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The Experience Curve - a function of market share because of the expe-

rience curve effect.
Reviewed
CASH GENERATION
IV. The Growth Share Matrix or (Market Share)
High Low
The Product Portfolio
High ?
CASH USE
Many “businesses” require (Growth Rate)
far more cash input than
Low
they can ever generate.

The growth share matrix is a diagram of the

normal relationship of cash use and cash genera-
A few businesses generate tion.
far more cash than they can
profitably reinvest. Stars are in the upper left quadrant. They grow
rapidly and therefore they use large amounts of
cash. However, since they are leaders, they also
generate large amounts of cash. Normally, such
A few businesses are self- products are about in balance in net cash flow.
sufficient in cash flow. Over Over time all growth slows. Therefore, stars even-
time they will become much tually become cash cows if they hold their market
larger and also large net share. If they fail to hold market share, they
generators of cash. become dogs.

Most businesses, however, Cash cows are in the lower left quadrant. Growth
generate very little cash even is slow and therefore cash use is low. However,
though they use little. The market share is high and therefore comparative
reported earnings must be cash generation is also high. Cash cows pay the divi-
reinvested and probably dends, pay the interest on debt and cover the cor-
always will. These businesses porate overhead.
are “cash traps.”
Dogs are in the lower right quadrant. Both
Between these categories is growth and share are low. Dogs often report a pro-
an unstable situation that fit even though they are net cash users. They are
rarely persists for long. Com- essentially worthless. They are cash traps.
petitors of equal size in a pro-
duct-market segment rarely Question marks are the real cash traps and the real
stay of equal size. gambles. They are in the upper right quadrant.
Their cash needs are great because of their
The use of cash is proportional to the rate of growth. Yet, their cash generation is very low
growth of any product. The generation of cash is because their market share is low.

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… The Experience Curve - Reviewed RELATIVE COST

.64 .80 1.00 1.25 1.55

4.0 2.0 1.0 0.5 .25

Left alone question marks are sure losers. They
Relative Share to Largest
can require years of heavy cash investment. Yet, if Competitor in Specific Segment
they do not develop a leading market position
before the growth slows, they become just big Characteristically, a normal experience curve
dogs. slope will produce cost ratios to the largest compe-
titor like these.
Yet question marks are very difficult to convert
into stars. Increase in market share compounds When the cost differential is less than this, it is
cash needs. The cost of acquiring market share usually because of shared experience. Failure to
doubly compounds the cash needs. Question marks achieve this differential can also be caused by
are sometimes big winners if backed to the limit. inadequate investment or poor management.
But most question marks are big losers. Sometimes the segment itself has been improperly
identified, and the market share being measured is
The growth share matrix is directly derived not the relevant market.
from the experience curve. The experience curve
is the means of measuring probable competitive Growth can be shown in terms of the capital
cost differentials. A difference in market share of 2 opportunity alternatives.
to 1 should produce about 20 percent or more dif-
ferential in pretax cost on value added. This is
equivalent to 5-25 percent and more after-tax diffe-
rential on revenues depending on asset turnover
and percent value added.
Growth
10%
The cash flow reference is to the largest compe-
titor in the product. The growth share matrix can
be drawn with market share shown in this way.

Only one competitor can be on the left of 1.0. Growth which is less than the company invest-
All others are smaller by definition. ment threshold cutoff rate means that the present
cash generation is more valuable than the future
equivalent. Growth which is more than this means
the payoff grows faster than the available alternate
investments.

All of the products of a company can be shown

on a single growth share matrix as a product port-
folio. Each product can be plotted on its own
growth and share coordinates. The size of the pro-
duct can be indicated by a circle in proportional
4.0 2.0 1.0 .5 .25 scale.
Ratio to market share of largest competitor

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… The Experience Curve - Reviewed

10% = Current

= Projected

2.0 1.0 .5
If all products are plotted on a single matrix, Relative Weighted Average Share
then the company's whole portfolio can be shown VS Largest Competitor
on a single display. Nothing should be in the upper sector in which
industry growth exceeds your growth. This is
A TYPICAL SUCCESSFUL DIVERSIFIED COMPANY death valley. Either manage for net cash flow and
get out or gain market share.
20%
Typically most products have less market share
than the leading competitor. Yet, it is typical also
that the weighted average market share of most
10%
companies exceeds 1.0 on such a display.
Such a single chart with a projected position
five years out is sufficient alone to tell a company's
profitability, debt capacity, growth potential, divi-
This can be combined with a display to show dend potential and competitive strength.
the direction in which each product is moving. However, great care must be taken in product-
market segmentation before drawing such charts.
It is quite possible for a company to be the largest
in the industry and be a leader in no single seg-
ment.
Industry
Growth Rate
Growth share matrices and related charts are
very valuable tools for analyzing strategic posi-
tions and options.
Bruce D. Henderson
Your Growth Rate © The Boston Consulting Group, Inc. 1973

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