BCG for R&E

My last post discussed the reapplication of The Ladder of Customer Loyalty model to capital retention. I renamed the model The Ladder of Company Loyalty. Eric Canada let me use his data to make the point that investing in retention and expansion represents a high job growth opportunity for most communities. Eric also challenged me to “peel the onion” back another layer and provide some guidance on the “How To” considerations.

This post takes a look at reapplying the famous Boston Consulting Group model as a tool to help you approach R&E strategically. When I was at Procter & Gamble, I used the Boston Consulting Group (BCG) model frequently to drive additional strategic focus to building brands.  It helped me make certain I was investing sufficient resources to both protect the business core and accelerate franchise growth.  This balanced approach delivered the best probability of sustainable success, and my brands thrived as a result.

First, let’s translate the BCG model so it is easy to reapply in economic development, and second, let’s connect it with The Ladder of Company Loyalty.

BCG MATRIX MODEL

This model is one of the most well-known and frequently used portfolio management models. BCG created it in the early 70’s to help guide strategic decisions in managing product life cycles. It is a helpful tool to determine what investment priorities should be given to various products in the portfolio of a business unit. In my experience, it can be reapplied to determine the investment priorities for an economic portfolio to ensure long-term job growth creation. The basic idea is if a company (or industry) has a bigger market share, or if the company’s market grows faster, it is better for the community.

BCG Matrix

STARS (high growth, high market share) – These are companies in your community that are leaders in their industry. They will also typically be companies that represent a reasonable number of existing jobs. These companies are growing and have the critical mass to create sustainable employment. You will want to disproportionately invest resources in ensuring you form a strong partnership with your Stars and their needs are being met/exceeded in your community. You should be certain management from your Star companies are involved in helping determine how to further strengthen your community business climate.

CASH COWS (low growth, high market share) – These companies are likely the stars of yesterday. They employ a significant number of your community’s residents both directly and indirectly through a well establish supply chain. The management of these companies should already be heavily involved in helping you shape the business climate. If not, make it so. Loss of one of these companies means your local economy will take a noticeable hit. You want to resist the temptation to become complacent in servicing these companies and be certain you stay in close contact with management.

DOGS (low growth, low market share) – While certainly not a flattering label, these companies are very needy and represent a risk of disproportionately using your limited resources. Typically you won’t have to go out of your way to engage management in these companies because they will be seeking you out for low interest loans or any other financial support you can provide to keep their cash flow afloat. Be careful you do not create expensive “rescue plans” to save these companies. They need to become more competitive in their industry to represent a sustainable job growth opportunity for your community.

QUESTION MARKS (high growth, low market share) – These companies have the potential to become your community’s STARS of tomorrow. The upside job growth potential typically is attention getting, and management is always very enthusiastic. Your local press and politicians love these companies. But, if the market share for these companies remains unchanged, they will become a major political and financial resource drain in your economic portfolio. You will need to assess as quickly as possible, if a company in this category is on a trajectory to become a STAR or a DOG. These businesses are often fighting an impossible task and are always attempting to “turn the business around”. If they are unable to get sufficient funding, they quickly become DOGs.

The most difficult thing in using this model is to obtain quantitative data to help you determine how to categorize companies in your community. Here are some tools that can help –

http://www.hoovers.com/100005479-1.html

http://www.secinfo.com/$/Search.as

http://online.wsj.com/public/page/companyresearch.html?mod=topnav_0_0012

http://www.zacks.com/research/index.php

http://biz.yahoo.com/i/

http://money.msn.com/stocks

http://www.blanecanada.com/product_synchronist.html

For non-publicly traded companies in your community, you will need to rely on your own call reports for the data. It is not critical to the exercise that you place a company exactly where it belongs on the grid. You simply need to be relatively right. Often an educated guess is sufficient when quantitative data is too hard or costly to come by.

TIEING IT ALL TOGETHER

Once you have the key companies in your community categorized within the BCG model, it is time to add the dimension of loyalty.

By definition, every company on your chart is minimally a Customer. The company has invested capital in your community and has a vested interest in growing. Some have expanded operations and invested subsequent capital. These companies are your Clients. The CEOs believe their company’s future growth objectives can be achieved by remaining in your community. And, a few companies are your Advocates. They brag about how wonderful doing business from and living in your community is. Their company’s long-term success is inextricably tied to your community’s development.

You should code each company in your STAR and CASH COW categories as a Customer, Client or Advocate. In my opinion, if your economic portfolio is well balanced, you should see a mix in your STAR category that looks like 20% Customer, 60% Client, and 20% Advocate. In your CASH COW category the ratio should approximate < 10% Customer, 40% Client, and >50% Advocate. Chances are, if you have been objective, your actual mix will be over balanced in Customers. Don’t panic. It simply means you have work to do.

CONTINUAL IMPROVEMENT

Your challenge now is to have a well defined tactical plan in place that can move Customers to Clients, turn Clients into Advocates, and then fully leverage the power of Advocates in your community’s capital attraction efforts.

This doesn’t happen by circumstance. It takes planning, establishing performance targets and holding people accountable for results. It also takes making R&E a real priority in your community’s economic portfolio management plan.

Eric Canada’s research indicates that over time 71% of new job growth will come from companies already in your community and only 15% will come through your capital attraction efforts. Yet, if your EDO is like most, you will be investing 70% – 80% of your time and energy chasing the 15%.

There is no magic ratio, but a rule of thumb I would suggest is you consider shifting your EDO investment so 50% of resources are invested in R&E, 30% in capital attraction, and 20% in capital formation (entrepreneurs). I recommend this ratio because it is a likely challenging enough that it will cause you to think differently about the tactics necessary to achieve it. For example, capping your capital attraction investment to 30% will force you to consider a collaborative approach with other EDOs in your Region or State in order to amortize your costs. This in turn will drive efficiencies into your operation that will deliver value year after year.

Set a target ratio of Customers, Clients and Advocates in your STARS and CASH COW categories. Set a target investment ratio for your EDO promotion efforts. Create a tactical plan to convert Customers to Clients and Clients to Advocates; and, to leverage Advocates in your capital attraction efforts. Then establish a tracking system so you can objectively evaluate execution of those tactics. If you do not measure performance, you will not see results.

ADVICE

I believe it is worthwhile to go through an exercise of categorizing your companies based on the BCG model and assessing where each stands on The Ladder of Company Loyalty. At a minimum, the exercise will force you to think about the companies in your community and make a judgment call on how “at risk” they might be for leaving your community. As you do this work, remember to include an assessment of M&A risk. Then I believe it is worthwhile to determine how robust your current tactical plan is to convert your Customers to Clients and Clients to Advocates. Bias your effort toward the STARS and CASH COWS in your portfolio. Are you investing sufficient resources to be reasonably confident in success? Are you fully leveraging your Advocates in your attraction efforts? If you do nothing more than this, you will undoubtedly identify opportunities for improvement that will make your economic portfolio management efforts more effective and job growth in your community more likely

If you want to take it to the next level, you need to determine how to systematize the work. This will involve process changes and a resource commitment to do it right. You may even want to consider contracting with a consultant (e.g. Blane Canada and their Synchronist System) to help guide your EDO leadership and Board through a facilitated exercise and to implement a sustainable process improvement in your operation.

In the end, I believe a more deliberate approach to R&E will deliver a return on jobs for your community. It will also insulate your portfolio from competitive poaching thereby helping you retain jobs.

Please leave a comment sharing your thoughts and experience. What is the biggest hurdle you face to focusing on R&E? How supportive is the community leadership to investing in R&E versus capital attraction?

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DISCLOSURE

I have no business relationship with Blane Canada Ltd. I chose to highlight the Company based on my own research of their quantitative approach to R&E, and because I am referencing their data.

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3 Comments so far

  1. Joe H

    April 5, 2011

    Ed, great commentary and application of the BCG model in an economic development context.

    My initial reaction is that the Cash Cows could potentially be even more important in this context… Older, established and profitable businesses could be under heavy pressure to relocate in order to minimize costs over time — which could have a huge impact on the communities they currently are located in.

    In the worst case, Cash Cows could create a “leaky bucket” scenario that offsets the work communities are doing to attract new industries… It takes a lot of successful small Question Marks to equal the impact of one big Cash Cow.

  2. Ed Burghard

    April 5, 2011

    Joe – I agree. And, the sad case is many communities take their Cash Cow companies for granted assuming that they are so entrenched in the local economy that they would never consider leaving. Then they wake up one day to learn the company was acquired and is shutting down local operations. In addition to the need to generate efficiencies as a margin improver, Cash Cows are at risk for M&A.

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