Serendipity or Strategy: BCG’s Growth Share Matrix

When we describe an event as fortunate, we are acknowledging that the greater part of contributing factors are either outside of our control, not fully understood, or both. It therefore follows that for corporate investment decisions, it may be prudent to bring as much relevant information within our comprehension and control as possible to maximise our "luck".

The Growth Share Matrix[1] pictured above and outlined below, gives us a framework for doing just that. The framework is used as a decision-making tool for selecting the investment opportunities that deliver eighty per cent of all the societal benefits and associated excess profits that capitalism can produce. This piece will attempt to persuade the reader that the role fortune plays in the most outstanding corporate success stories can be explained, at least in part, with the aid of The Growth Share Matrix.

The case for Serendipity

In his brilliant analysis of the corporate lifecycle and investing, Aswath Damodaran, Professor of Finance at NYU Stern, challenges the Harvard Business School and McKinsey orthodoxy for describing the common traits of successful CEOs. Damodaran points out a glaring omission within their school of thought: the pertinent failure to acknowledge the role of luck.

I find it odd that there are no questionable qualities listed on the successful CEO list. Especially given the evidence that, overconfidence seems to be a common feature among CEO's and that it is this overconfidence that allows them to act decisively and adopt long term perspectives. When those bets, often made in the face of long odds pay off, their makers are perceived as successful, but when they do not the decision makers are consigned to the ash heap of failure. Put simply it is possible that the quality that binds together successful CEOs the most, is luck. A quality that neither Harvard Business School nor McKinsey can pass on or teach.[2]

And he’s in good company. His academic counterpart at Stanford University, Jim Collins conducted interviews with the CEOs of the eleven “Great” companies analysed for their Good to Great study. The CEOs interviewed were at the helm of listed companies that sustained returns of three times or more than the S&P 500 average over fifteen years. When questioned, these CEOs put a big premium on luck. Something that Collins argues says more about the humility of the great CEOs than the reality of conditions outside of their control contributing to their unusual success.

I mean, any number of times, you’d go through the interview transcripts… I was just looking back at the Sam Siegel transcript from Nucor.  I said “Well, how did you guys make so many good decisions?” He goes, “Well, I guess we were just really lucky in our decisions.”[3]

Compounding Luck: The Matthew Effect 

For to everyone who has, more will be given, and he will have abundance; but from him who does not have, even what he has will be taken away.[4] (Matthew 25:29)

In his often-quoted Outliers[5], Malcom Gladwell makes perhaps the most compelling argument for the role of serendipity in predicting positive outcomes, or more specifically, the role of time and place. A premise that’s understandably often downplayed or outright ignored in the contemporary self-help style business literature.

During research, Gladwell noticed a disproportionate number of professional Canadian hockey players were born in January, February and March. The cut-off for youth Hockey in Canada is January 1st, which means the January-born child-athletes have an almost twelve-month developmental advantage in comparison to their peers born in December. So what was perceived as talent by the hockey scouts was in fact an issue of timing, which, as The Matthew Effect describes, is then compounded over time as the preferentially selected winter-born child athletes go on to get more ice time, better coaching and more opportunities than their autumn-born peers.

Positioning, Positioning, Positioning![6]

A perhaps closer to home example of the Matthew effect in action for the readership of this column can be found in the stories of Silicon Valley entrepreneurs Bill Gates, Steve Jobs, Eric Schmidt – names synonymous with three of today’s Magnificent 7 stock-market giants. According to Gladwell’s research, the most reliable predictor as to whether you’d turn out a Silicon Valley billionaire in the 2000s was again, your date of birth. In this instance, you needed to be born in the mid 1950s, which put you in your late teens or early twenties during the personal computer revolution of the late 1970s. This meant you had a shot at being the first (and youngest) to get your 10,000 hours of computer programming practice in and get ahead of similarly talented individuals born any earlier or later.

Fortune must put one in the right time and place to capitalise on talent. This doesn’t mean guile and determination are unimportant factors in determining success, but according to Gladwell, to become the outlier, unique character traits must first be underpinned by fortunate positioning. Something demonstrably outside of our control. I am in part in agreement with this point of view; luck is a product of circumstance, something you’re born into. The more we mature into adolescence and adulthood, the more independent we become, the greater the influence we exert on determining our own outcomes. The country you were born in, the family you were born into, the values you’re brought up to uphold and the social and economic status of your parents are undoubtedly hugely important factors for your success. But there is an underlying complexity and nuance that is often hard to unpick, and there are plenty of outliers, for example, Margaret Thatcher, who don’t fit within this framework.

My Parting Gift: The Growth Share Matrix

If luck is a product of circumstance, then all outlandishly lucrative investment opportunities should fit neatly in the top left box of The Growth Share Matrix.  This Matrix, designed and utilised by Boston Consulting Group’s founding partner Bruce Henderson, challenged much of the contemporary investment dogma, asserting:

Margins and Cash Generated are a function of Market Share, high margins and high market share go together [7].

Furthermore, the growth share matrix, as outlined in the illustration above, puts all the emphasis on a product or service attaining “star” status, and the subsequent fight to maintain its leading market position. Thereby, justifying higher and defendable margins as the product or service transforms into a “cash cow”, when the high growth phase inevitably evens off.

To qualify as a star business, your venture must meet the following criteria:

1. It must be the market leader in a niche, either a niche that it has created or a niche that already exists

2. To create a new niche, the product or service must be unique or a material variation on an existing product/service that has unique benefits to the customer, and it must also be difficult to copy. E.g. Hover (Old Star: Dog or Question Mark?) – Dyson (Present Star) – Shark (Question Mark or challenging the star?)

3. That niche created or entered must be growing at least 10% per annum: leveraging the enormous power of compounding growth

This framework, as later put into hugely profitable practice and then expanded on by the investor, entrepreneur and writer Richard Koch. It is summarised in his excellent book “the star principle” which I commend to you.

Both the positioning of time, place and resources gifted (or not) through fortune, and positioning by design are premier factors in determining the return on capital and more importantly, the wider social impact of a venture. Neither positioning through fortune nor positioning through design can be viewed in isolation. But when we reflect on prior entrepreneurial or investment opportunities through the lens of The Growth Share Matrix, we can perhaps go some way towards explaining some of those “lucky breaks” we’ve all had along the way. With a bit of luck, perhaps we can also encourage their repetition.

Alex is a Director of Penpole Consulting, a Cyber Security service provider that helps Private Equity firms maximise portfolio company value by improving cyber security posture and reducing operational risk.

Want to connect? Reach out to Alex directly: md@penpole.co.uk

[1] Boston Consulting Group. (1970). The Product Portfolio (PDF). Boston Consulting Group. https://web-assets.bcg.com/img-src/BCG_The_Product_Portfolio_tcm9-139921.pdf

[2] Damodaran, A. (2024). The Corporate Lifecycle, Business, Investment and Management Implications. Portfolio

[3] Collins, J. (2001). Good to great: Why some companies make the leap… and others don’t. Penguin Random House.

[4] The Holy Bible, NIV. (2011). Zondervan.

[5] Gladwell, M (2009). Outliers: The story of success. Penguin.

[6] Koch, R (2008). The Star Principle. How it can make you rich. Piatkus.