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TheProductPortfolio
1970byBruceHenderson
Categories:Strategy
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BruceHenderson
moreaboutBruce
Thevalueofaproductdependsonitsobtainingaleadingshareofitsmarketbeforegrowthslows.
Everyproductshouldeventuallybeacashgeneratorotherwiseitisworthless.
Onlyadiversifiedcompanywithabalancedportfoliocanuseitsstrengthstotrulycapitalizeongrowthopportunities.

Tobesuccessful,acompanyshouldhaveaportfolioofproductswithdifferentgrowthratesanddifferentmarketshares.Theportfoliocomposition
isafunctionofthebalancebetweencashflows.Highgrowthproductsrequirecashinputstogrow.Lowgrowthproductsshouldgenerateexcess
cash.Bothkindsareneededsimultaneously.
Fourrulesdeterminethecashflowofaproduct.
Marginsandcashgeneratedareafunctionofmarketshare.Highmarginsandhighmarketsharegotogether.Thisisamatterofcommon
observation,explainedbytheexperiencecurveeffect.
Growthrequirescashinputtofinanceaddedassets.Theaddedcashrequiredtoholdshareisafunctionofgrowthrates.
Highmarketsharemustbeearnedorbought.Buyingmarketsharerequiresanadditionalincrementofinvestment.
Noproductmarketcangrowindefinitely.Thepayofffromgrowthmustcomewhenthegrowthslows,oritneverwill.Thepayoffiscashthat
cannotbereinvestedinthatproduct.
Productswithhighmarketshareandslowgrowtharecashcows.Characteristically,theygeneratelargeamountsofcash,inexcessofthe
reinvestmentrequiredtomaintainshare.Thisexcessneednot,andshouldnot,bereinvestedinthoseproducts.Infact,iftherateofreturnexceeds
thegrowthrate,thecashcannotbereinvestedindefinitely,exceptbydepressingreturns.
Productswithlowmarketshareandslowgrowtharepets.Theymayshowanaccountingprofit,buttheprofitmustbereinvestedtomaintain
share,leavingnocashthrowoff.Theproductisessentiallyworthless,exceptinliquidation.
Allproductseventuallybecomeeithercashcowsorpets.Thevalueofaproductiscompletelydependentuponobtainingaleadingshareofits
marketbeforethegrowthslows.
Lowmarketshare,highgrowthproductsarethequestionmarks.Theyalmostalwaysrequirefarmorecashthantheycangenerate.Ifcashisnot
supplied,theyfallbehindanddie.Evenwhenthecashissupplied,iftheyonlyholdtheirshare,theyarestillpetswhenthegrowthstops.The
questionmarksrequirelargeaddedcashinvestmentformarketsharetobepurchased.Thelowmarketshare,highgrowthproductisaliability
unlessitbecomesaleader.Itrequiresverylargecashinputsthatitcannotgenerateitself.
Thehighshare,highgrowthproductisthestar.Itnearlyalwaysshowsreportedprofits,butitmayormaynotgenerateallofitsowncash.Ifit
staysaleader,however,itwillbecomealargecashgeneratorwhengrowthslowsanditsreinvestmentrequirementsdiminish.Thestareventually
becomesthecashcow,providinghighvolume,highmargin,highstability,security,andcashthrowoffforreinvestmentelsewhere.
Thepayoffforleadershipisveryhighindeed,ifitisachievedearlyandmaintaineduntilgrowthslows.Investmentinmarketshareduringthe
growthphasecanbeveryattractive,ifyouhavethecash.Growthinmarketiscompoundedbygrowthinshare.Increasesinshareincreasethe
margin.Highmarginpermitshigherleveragewithequalsafety.Theresultingprofitabilitypermitshigherpaymentofearningsafterfinancing
normalgrowth.Thereturnoninvestmentisenormous.
Theneedforaportfolioofbusinessesbecomesobvious.Everycompanyneedsproductsinwhichtoinvestcash.Everycompanyneedsproducts
thatgeneratecash.Andeveryproductshouldeventuallybeacashgeneratorotherwiseitisworthless.
Onlyadiversifiedcompanywithabalancedportfoliocanuseitsstrengthstotrulycapitalizeonitsgrowthopportunities.Thebalancedportfolio
has:
starswhosehighshareandhighgrowthassurethefuture
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cashcowsthatsupplyfundsforthatfuturegrowthand
questionmarkstobeconvertedintostarswiththeaddedfunds.
Petsarenotnecessary.Theyareevidenceoffailureeithertoobtainaleadershippositionduringthegrowthphase,ortogetoutandcutthelosses.

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Automotive
Consumer&Retail
Energy&Environment
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Hardware,Software,&Telecommunications
HealthCare
IndustrialProducts&Processes
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PrivateEquity
PublicSector
SocialSector
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People&Organization
PostmergerIntegration
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