"Chrysler delivers the bad news to 789 dealers" was yesterday's headline. Today the headline read "GM notifies dealers of shutdowns" as the company sent 1,100 dealers the notice they would no longer be allowed to stay in business. Thousands are losing jobs. Chrysler is bankrupt, and GM looks destined to file shortly. But wait a minute, GM was the market share leader for the last 50 years!! These big companies, in manufacturing, were supposed to be able to protect their business and become "cash cows." They weren't supposed to get beaten up, see their cash sucked away and end up with nothing!
About 30 years ago a fairly small management consultancy that was started as a group to advise a bank's clients hit upon an idea that skyrcketed its popularity. The fledgling firm was The Boston Consulting Group, and its idea was the Growth/Share matrix. It created many millions of dollars in fees over the years, and is now a staple in textbooks on strategic planning. Unfortunately, like a lot of business ideas from that era, we're learning from companies like GM and Chrysler that it doesn't work so well.
The idea was simple. Growth markets are easier to compete in because people throw money at the companies – either via sales or investment. So it's easier to make money in growing businesses. Market share was considered a metric for market power. If you have high share, you supposedly could pretty much dictate prices. High share meant you were the biggest, which supposedly meant you had the biggest assets (plant, etc.) and thus you had the lowest cost. So, low growth and low share meant your business was a dog. High growth and low share was a question mark – maybe you'd make money if you eventually get high share. High growth and high share was a star. And low growth but high share is a cash cow because you could dominate a business using your market clout to print money – or in the venacular of the matix – milk the money from this cow into which you put very little feed.
In the 1970s/80s, looking at the industrial era, this wasn't a bad chart. Especially in asset intensive businesses that had what were then called "scale advantages." In the industrial world, having big plants with lots of volume was interpreted as the way to being a low-cost company. Of course, this assumed most cost was tied up in plant and equipment – rather than inventory, people, computers, advertising, PR, viral marketing, etc. The first part of the matrix has held up pretty well; the last part hasn't. We now know that it's easier to make money in growth. But it doesn't turn out that share really gives you all that much power nor does it have a big determination in profitability.
We know that having share is no defense of profits. The assumption about entry barriers keeping competitors at bay, and thus creating a "defensive moat" around profits, is simply not true. Today, companies build "scale" facilities overnight. They obtain operating knowledge by hiring competitor employees, or simply obtaining the "best practices" from the internet. Distribution systems are copied with third party vendors and web sites. Even advertising scale can be obtained with aggressive web marketing at low cost. And so many facilities are "scale" in size that overcapacity abounds – meaning the competitor with no capacity (using outsourced manufacturing) can be the "low cost" competitor (like Dell.).
Thus, all markets are overrun with competitors that drive down profits any time growth slows. As GM learned, even with more than 50% share (which they once had) they could not stop competitors from differentiating and effectively competing. Not even Chrysler, with the backing of Mercedes, could maintain its share and profits against far less well healed competitors. When growth slows, the cash disappears into the competitive battles of the remaining players. Unfortunately, even new players enter the market just when you'd think everyone would run for the hills (look at Tata Motors launching itself these days wtih the Nano). Competitors never run out of new ideas for trying to compete – even when there's no growth – so they keep hammering away at the declining returns of once dominant players until they can no longer survive.
Competition exists in all businesses except monopolies, and threatens returns of even those with highest share. Today it might be easy to say that Google cannot be challenged. That is short-sighted. People said that about Microsoft 20 years ago – and today between Apple, Linux and Google Microsoft's revenue growth is plummeting and the company is unable to produce historical results. People once said Sears could not be challenged in retailing. Kodak in amateur photography. And GM in cars. Competitors don't quit when growth slows – until they go bankrupt – and even then they don't quit (again, look at Chrysler). High share is no protection against competition.
And thus, there is no "easy cash in the cow" to be milked. It all gets spent fighting to stay alive. Trying to protect share by cutting price, paying for distribution, advertising. And if you don't spend it, you simply vanish. Really fast. Like Lehman Brothers. Or Bennigans.
The only way to make money, long term, is to keep growing. To keep growing you have to move into new markets, new technologies, new services – in other words you have to keep moving with the marketplace. And that produces success more than anything else. It's all about growth. Forget about trying to have the "cash cow" – it's like the unicorn – it never existed and it never will.
