Traditionally, the concept of business growth has been premised around capturing market share to drive market power, leading to efficiencies through size and, therefore, profit.
But what if that’s no longer the right path to higher profits and capital value?
I find when you discuss business growth that there are well-entrenched paradigms that drive the behaviours and actions of leaders without challenge. That is the nature of paradigms. A recent article I read on the importance of market share made me pause and say, ‘Really? I’m not sure if that’s the complete picture.’
Where do you think share of market and market growth fit into a business’s growth agenda?
It’s All In Market Growth, Not Market Share
In a recent Harvard Business Review article titled, ‘Why Companies Should Measure “Share of Growth”, Not Just Market Share’, the authors, Eddie Yoon, Seymour Burchman and Barry Sullivan, argue that share of market growth and not share of market is a far better indicator of performance. In their words: ‘Accelerating growth is on every CEO’s agenda. Each year business leaders commit to an overall revenue growth target, but the reality is that growth within a business is often very uneven. Some parts grow faster, and one hopes that they offset the other parts that may be declining.’
The authors believe market share to be a backward-looking indicator of what happened historically. Whereas share of market growth is a forward-looking indicator and better reflects where the business should invest for the future. Also, they note, that the whole concept of the ‘market’ and how its boundaries are defined becomes challenging, as boundaries become more blurred.
Preferably you want to be winning a greater share of market growth than your competitors to reflect your ability to outperform them – otherwise, your share of market will diminish.
But the real question it raised for me was:
Is share of market growth a better indicator of where to invest?
What About The BCG Growth Share Matrix?
Thinking about growth and where to invest, took me back to the classic Boston Consulting Group (BCG ) Growth Share Matrix, which I have no doubt is still used by many leaders to categorise growth opportunities.
If we think back to this classic matrix, it affirms the view that holding a high share of the market is of greater value when that market is experiencing high growth.
To help you recall the language of the matrix:
- ‘Stars’ are those businesses with high market share in markets experiencing high growth. These are markets where you have gained market power and future growth is strong.
- ‘Question Marks’ are those businesses in markets with a high growth rate but with low market share. These are markets that provide an opportunity for strong growth but in which you have yet to establish a strong market position.
- ‘Cash Cows’ are businesses with high market shares but in markets with low growth. These are markets where you can milk the profits and you do not need to reinvest due to their low growth.
- ‘Dogs’ are businesses with low market share and low rates of growth. These are markets to exit, as they are seen to provide little opportunity for growth.
The narrative of the Growth Share Matrix would go something like this:
- The Dogs I need to get out of quickly and reallocate the resources they utilise.
- I need the Cash Cows to fund my Stars and invest in my Question Marks, but how long will these Cash Cows last? Especially, if I milk them of all their cash.
- The Stars are just in their sweet spot where I am dominating the market and future growth looks good.
- And the Question Marks I need to mature to become Stars to replace the existing Stars when their lights fade.
As a side point, I wonder how many businesses that were considered Dogs would have been revitalised into Stars if the paradigm of ‘mature markets’ did not exist?
If you are interested in understanding this aspect further then read one of my earlier articles, ‘The Myth Of A ‘Mature’ Business‘.
The Boston Consulting Group still believes the matrix is a useful tool. They note: ‘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 organisation behaviour to facilitate its use for strategic experimentation.’
BCG believes that the time a business may exist in a quadrant is now less than two years because:
- The time lag between innovation and adoption has reduced and is continuing to.
- Unpredictability in markets is continuing to rise.
- The premise that higher market share leads to sustained competitiveness is breaking down.
So it would seem even though the BCG Growth Share Matrix combines both share of market and potential growth in that market (to prioritise growth opportunities), that BCG also now believe competitiveness is a critical factor. It has become a critical factor due to the rate of change in markets and the inability to sustain positions of market power without continuing and strong competitiveness.
So What Do I Invest In For Growth?
In a recent TechCrunch article by Katie Roof titled ‘Intel CEO explains why he spent $15 billion on Mobileye’, Intel CEO Brian Krzanich says that their investment in Mobileye, an Israeli auto start up, reflected the company’s long-term vision for automobiles.
Krzanich says of the decision: ‘The car of the future is going to look much more like a server […] if you get ransomware or some kind of virus on one portion of the device’ Intel will not only have backups, but they could ‘refresh your car on the fly’.
Katie Roof goes on to note: ‘Shortly after his presentation, Intel released its findings that autonomous driving will result in a $7 trillion boon to the economy by 2050. Their reasoning is that “autonomous driving and smart city technologies will enable the new passenger economy, gradually reconfiguring entire industries and inventing new ones thanks to the time and the cognitive surplus it will unlock.”’
Taking a quick look at how Intel presently sees itself as a business explains why this investment is a natural growth corridor: ‘Intel makes possible the most amazing experiences of the future […]You may know us for our processors. But we do so much more. Intel invents at the boundaries of technology to make amazing experiences possible for business and society, and for every person on Earth […] Intel is disrupting industries and solving global challenges. Leading on policy, diversity, inclusion, education and sustainability, we create value for our stockholders, customers, and society.’
As a long-term capital investment to open market opportunities, obtain critical capabilities and position Intel as a player in what they see as a game-changing technology, the investment in Mobileye would seem to make sense. In the matrix context, it sits in the Question Mark quadrant but one where growth expectations are high.
The investment in Mobileye can also serve as an example of a range of other factors that must be considered in deciding where growth may lie and into what to invest.
What’s Behind Market Share And Share Of Market Growth?
Is market share an indicator of capital value? Capital value lies in ‘the ability of a business to produce an enduring income/profit’, which is reflected in its competitive engine. In simple terms, capital value rests in a business’s ability to compete.
Intel invested in Mobileye to open market opportunities where it believes there will be significant growth. But only after that opportunity also reflected:
- Congruence with the purpose for which it sees itself existing as a business. This will go well beyond profit. (To read more on this, see my article, ‘Is Business Doing The Right Thing By Society?’)
- A compounding of growth being an investment in a market that is a natural extension of their existing products/services.
- A matching of their capabilities and competencies with the customer need that will emerge in the new market, and the ability to deliver more customer value than anyone else.
All of these traits speak to the ability of Intel to build a strong competitive engine in this market. If it cannot compete effectively it will be unable to deliver winning customer value, will not win a share of growth, and will not gain a significant market share.
Essentially, where you decide to invest for growth must be guided by your capability to compete effectively in that market. This is determined by the strength of your competitive engine, which is the true measure of your underlying capital value.
Active Knowledge Questions:
- In what markets does your competitive engine allow you to compete effectively?
- Are you guided by the outcome, percentage of market and growth, or by the catalyst, the strength of your competitive engine?
- When investing in growth, do you think of investing in the engine?
Act Now:
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All the best in the success of your business,
Richard Shrapnel
