Friday, August 8, 2008

An economic parable - bonus coverage

A couple of notes about Wednesday's post, in one case a clarification, in the other an amplification.

The graphic of the growth-share matrix was borrowed from Wikipedia, but I should have made it clear that the values on the axes for market growth rate and relative market share were examples. It is not meant to imply that there is some magic cut-off at 6% growth rate. In the real world, every company would define their expectations differently.

The amplification has to do with the way that companies work today. Perhaps the most arguable part of my argument was that, rather than gratefully hanging on to cash cows, companies today are looking for ways to play up their high-growth stars. That flies in the face of the theory of this model, which contends that companies should look for a mix of all but the dogs.

I argued that the relentless short-term focus of companies, exacerbated by the easy movement of investment money and (possibly) the incentive plans of executives, has created a climate in which growth is the mantra, the unassailable goal. There is an impatience with cash cows, despite their cash generation, because they don't show the potential to be game-changers - they just aren't sexy, and they certainly don't prove a manager's acumen.

The easiest way to illustrate this is to expand on the example of segmentation by geographical areas. When the CEO comes to the VP of Sales to set targets for the coming year, it is unlikely that the conversation will focus on the maintenance of large inflows of cash. It is far more probable that the CEO will say, "Get those sales figures up by 10%."

Let's simplify the example and say that this company does business in only two markets, the U.S. and China. In the U.S., we will be amazed if the economy grows at 2% this year; many feel we could end up negative. To grow sales by 10% will require the VP to increase market share rather dramatically, which, in a mature market, is likely to be impossible.

In China, on the other hand, double-digit growth is decidedly possible. To increase sales 10% there may involve nothing more than riding the economic tide. And the Chinese market is quite immature; it is very that this company will be the first real player in whatever it's selling.

I don't want to get any more specific with the numbers - it would only blur the implications. But think of those implications. The far bigger bang for the buck is going to come from China. Hitting or exceeding your target, with concomitant bonus, is so much easier if the VP concentrates on the China market.

Take this, multiply it by hundreds or thousands of companies, and we end up with what we're seeing now. Calling this trend disturbing for the ultimate health of our economy probably understates the case.

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