Beyond the experience curve ...

experience curve:
market share->cumulative volume->lower cost->competitive
advantage

life cycle:
rapid growth markets:
market share is easier to acquire
less rivalry (you dont have to subtract customers to competitors)

What is a Strategic Business Unit?

A company division, a product line within a division, or
single product or company brand that has an objective and
mission different from other company business and that
can be marketed independently from the rest of the
company

industry attractiveness:
growth rate

cost advantage:
relative market share

industry attractiveness:
growth rate

10%

1.0
relative market share
(log scale)

Why relative market share?

measuring relative market share:
Strategic Business Unit sales, year
largest competitors sales, year
Market growth rate:
Market Size (t) - Market Size (t-1)
Market Size (t-1)

industry attractiveness:
growth rate

SB
U3

sb
u2
SBU
5

10%

SB
U4

SBU 1

1.0
relative market share

bubble size:
! ! ! ! !

Strategic Business Units Sales

Total firm sales

industry attractiveness:
growth rate

SB
U3

sb
u2
SBU
5

10%

SB
U4

SBU 1

1.0
relative market share

Features of different SBU categories

Thrust

Profitability Investment

Net Cash
Flow

STARS

Hold/Increase

High

High

None

CASH COWs

Hold

High

Low

Highly Positive

QUESTION
MARKS 1

Increase

None/Negative

Very High

Highly Negative

QUESTION
MARKS 2

Harvest/Divest

Low/Negative

Divest?

Positive?

DOGS

Harvest/Divest

Low/Negative

Divest?

Positive?

(Hax & Majluf 1983)

An example:

Product

market
share (%)

nearest
competitor
market
share (%)

This year
market
sales

Last year
market
sales

Washing
Powder

25.0

12.5

23,000

22,000

detergent

18.5

25.0

12,000

10,000

toothpaste

16.0

12.0

15,000

12,000

shampoos

9.8

15.0

20,000

19,000

18.0

12,000

8,000

skin creams 12.0

Victims of the Product portfolio mindset?

Oxirane Corporation: In a race to be the first along the ethylene

glycol industry's experience curve, Oxirane decided to forgo staged
technological learning by jumping into full production. Standardizing
early by cutting back on R&D resulted in bankruptcy.

Bowmar Calculators: Attempting to achieve experience-based

competitive superiority on an inferior technological platform (discrete components) left the firm vulnerable to integrated circuit
technology. Resulting obsolescence ceded the market to Texas
Instruments and Fairchild.
Baldwin Locomotive. Once the market leader, Baldwin was too slow
to adopt the new diesel electric technology, forcing it to yield the
product market to GM.
Swiss watchmakers: Employing innovative quartz and LCD
technology Seiko and Texas Instruments were able to favorably
restructure the watch industry, allowing them to steal significant
market share from the Swiss.

Westinghouse and General Electric: Prematurely labeling their

heavy electrical equipment technology as mature, both firms
decided to license to firms in France, Switzerland, Germany, and
Japan. Shortly thereafter, neither GE nor Westinghouse were able to
win major contracts to build generating plants in any of these
countries.

General Electric, Siemens, Philips, and Honeywell: Lured by the

high profits and growth potential that IBM was enjoying in the 1960s
macrocomputer market, these firms entered the market. High profit
potential and market growth blinded their entry strategy to necessary
key success factors exogenous to the BCG model such as relevant
technological expertise, a compatible organizational culture and
industry-specific marketing and financial management. They placed
blind faith in the universality of growth/share strategies regardless of
contextual supply-side market dynamics or the importance of other
internal competencies. Several unprofitable years later, all four firms
were forced to divest and exit the industry.

The U.S. Television Industry: During the mid-1970s, an almost

unanimous strategic conclusion in the U.S. television industry
labeled itself as mature teetering on decline. Consistent with the
growth/share model, incumbent firms actively engaged in harvesting
strategies. The resulting dearth of technological innovation and
marketing support made the industry vulnerable to properly oriented
Japanese competitors. Optimistically regarding the TV market as
holding profitable long-term potential, the Japanese industry
invested heavily in marketing and product improvement (e.g.,
quadraphonic stereo sound, inexpensive portable models, modular
design, big screens, remote control, etc.). Today, the Japanese
dominate the global television industry, and seem destined to
continue given the potential resurgence of market growth through
high definition television (HDTV) and the "500 channel universe."
(source: Fleisher and Bensoussan 2003)

Limits?
Problems with the experience curve
Is industry growth a good proxy for industry attractiveness?
Does not consider complementarities.
Ignores industry structure
Ignores the impact of small competitors whose market share is rising fast.

No marginalistic thinking (the first dollar invested in a dog may

yield higher returns than the last dollar invested in a star)

Matrices proliferate....