Thursday, April 14, 2005
Bruce Hendersen- Meaningful Quality Relationships
Extracts from the aticle "Competitive Business Strategy in Historical Persepectives)
Author- Pankaj Ghemawat- Senior Proffessor, Havard Business School
BCG’s founder, Bruce Henderson, believed that a consultant’s job was to find “meaningful quantitative relationships” between a company and its chosen markets.In his words, “good strategy must be based prima-rily on logic, not . . . on experience derived from intuition.”Indeed,Henderson was utterly convinced that economic theory would someday lead to a set of universal rules for strategy. As he explained, “[I]n most firms strategy tends to be intuitive and based upon traditional patterns of behavior which have been successful in the past. . . . [However,] in growth industries or in a changing environment, this kind of strategy is rarely adequate. The accelerating rate of change is producing a business world in which customary managerial habits and organization are in-creasingly inadequate.”In order to help executives make effective strategic decisions, BCG drew on the existing knowledge base in academia: one of its first em-ployees, Seymour Tilles, was formerly a lecturer in Harvard’s businesspolicy course. However, it also struck off in a new direction that Bruce Henderson is said to have described as “the business of selling power-ful oversimplifications.”In fact, BCG came to be known as a “strat-egy boutique” because its business was largely based, directly or indi-rectly, on a single concept: the experience curve .The value of using a single concept came from the fact that “in nearly all problem solving there is a universe of alternative choices, most of which must be discarded without more than cursory attention.”Hence, some “frame of reference is needed to screen the . . . relevance of data, methodology, and implicit value judgments” involved in any strategy decision. Given that decision making is necessarily a complex process, the most useful “frame of reference is the concept. Conceptual thinking is the skeleton or the framework on which all other choices are sorted out.”BCG and the Experience Curve. BCG first developed its version of the learning curve—what it labeled the “experience curve”—in 1965–66. According to Bruce Henderson, “it was developed to try to explain price and competitive behavior in the extremely fast growing seg-ments” of industries for clients like Texas Instruments and Black . Tilles credits Henderson for recognizing the competitiveness of Japanese industry at a time, in the late 1960s, when few Americans be-lieved that Japan or any other country could compete successfully against American industry.
BCG consultants studied these industries, they naturally asked why “one competitor outperforms another (assuming compara-ble management skills and resources)? Are there basic rules for suc-cess? There, indeed, appear to be rules for success, and they relate tothe impact of accumulated experience on competitors’ costs, industryprices and the inter relation between the two.”The firm’s standard claim for the experience curve was that for each cumulative doubling of experience, total costs would decline by roughly 20 to 30 percent due to economies of scale, organization all earning, and technological innovation. The strategic implication of theexperience curve, according to BCG, was that for a given product seg-ment, “the producer . . . who has made the most units should have thelowest costs and the highest profits.”Bruce Henderson claimed thatwith the experience curve “the stability of competitive relationshipsshould be predictable, the value of market share change should be cal-culable, [and] the effects of growth rate should [also] be calculable.”From the Experience Curve to Portfolio Analysis. By the early1970s, the experience curve had led to another “powerful oversimplifi-cation” by BCG: the “Growth-Share Matrix,” which was the first use ofwhat came to be known as “portfolio analysis.” The ideawas that after experience curves were drawn for each of a diversified company’s business units, their relative potential as areas for invest-ment could be compared by plotting them on the grid.BCG’s basic strategy recommendation was to maintain a balancebetween “cash cows” (i.e., mature businesses) and “stars,” while allo-cating some resources to feed “question marks,” which were potential stars. “Dogs” were to be sold off. In more sophisticated language, a BCGvice president explained that “since the producer with the largest stable market share eventually has the lowest costs and greatest profits, it be-comes vital to have a dominant market share in as many products aspossible. However, market share in slowly growing products can begained only by reducing the share of competitors who are likely to fight back.” If a product market is growing rapidly, “a company can gain share by securing most of the growth. Thus, while competitors grow,Bruce Henderson explained that, unlike earlier versions of the “learning curve,” BCG’sexperience curve “encompasses all costs (including capital, administrative, research andmarketing) and traces them through technological displacement and product evolution. It isalso based on cash flow rates, not accounting allocation.”
Author- Pankaj Ghemawat- Senior Proffessor, Havard Business School
BCG’s founder, Bruce Henderson, believed that a consultant’s job was to find “meaningful quantitative relationships” between a company and its chosen markets.In his words, “good strategy must be based prima-rily on logic, not . . . on experience derived from intuition.”Indeed,Henderson was utterly convinced that economic theory would someday lead to a set of universal rules for strategy. As he explained, “[I]n most firms strategy tends to be intuitive and based upon traditional patterns of behavior which have been successful in the past. . . . [However,] in growth industries or in a changing environment, this kind of strategy is rarely adequate. The accelerating rate of change is producing a business world in which customary managerial habits and organization are in-creasingly inadequate.”In order to help executives make effective strategic decisions, BCG drew on the existing knowledge base in academia: one of its first em-ployees, Seymour Tilles, was formerly a lecturer in Harvard’s businesspolicy course. However, it also struck off in a new direction that Bruce Henderson is said to have described as “the business of selling power-ful oversimplifications.”In fact, BCG came to be known as a “strat-egy boutique” because its business was largely based, directly or indi-rectly, on a single concept: the experience curve .The value of using a single concept came from the fact that “in nearly all problem solving there is a universe of alternative choices, most of which must be discarded without more than cursory attention.”Hence, some “frame of reference is needed to screen the . . . relevance of data, methodology, and implicit value judgments” involved in any strategy decision. Given that decision making is necessarily a complex process, the most useful “frame of reference is the concept. Conceptual thinking is the skeleton or the framework on which all other choices are sorted out.”BCG and the Experience Curve. BCG first developed its version of the learning curve—what it labeled the “experience curve”—in 1965–66. According to Bruce Henderson, “it was developed to try to explain price and competitive behavior in the extremely fast growing seg-ments” of industries for clients like Texas Instruments and Black . Tilles credits Henderson for recognizing the competitiveness of Japanese industry at a time, in the late 1960s, when few Americans be-lieved that Japan or any other country could compete successfully against American industry.
BCG consultants studied these industries, they naturally asked why “one competitor outperforms another (assuming compara-ble management skills and resources)? Are there basic rules for suc-cess? There, indeed, appear to be rules for success, and they relate tothe impact of accumulated experience on competitors’ costs, industryprices and the inter relation between the two.”The firm’s standard claim for the experience curve was that for each cumulative doubling of experience, total costs would decline by roughly 20 to 30 percent due to economies of scale, organization all earning, and technological innovation. The strategic implication of theexperience curve, according to BCG, was that for a given product seg-ment, “the producer . . . who has made the most units should have thelowest costs and the highest profits.”Bruce Henderson claimed thatwith the experience curve “the stability of competitive relationshipsshould be predictable, the value of market share change should be cal-culable, [and] the effects of growth rate should [also] be calculable.”From the Experience Curve to Portfolio Analysis. By the early1970s, the experience curve had led to another “powerful oversimplifi-cation” by BCG: the “Growth-Share Matrix,” which was the first use ofwhat came to be known as “portfolio analysis.” The ideawas that after experience curves were drawn for each of a diversified company’s business units, their relative potential as areas for invest-ment could be compared by plotting them on the grid.BCG’s basic strategy recommendation was to maintain a balancebetween “cash cows” (i.e., mature businesses) and “stars,” while allo-cating some resources to feed “question marks,” which were potential stars. “Dogs” were to be sold off. In more sophisticated language, a BCGvice president explained that “since the producer with the largest stable market share eventually has the lowest costs and greatest profits, it be-comes vital to have a dominant market share in as many products aspossible. However, market share in slowly growing products can begained only by reducing the share of competitors who are likely to fight back.” If a product market is growing rapidly, “a company can gain share by securing most of the growth. Thus, while competitors grow,Bruce Henderson explained that, unlike earlier versions of the “learning curve,” BCG’sexperience curve “encompasses all costs (including capital, administrative, research andmarketing) and traces them through technological displacement and product evolution. It isalso based on cash flow rates, not accounting allocation.”
