Friday, December 26, 2008

Applying the Boston Matrix to Publishing

Lynne Connolly is a UK writer I both like and admire a great deal. She writes terrific novels and is an academic with wide interests.

In a post on a writing group yesterday, Lynne made reference to the BCG Matrix (also called the Boston Matrix) to describe the publishing industry.

Years ago, I worked as a broker for Smith Barney. The Boston Matrix was often invoked to assess companies. I had not thought of it in years, but immediately decided to do a couple of posts, tying it more specifically to the publishing industry. I asked Lynne for permission to mention her name and to quote her here. Gracious, as always, she agreed.

So, today we'll talk about the matrix itself. In the next post, we'll apply it to publishing.

First, let me describe the concept. It was originally created by Bruce Henderson of the Boston Consulting Group back in the '70s to assist companies in analyzing their product lines.

To help explain the theory behind it, here is a graphic version of the matrix from Value Based Management.Net.

As you can see from the above graph, Henderson set his matrix on an X and Y axis. The vertical axis (X) is low-to-high business growth. The horizontal axis (Y) is high-to-low market share. When analyzing a company, Henderson used a scatter graph to show the relative size of each of the four boxes.

The matrix assesses all product lines and assigns them to one of four categories:

1) The Cash Cows: These products are the foundation on which most successful companies rest. If you are fortunate enough to have a product line that is a cash cow, you occupy a large share of your market. Your cash cows produce profits over and above their expense, and you can "milk" them for the money your company needs.

Note, however, that while the cash cows dominate their market, they have little expectation of growth. For this reason, you try to keep your spending on them as low as you can.

2) The Dogs: Like cash cows, dogs have a low expectation of growth. However, unlike the cash cows, dogs also own a very small piece of the market. With luck, they break even.

As a business owner, you want to do more than break even. Dogs hurt you because they are bringing down your ROA (return on assets) while not producing much--if any--benefit. These are the product lines you look to sell off or close entirely.

3) The Question Marks: The question marks are the polar opposite of the cash cows. They have low market share, but a large expectation of growth. These are the new product lines which a company spends huge R&D (research and development) dollars to build. The hope, of course, is that this gamble will pay off and that the market share will grow, justifying the investment and that the product line will convert from a question mark to a star.

This is the danger area over which a company must keep close watch. If the expected growth does not occur, the product line should be discontinued. Careful decision-making is essential. When do you pull the plug, and how long should you continue throwing money at a product line?

4) The Stars: This is the holy grail that every company seeks. The stars are both high growth, meaning a fast-growing industry, and high market share. Think of them as the up-and-comers. The business pins its hopes on these, investing money in them with the expectation that they will become the next cash cow.

In response to a comment from a member of our writing loop who said publishers need to begin focusing only on best-selling authors, Lynne responded, "If you're familiar with the BCG growth-share matrix, . . . Concentrate on one area only and the risk model becomes overbalanced, together with the company's long term prospects and the company tips over when that particular bubble bursts."

She is exactly right. Eventually cash cows grow old and die. The company must continuously breed new calves that can develop first into stars and then--hopefully--into the cash cows of tomorrow.

Think about this and we'll talk more in the next post.

Please go here to see Lynne's website.

Please go here to read more about the matrix at Value Based Management.Net

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