulfilling
demand. It can be seen as a second-order type of experience, one that comes from sharing
experience across different areas and learning how to learn new things. It includes the ability
to “forget” lessons from the past when such information has become obsolete and is no longer
relevant to the latest product generation.

We can illustrate the power of demand-shaping experience, and how the past and present of
the experience curve interweave, by taking a contemporary look at the industry that gave birth
to the experience curve.

Facebook successfully shaped demand for its services by continually improving users’
experience and doing so faster than rival Myspace. (See Exhibit 2.) To build demand-shaping
experience, Facebook released new software weekly and experimented with new technologies
and features such as live chat, photo albums, and a third-party app-developer interface. These
efforts allowed Facebook to gain a more thorough understanding of users’ needs and desires
and respond to them with accelerated new-product generation, translating into a swelling
userbase and eventually also an improved cost position.

Netflix twice radically shaped demand by improving the convenience of a service. Its promise
of convenient and inexpensive DVDs by mail (with no late fees or hassles with pickup and
drop-off) successfully shaped the demand for home video. Netflix succeeded again when it
introduced streaming (which added the benefits of assured and instant availability), even
though the offering was obviously going to cannibalize the company’s DVD-by-mail business.
Netflix realized that the DVD-by-mail offering was vulnerable to streaming technology,
regardless of which company launched the service first. The company’s early move to shape
demand forced its major competitors to react to the initial consumer expectations that Netflix
had set, giving Netflix a substantial advantage.

These companies’ focus on excellence in both shaping and fulfilling demand allowed them to
thrive, often overtaking their established competitors. This is a phenomenon that the traditional
experience curve cannot explain.

Sustaining Competitive Advantage both Within and Across Product Generations

Solidifying your long-term competitive advantage in today’s environment requires asking
yourself a series of questions about excellence in both shaping and fulfilling demand.

What balance of experience in fulfilling and shaping demand is required in our industry?
In some industries, experience in fulfilling demand remains critical. Other industries, usually
younger ones, will benefit more from experience in shaping demand. Determine what your
industry requires. Remember that, as illustrated by ARM Holdings, experience can be sourced
externally under certain circumstances.

Do we have the right disciplines and capabilities to develop and leverage experience in
fulfilling demand?
Build scale and defend the market share of your established products. Learn through repetition
and incremental improvement, both explicit and implicit, to further reduce costs.

Do we have the right disciplines and capabilities to develop and leverage experience in
shaping demand?
Unlink the development of new products and services from the production and management of
existing ones. Empower individuals to experiment. Foster an appetite for risk with incentives
that reward success; punish failure only if it arises from irresponsibility. Accelerate the product
life cycle and plan the retirement of products as well as their launch. Create advantage by better
understanding and shaping demand.

Do we have the right metrics in place for both types of experience?

Ensure that you can gauge your prowess in building and leveraging both types of experience.
Compare the results with those of your direct and indirect competitors. Examine your relative
cost positions and demand-shaping clock speed and use them as your firm’s composite measure
of success.

Do we have the right approach to balancing and combining experience types?

As consumer tastes and product generations change ever more rapidly, experience in fulfilling
demand alone is no longer sufficient to sustain a competitively advantaged position. An
additional type of experience—experience in shaping demand—becomes necessary as well.
This experience must be acquired through new and different means that can sometimes be in
direct conflict with the current means your organization employs to acquire experience. But
failure to do so can exact a significant toll, ranging from the loss of a leadership position to
outright business failure.
BCG Classics Revisited: The Rule of Three and Four

 In 1976, BCG founder Bruce Henderson posited that a “stable, competitive” industry
will never have more than three significant competitors, and the industry's structure will
find equilibrium when the three companies' market shares reach a ratio of
approximately 4:2:1.
 BCG research confirms that Henderson's observation was valid when he made it and
has remained valid over the decades for prescribed industries.
 This “rule of three and four” does not seem to apply to the growing number of more
dynamic, unstable industries, or to industries where regulation hinders genuine
competition or industry consolidation.

In “The Rule of Three and Four,” Bruce Henderson put forth an intriguing hypothesis about
the evolution of industry structure and leadership. He posited that a “stable, competitive”
industry will never have more than three significant competitors. Moreover, that industry
structure will find equilibrium when the market shares of the three companies reach a ratio of
approximately 4:2:1.

Henderson noted that his observation had yet to be validated by rigorous analysis. But it did
seem to map closely with the then-current structures of a wide range of industries, from
automobiles to soft drinks. He believed that even if the hypothesis were only approximately
true, it would have significant implications for businesses.

Fast-forward to 2012. Has the rule of three and four held? If so, to what degree? Does it merit
the attention of today’s decision makers? Our analysis yielded compelling findings.

Testing the Rule of Three and Four

To test Henderson’s theory, the BCG Strategy Institute, working in collaboration with
academics from Chapman, Claremont, and Rutgers Universities, studied industry data from
more than 10,000 companies dating back to 1975. Our analysis allows us to confirm that
Henderson’s hypothesis was indeed valid when he conceived it: it accurately described the
market share structures current at the time and trends in a wide range of industries. We can also
confirm that the rule of three and four has remained a predictor of the evolution of industry
structures in “stable, competitive” industries over the decades, with the caveat that many
industries have experienced a departure from such stable conditions.

To facilitate our analysis, we divided companies into two categories: those with market shares
of more than 10 percent (“generalists”) and those with shares of 10 percent or less. The
prevalence of industries with no more than three generalists (the “three” part of Henderson’s
rule) was striking. From 1976 through 2009, industries with one, two, or three generalists
ranged from 72 percent to 85 percent and averaged 78 percent. The most common industry
structure throughout the period was the three-generalist configuration, which prevailed in 13
of those 34 years and was the second-most common in 20 out of 34 years.
Industries with three-generalist structures have also proven the most profitable for industry
participants, with an average return on assets a full 2.5 percentage points higher than in
industries with four, five, or six generalists. Additionally, three- and two-generalist
configurations appear to have the greatest stability and to act as the strongest “basins of
attraction”—that is, more companies gravitate toward these structures every year than toward
any other. (See Exhibit 1.)

Our study also confirmed the “four” part of Henderson’s rule—the 4:2:1 market-share ratio
that tends to characterize equilibrium in these industries. Over the period studied, the top
players in nearly 60 percent of industries with three-generalist structures had relative market
shares of 1.5x to 2.5x, quite close to Henderson’s prediction of 2.0x. And we confirmed that
today, the 4:2:1 relationship is the most prevalent among industries led by three generalists.

Current examples of the rule of three and four are easy to find. The U.S. rental-car industry is
one. (See Exhibit 2.) In 2006, four competitors—Avis, Enterprise Holdings, Hertz, and
Vanguard Car Rental—had market shares exceeding 10 percent. The March 2007 acquisition
of Vanguard by Enterprise, however, gave the latter nearly half the market—and set in motion
competitive dynamics implicit in the rule of three and four. In fact, the market has closely
followed Henderson’s script. In 2011, the three market leaders—Enterprise, Hertz, and Avis—
had market shares of 48 percent, 22 percent, and 14 percent, respectively, close to the 4:2:1
ratio Henderson predicted. Hertz’s 2012 acquisition of Dollar Thrifty, which held a 3 percent
market share at the time, made the numbers align even more closely with the rule.
The rule of three and four does not seem to apply to the growing number of more dynamic,
unstable industries, such as consumer electronics, investment banking, life insurance, and IT
software and services. Nor does it apply to industries where regulation hinders genuine
competition or industry consolidation, such as telecommunications in the U.S. (witness, for
example, the government’s antitrust action against the merger of AT&T and T-Mobile). The
difference in applicability is stark. For companies in low-volatility industries led by three
generalists, we measured a return on assets 6.1 percentage points higher than that of companies
in low-volatility industries led by a larger number of generalists. Yet we found no such trend
in high-volatility industries—the three-generalist configuration had no advantage over others.
A possible explanation for this is that experience curve effects, which Henderson supposed
underpinned the rule, are less applicable in industries where technological innovation and other
factors shift the basis of advantage before the benefits of a lower cost position can be realized.
Rising turbulence in many industries has also reduced the rule’s impact over time. The higher
return on assets associated with three-generalist structures, for example, has decreased, falling
from an average of approximately 3 percentage points in the 1970s to roughly 1 percentage
point today. The same holds for the prevalence of the 4:2:1 market-share ratio among industries
led by three generalists—that ratio is still the most common in such industries, but it is less
common than it was at its peak.

Implications for Decision Makers

For corporate decision-makers, the rule of three and four has important implications. First, an
understanding of the industry environment is critical. Is the industry one in which classical
“rules” of strategy, such as the rule of three and four, apply, or does it demand an alternative—
for example, an adaptive—approach? (See “Your Strategy Needs a Strategy,” Harvard
Business Review, September 2012.) Next, decision makers must determine whether their
company has a long-term viable position in its industry. Where the rule applies, this is largely
determined by market share. Being the industry’s largest player is the most desirable position;
the number two and three spots are also sustainable. Any other position is likely to be
unsustainable.
Once they understand their company’s position, decision makers must shape their strategies
accordingly. If the company is a top-three player, it should aggressively defend its share. If it
is outside the top three, it should attempt to improve its position through consolidation or by
shifting the basis of competition—or it should exit the industry. (As Henderson wrote, “…cash
out as soon as practical. Take your write-off. Take your tax loss. Take your cash value. Reinvest
in products and markets where you can be a successful leader.”) If the company operates in an
environment where the rule does not apply, it should employ adaptive or shaping strategies,
which we have described elsewhere.

The rule has implications for other stakeholders as well. Investors, for example, should factor
an industry’s dynamics and likely trajectory into their investment strategies. And policy makers
should consider the rule and its ramifications as they weigh antitrust issues.

As we have seen, the rule of three and four remains relevant more than three decades after its
conception—in a business environment that is, in many respects, profoundly different—and its
implications continue to provide guidance for decision makers working in environments where
classical business strategies hold. For companies in increasingly unstable environments, a new
set of rules applies, calling for more adaptive approaches to strategy. In future articles, we will
critically reexamine additional pivotal ideas from BCG’s classic strategic thinking to see what
lessons they hold for today’s businesses.

BCG Classics Revisited: Time-Based Competition

 Companies now need to act at the “speed of data.” And with speed and data come
learning and business model innovation.
 Today’s need not only for speed but also for adaptiveness should spur managers to shift
their mindset about the imperatives necessary to survive and succeed in a TBC 2.0
world.

Nearly 25 years after the book’s publication in 1990, Apple CEO Tim Cook is known to give
his colleagues copies of Competing Against Time: How Time-Based Competition Is Reshaping
Global Markets, the seminal work by BCG’s George Stalk and Tom Hout. Why does the leader
of one of the world’s most innovative companies consider it a still-worthwhile read?

Traditionally, businesses strove to produce high-quality goods at the lowest possible cost. But
Stalk and Hout taught the business world that the added element of speed was ultimately the
key to competitive advantage. Stalk had observed Japanese companies that were not scale
leaders in their industries reaping advantage by shortening their product-development cycles
and factory-process times—essentially managing time the way that most businesses managed
costs, quality, and inventory. This “flexible manufacturing” approach also reduced variety-
related costs at the companies. Consequently, despite their smaller size and volumes, these
companies could produce fewer goods but with greater diversity and quality than their
competitors—and do so at lower cost. (See Exhibit 1.)
The acceleration of cycle times not only allowed companies to remove waste from the process,
it also provided a host of competitive benefits. By responding more quickly, companies
enhanced their productivity and also gained favor with customers, thereby achieving higher
market share. By embracing the principles of time-based competition (TBC), the businesses
also reduced complexity and rework and increased transparency, allowing them to break the
assumed tradeoff between cost and quality.

TBC’s impact on business thinking ultimately proved enormous, with companies across sectors
embracing it and its popular derivative, process reengineering, to streamline and accelerate
their operations. Sun Microsystems (acquired by Oracle in 2010) achieved market dominance
by halving the time required to design and introduce engineering workstations. Honda gained
ground by introducing 113 new models in the time it took its close competitor Yamaha to create
37. Jack Welch announced that GE’s core principles would be “speed, simplicity, and self-
confidence.”

Zoom forward to today, when the pace of change seems faster than ever: technologies are
evolving increasingly quickly, economic power is shifting to emerging markets, and many
business models are becoming obsolete. As a result, an unprecedented number of long-standing
incumbent companies seem to be questioning how they do business.
Companies are attempting to meet the demands of this time-compressed reality in both new
and traditional ways. They are exploiting 3D printing, for example, to reduce the time it takes
to produce prototypes; deploying automated factories to shrink change-over times; enabling
greater customization and closer proximity to customers; and leveraging big data and analytics
to make it easier to identify and act on opportunities.

Common to all of these efforts is the recognition of the growing primacy of speed. Words like
“agility” are increasingly on the lips of CEOs. Says Jeremy Stoppelman, CEO of Yelp, “You
have to be very nimble and very open-minded. Your success is going to be very dependent on
how you adapt.” It’s a view that extends well beyond the big-tech arena. As Mitchell Modell,
CEO of Modell’s Sporting Goods, observes, “The big never eat the small—the fast eat the
slow.”
So, are we headed back to the future? Is Tim Cook right? Is it time to dust off the BCG classic
and re-reengineer our core processes? The answer to all three questions is yes—but with several
important qualifiers.

Without a doubt, the pace of change is now faster than ever. Many businesses have evolved
into essentially information businesses, and many more are critically dependent upon
increasingly complex signals and information.

Companies now, therefore, need to act at the “speed of data.” This is a tough quantitative
challenge, requiring new technologies and techniques to bridge gaps between the intrinsic
speed and flexibility of data on one hand, and people, organizations, and physical assets on the
other. It is also a qualitative challenge, requiring many companies to rethink their business
model.

UPS, a package delivery firm, may not seem like a digital company. But living up to its
“Moving at the Speed of Business” tagline requires sophisticated and dynamic integration,
analysis, and aggressive data management. UPS’s front-line employees use data to meet
performance objectives. Truck drivers, for example, use route-optimization algorithms to
decide whether to save a mile of driving or to deliver a package 15 minutes early. To avoid
overwhelming employees, the company refines the display of information; to make workers
more comfortable with on-the-job analytics, it utilizes familiar platforms, such as smartphones.
UPS also prioritizes continuous improvement to become faster still: it is building real-time,
adaptive analytics into the next version of its logistics software, for instance.

Whereas TBC was about doing a predictable set of activities faster, companies now also need
to be able to learn how to do new things faster and more effectively. Agility is insufficient—
companies now also need to be adaptive. In today’s era of accelerated change, new products,
technologies, and business models can arise before companies have had a chance to fully
optimize existing ones. Exhibit 2 shows how telephone technology illustrates this phenomenon
at work.

Alibaba, China’s dominant retailer, exemplifies “TBC 2.0” and its virtuous cycle of data,
speed, learning, innovation, and growth. Every day, Alibaba’s three server centers process
more than a petabyte of data—the equivalent of three times the storage space needed for all the
DNA information of the U.S. population. With that data firepower, Alibaba is driving an
economic transformation in Chinese retailing, delivering more products faster and to more
people via more, new, and different business models.

And with speed and data come learning and business model innovation. Via AliPay, Alibaba’s
customers can now pay for online purchases and invest their savings, and businesses can obtain
loans. Companies and governments can store data on Alibaba’s cloud-computing services; and
other retailers, such as Haier and Nike, can set up online store fronts through Tmall.com,
Alibaba’s business-to-consumer platform. Alibaba is using speed, information, and innovation
to tap the burgeoning power of Chinese consumption by creating a single, truly nationwide
market.
Today’s need not only for speed but also for adaptiveness should spur managers to shift their
mindset about the imperatives necessary to survive and succeed in a TBC 2.0 world. For an
increasing number of businesses, these imperatives include the following:

 Reconceiving your business as an information business

 Ensuring that your organization can respond at the speed of data
 Recognizing that the basis for competitive advantage has shifted from scale, position,
and speed to adaptiveness
 Cultivating and measuring rapid learning
 Balancing the exploitation of existing opportunities and business models with the
exploration of new ones
 Breaking free from yesterday’s successful business model
 Time-based competition is more relevant than ever. Companies must now not only run
faster but also adapt to keep up.

BCG Classics Revisited: The Growth Share

Matrix
 The growth share matrix was put forth by Bruce Henderson as a tool for helping
companies allocate resources based on the attractiveness of their market and their own
level of competitiveness.
 Since the introduction of the matrix, the business environment has become more
dynamic and unpredictable, and market share has become less of a driver of and
surrogate for advantage.
 The matrix remains highly relevant today as a way of allowing companies to manage
strategic experimentation.

More than 40 years after Bruce Henderson proposed BCG’s growth-share matrix, the concept
is very much alive. Companies continue to need a method to manage their portfolio of products,
R&D investments, and business units in a disciplined and systematic way. Harvard Business
Review recently named it one of the frameworks that changed the world. The matrix is central
in business school teaching on strategy.

At the same time, the world has changed in ways that have a fundamental impact on the original
intent of the matrix: since 1970, when it was introduced, conglomerates have become less
prevalent, change has accelerated, and competitive advantage has become less durable. Given
all that, is the BCG growth-share matrix still relevant? Yes, but with some important
enhancements.
The Original Matrix

“A company should have a portfolio of products with different growth rates and different
market shares. The portfolio composition is a function of the balance between cash flows.…
Margins and cash generated are a function of market share.”
—Bruce Henderson, “The Product Portfolio,” 1970

At the height of its success, in the late 1970s and early 1980s, the growth share matrix (or
approaches based on it) was used by about half of all Fortune 500 companies, according to
estimates.

The matrix helped companies decide which markets and business units to invest in on the basis
of two factors—company competitiveness and market attractiveness—with the underlying
drivers for these factors being relative market share and growth rate, respectively. The logic
was that market leadership, expressed through high relative share, resulted in sustainably
superior returns. In the long run, the market leader obtained a self-reinforcing cost advantage
through scale and experience that competitors found difficult to replicate. High growth rates
signaled the markets in which leadership could be most easily built.

Putting these drivers in a matrix revealed four quadrants, each with a specific strategic
imperative. Low-growth, high-share “cash cows” should be milked for cash to reinvest in high-
growth, high-share “stars” with high future potential. High-growth, low-share “question
marks” should be invested in or discarded, depending on their chances of becoming stars. Low-
share, low-growth “pets” are essentially worthless and should be liquidated, divested, or
repositioned given that their current positioning is unlikely to ever generate cash.

The utility of the matrix in practice was twofold:

 The matrix provided conglomerates and diversified industrial companies with a logic
to redeploy cash from cash cows to business units with higher growth potential. This
came at a time when units often kept and reinvested their own cash—which in some
cases had the effect of continuously decreasing returns on investment. Conglomerates
that allocated cash smartly gained an advantage.
 It also provided companies with a simple but powerful tool for maximizing the
competitiveness, value, and sustainability of their business by allowing them to strike
the right balance between the exploitation of mature businesses and the exploration of
new businesses to secure future growth.
The BCG Matrix in a Changing World

The world has changed. Conglomerates have become far less prevalent since their heyday in
the 1970s. More importantly, the business environment has changed.

First, companies face circumstances that change more rapidly and unpredictably than ever
before because of technological advances and other factors. As a result, companies need to
constantly renew their advantage, increasing the speed at which they shift resources among
products and business units. Second, market share is no longer a direct predictor of sustained
performance. (See Exhibit 1.) In addition to share, we now see new drivers of competitive
advantage, such as the ability to adapt to changing circumstances or to shape them.

The Continued Relevance of the BCG Matrix

“We keep speed in mind with each new product we release…. And we continue to work on
making it all go even faster…. We’re always looking for new places where we can make a
difference.”
—Google’s company-philosophy statement

Given the rapid pace and unpredictable nature of change in today’s marketplace, the question
arises: Has the matrix lost its value?

No, on the contrary. However, its significance has changed: it needs to be applied with greater
speed and with more of a focus on strategic experimentation to allow adaptation to an
increasingly unpredictable business environment. The matrix also requires a new measure of
competitiveness to replace its horizontal axis now that market share is no longer a strong
predictor of performance. Finally, the matrix needs to be embedded more deeply into
organization behavior to facilitate its use for strategic experimentation.

Successful companies nowadays need to explore new products, markets, and business models
more frequently to continuously renew their advantage through disciplined experimentation.
They also need to do so more systematically to avoid wasting resources, a function the matrix
has successfully fulfilled for decades. This new experimental approach requires companies to
invest in more question marks, experiment with them in a quicker and more economical way
than competitors, and systematically select promising ones to grow into stars. At the same time,
companies need to be prepared to respond to changes in the marketplace, cashing out stars and
retiring cows more quickly and maximizing the information value of pets.

Google is a prime example of such an experimental approach to portfolio management, as

expressed in its mission statement: “Through innovation and iteration, we aim to take things
that work well and improve upon them in unexpected ways.” Its portfolio is a balanced mixture
of relatively mature businesses such as AdWords and AdSense, rapidly growing products such
as Android, and more nascent ones such as Glass and the driverless car.

But at Google, portfolio management is not just a high-level analytical exercise. It is embedded
in organizational capabilities that facilitate strategic experimentation. Google’s well-known
exploratory culture ensures that a large number of ideas get generated. From these question
marks, a few are selected, on the basis of rigorous and deep analytics. Subsequently, they are
tried out on a restricted basis, before being scaled up.

BCG Matrix 2.0 in Practice

To get the most out of the matrix for successful experimentation in the modern business
environment, companies need to focus on four practical imperatives:

Accelerate.
It is critical to evaluate the portfolio frequently. Businesses should increase their strategic
clock-speed to match that of the environment, with shorter planning cycles and feedback loops
requiring simplified approval processes for investment and divestment decisions.

Balance exploration and exploitation.

This requires having an adequate number of question marks while simultaneously maximizing
the benefits of both cows and pets:
 Increase the number of question marks. This requires a culture that encourages risk
taking, tolerates failure, and allows challenges to the status quo.
 Test question marks quickly and economically. Successful experimenters achieve this
by using rapid (for example, virtual) tests that limit the cost of failure.
 Milk cows efficiently. Successful companies do not neglect the need to exploit existing
sources of advantage. They milk low-growth businesses by improving profitability
through incremental innovation and streamlining of operations.
 Keep pets on a short leash. With experimentation comes failure: our analysis found that
the number of pets increased by almost 50 percent in 30 years. Although Bruce
Henderson asserted that pets were worthless, today’s successful companies capture
failure signals from pets to inform future decisions on where and how to experiment.
Additionally, they attempt to lower exit barriers and move quickly to squeeze out
remaining value before divestment.
Select rigorously.
Companies must carefully select investments as well as divestments. Successful companies
leverage a wide range of data sources and develop predictive analytics to determine which
question marks should be scaled up through increased investment and which pets and cows to
divest proactively.

Measure and manage portfolio economics of experimentation.

Understanding the experimentation level required to maintain growth is important for long-
term sustainability:
 Manage the rate of experimentation. Successful companies continually measure and
manage the number and costs
 Drive new product and business success. Companies need to ensure that the probability
that question marks become stars is high enough—and that the cost of failure for these
question marks is acceptable—in order to sustain growth from new products.
 Maintain a portfolio balance. Successful companies look for today’s stars (and question
marks) to ultimately generate at least enough profitability to replace cows (and pets)
that are later in their life cycle so that the company portfolio generates sufficient
profitability in the long run.
Increasing change certainly requires companies to adjust how they apply the matrix. But it does
not undercut the power of the original concept. Every company needs products that generate
cash. And every product should eventually be a cash generator; otherwise it is worthless.