The world has changed. Conglomerates have become far less prevalent since their heyday in the 1970s. More importantly, the business environment has changed.
First, companies face circumstances that change more rapidly and unpredictably than ever before because of technological advances and other factors. As a result, companies need to constantly renew their advantage, increasing the speed at which they shift resources among products and business units. Second, market share is no longer a direct predictor of sustained performance. (See Exhibit 1.) In addition to share, we now see new drivers of competitive advantage, such as the ability to adapt to changing circumstances or to shape them.
So, what do these two shifts mean for the original portfolio concept? We might expect that these developments translate into changes in the distribution of businesses across the matrix. As change accelerates, we may see that businesses move around the matrix quadrants more quickly. Similarly, as the disruption of mature businesses increases with change and unpredictability, we may see proportionately lower numbers of cash cows because their longevity is likely in many cases to be curtailed.
To test these hypotheses, we looked closely at the effect of these changes in the U.S. economy, by treating individual companies as analogues for individual business units in a conglomerate’s portfolio. In our analysis, we assigned every publicly listed U.S. company to a portfolio quadrant, on the basis of its growth rate and market share.
The results robustly support the hypotheses.
First, companies indeed circulated through the matrix quadrants faster in the five-year period from 2008 through 2012 than in the five-year period from 1988 through 1992. This was true in 75 percent of industries, reflecting the higher rate of change in business overall. In those industries, the average time spent in a quadrant halved: from four years in 1992 to less than two years in 2012. To further test this hypothesis, we also studied ten of the largest U.S. conglomerates and discovered that the average time any business unit spent in a quadrant was less than two years in 2012. Only a few, relatively stable industries, such as food retail and health-care equipment, saw fewer disruptions and hence did not show faster circulation.
Second, our analysis showed the breakdown of the relationship between relative market share and sustained competitiveness. Cash generation is less tied to mature businesses with high market share: in our analysis of public companies, the share of total profits captured by cash cows in 2012 was 25 percent lower than it was in 1982. (See Exhibit 2.) At the same time, the duration of that later part of the life cycle declined as well, on average by 55 percent in those industries that witnessed faster matrix circulation.
The analysis was based on all publicly listed U.S. companies from 1980 through 2012 as provided by Compustat. Relative growth rate is the difference between the company growth rate and the market growth rate, with high being above market average and low being below market average. Relative market share is a company’s market share divided by the market share of the industry’s third-ranked company in terms of share. Companies were segmented by Global Industry Classification Standard to determine appropriate market segments and market growth rates. The average time spent in a quadrant was calculated for the five-year periods from 1988 through 1992 and from 2008 through 2012.
We studied the following companies: Carlisle Companies, Danaher, Disney, The Dow Chemical Company, DuPont, General Electric, Loews, Procter & Gamble, 3M, and Textron.