Skip to main content
diversification.com
← Back to A Definitions

Adjusted growth share

What Is Adjusted Growth Share?

Adjusted Growth Share is a refined analytical framework within corporate finance and strategic management that enhances the traditional Growth-Share Matrix by incorporating additional factors beyond simple market share and market growth rate. While the foundational concept categorizes a company's product portfolio based on these two dimensions, Adjusted Growth Share acknowledges that a more nuanced understanding of a business unit's position and potential requires accounting for qualitative and quantitative elements not captured by the basic matrix. This approach is part of broader strategic planning efforts, aiming to provide a more accurate picture for resource allocation and investment decisions. It helps businesses assess their various offerings in the context of their specific competitive landscape and market dynamics, rather than relying solely on generalized metrics.

History and Origin

The concept of evaluating products based on their growth and market share originated with the Boston Consulting Group (BCG) in the early 1970s. Bruce D. Henderson, the founder of the Boston Consulting Group, popularized the Growth-Share Matrix in his 1970 essay "The Product Portfolio."8 This matrix quickly became a central tool in strategic management, helping companies classify their business units into "Stars," "Cash Cows," "Question Marks," and "Dogs" based on their relative market share and the market growth rate. The matrix provided a straightforward visual aid for understanding a company's product portfolio and guiding cash flow allocation.

However, over time, practitioners and academics recognized certain limitations in the original, simplistic application of the matrix. These limitations led to the implicit development of more "adjusted" interpretations. For instance, the original matrix sometimes oversimplified complex market dynamics or failed to account for profitability beyond raw cash generation. The need for a more comprehensive view, considering factors like specific competitive advantage, market concentration, and the true cost of maintaining market share, gave rise to the principles that underlie Adjusted Growth Share. This evolution reflects a broader trend in strategic analysis towards more tailored, context-specific frameworks.

Key Takeaways

  • Adjusted Growth Share moves beyond basic market share and market growth rate, incorporating additional factors for a more accurate strategic assessment.
  • It provides a more nuanced view of a business unit's true potential and strategic implications within a company's product portfolio.
  • The framework helps refine resource allocation and investment decisions by considering specific market conditions, competitive dynamics, and profitability.
  • It evolved from the limitations of the traditional Growth-Share Matrix, addressing its oversimplifications.
  • Adjusted Growth Share aids in developing more robust strategic planning initiatives tailored to unique business contexts.

Formula and Calculation

Unlike the original Growth-Share Matrix, which uses straightforward relative market share and market growth rate, Adjusted Growth Share does not rely on a single, universal formula. Instead, it involves applying qualitative or quantitative "adjustments" to these foundational metrics based on specific contextual factors. The core idea is to refine the inputs before plotting or evaluating.

For instance, the Adjusted Market Growth Rate might consider factors such as:

  • Market size and potential for expansion or contraction.
  • The presence of disruptive technologies.
  • Regulatory changes impacting market entry or growth.
  • Consumer trends that might accelerate or decelerate demand beyond simple historical growth.

The Adjusted Relative Market Share might account for:

  • The sustainability of a competitive advantage (e.g., patent protection, strong brand loyalty).
  • The specific competitive landscape, including the number and strength of rivals, and their respective market share.
  • The cost structure of the business unit, which might allow for higher profitability even with lower absolute market share due to economies of scale.

The general approach involves:

  1. Calculating initial Market Growth Rate ((MGR)):
    MGR=(Current Market Size−Previous Market Size)Previous Market Size×100%MGR = \frac{(\text{Current Market Size} - \text{Previous Market Size})}{\text{Previous Market Size}} \times 100\%

  2. Calculating initial Relative Market Share ((RMS)):
    RMS=Business Unit’s Market ShareMarket Share of Largest CompetitorRMS = \frac{\text{Business Unit's Market Share}}{\text{Market Share of Largest Competitor}}

  3. Applying Adjustment Factors ((AF_G) for Growth, (AF_S) for Share): These factors are determined qualitatively or through weighted scoring based on the specific market and competitive analysis. For example, if regulatory hurdles make growth particularly difficult, (AF_G) might be less than 1. If a strong patent makes market share highly defensible, (AF_S) might be greater than 1.

    • Adjusted Market Growth Rate ((AMGR)): (AMGR = MGR \times AF_G)
    • Adjusted Relative Market Share ((ARMS)): (ARMS = RMS \times AF_S)

By applying these adjustments, the position of a business unit on the growth-share matrix (or its conceptual equivalent) can shift, leading to different strategic conclusions and investment decisions.

Interpreting the Adjusted Growth Share

Interpreting the Adjusted Growth Share involves evaluating a business unit's position after considering the refined metrics. If a business unit initially appeared to be a "Star" (high market share, high growth) based on raw data, an Adjusted Growth Share analysis might reveal it's closer to a "Question Mark" (low market share, high growth) if its competitive advantage is not sustainable, or if the market growth is inflated by temporary factors. Conversely, a "Dog" (low share, low growth) might reveal hidden value if its market share is highly defensible in a niche market, leading to strong return on investment (ROI) despite low growth.

The interpretation focuses on understanding the true potential and strategic implications of each business unit within the overall product portfolio. It helps management look beyond superficial numbers to assess long-term viability and profitability. This deeper understanding informs strategic planning, guiding whether to invest, divest, hold, or grow a particular product or service.

Hypothetical Example

Consider "InnovateTech Inc.," a diversified technology company with several business units. Their "SmartHome Systems" unit initially appears to be a "Star" in the traditional Growth-Share Matrix:

  • Raw Market Growth Rate: The smart home market is growing at 25% annually.
  • Raw Relative Market Share: InnovateTech holds 40% of the market, and its largest competitor holds 20%, giving it a relative market share of 2.0.

However, InnovateTech conducts an Adjusted Growth Share analysis:

  1. Market Growth Rate Adjustment: While the market is growing, a major new government regulation on data privacy is expected to slow adoption significantly for all players, particularly for integrated systems. InnovateTech applies an adjustment factor of 0.6 to the market growth rate, reflecting this upcoming headwind.

    • Adjusted Market Growth Rate = 25% * 0.6 = 15%

  2. Relative Market Share Adjustment: InnovateTech's 40% market share is primarily due to a first-mover advantage, but several new, well-funded competitors with superior technology are entering the competitive landscape, threatening to erode its position quickly. The company assesses that its true, sustainable relative market share is effectively lower due to the anticipated aggressive competition. They apply an adjustment factor of 0.75.

    • Adjusted Relative Market Share = 2.0 * 0.75 = 1.5

Based on the Adjusted Growth Share, the "SmartHome Systems" unit still appears strong (15% adjusted growth, 1.5 adjusted relative share), but its trajectory is less stellar than initially perceived. This adjustment prompts InnovateTech to consider defensive strategic planning, such as accelerating research and development to maintain competitive advantage, rather than continuing with an aggressive expansion strategy that might lead to wasted resource allocation if the underlying market dynamics are deteriorating.

Practical Applications

Adjusted Growth Share finds practical applications across various facets of corporate strategy and investment. It is particularly valuable in:

  • Corporate Portfolio Management: Companies with diverse product portfolios use Adjusted Growth Share to gain a more accurate view of where to allocate capital, focusing on areas with genuinely strong future prospects and sustainable market positions. This helps in making informed investment decisions, such as deciding whether to invest heavily in a promising new venture or to divest from a seemingly strong but ultimately vulnerable product line.
  • Mergers and Acquisitions (M&A): When evaluating potential acquisition targets, an Adjusted Growth Share analysis can provide a realistic assessment of the target's business units, going beyond reported market share and growth figures to uncover hidden risks or overlooked opportunities.
  • Strategic Planning and Innovation: By refining the understanding of market attractiveness and competitive position, businesses can better identify genuine innovation opportunities and align their strategic planning with the most promising areas.
  • Risk Management: The "adjustment" process inherently involves identifying and quantifying risks (e.g., regulatory changes, technological disruption, shifts in consumer behavior) that might not be apparent from raw growth and share data. This allows for proactive risk mitigation.
  • Competitive Analysis: Understanding the Adjusted Growth Share of both one's own business units and those of competitors provides a richer picture of the overall competitive landscape, informing pricing strategies, product development, and market entry decisions. Organizations like the International Monetary Fund (IMF) have highlighted how increasing corporate market power among a few dominant firms can impact overall economic dynamics, underscoring the importance of detailed competitive analysis.7

Limitations and Criticisms

While Adjusted Growth Share offers a more sophisticated analytical lens than the basic Growth-Share Matrix, it is not without its limitations and criticisms. Many of these stem from the inherent subjectivity introduced by the "adjustment" factors.

  • Subjectivity of Adjustments: The primary criticism is the potential for bias in determining adjustment factors. If not based on rigorous, objective data and analysis, these adjustments can become arbitrary, reflecting management's optimism or pessimism rather than market realities. This can lead to skewed strategic conclusions and poor resource allocation.6
  • Complexity: Implementing a thorough Adjusted Growth Share analysis requires significant data, expertise, and time to identify, quantify, and apply the appropriate adjustment factors. This can be complex, especially for large, diverse corporations.
  • Definition of "Market": Just like the original matrix, defining the relevant market for calculating market share and market growth rate can be challenging. An overly broad or narrow definition can drastically alter the perception of a business unit's position, even before adjustments are applied.5
  • Ignores Synergy: The framework, even with adjustments, typically analyzes individual business units in isolation. It may not adequately capture the synergistic benefits that one business unit might provide to others, even if it appears weak on its own merits. A "Dog" in the matrix might be crucial for supporting a "Cash Cow" or building a brand.4
  • Not a Predictive Tool: Adjusted Growth Share is an analytical framework, not a predictive model. It provides a snapshot and a structured way to think about a product portfolio, but it does not guarantee future outcomes or provide a definitive "best" strategy. As noted in critiques of the BCG Matrix, high market share does not always lead to high profits, and factors beyond growth rate and market share can impact profitability.3

Despite these limitations, understanding and carefully applying Adjusted Growth Share can still offer valuable insights when used as part of a broader, holistic approach to strategic planning, rather than as a standalone, infallible tool. Academic discussions often highlight the need for combining various tools for a better understanding of strategic business units.2

Adjusted Growth Share vs. Relative Market Share

Adjusted Growth Share and Relative Market Share are related but distinct concepts. Relative Market Share is a specific metric used in the traditional Growth-Share Matrix, calculated as a business unit's market share divided by the market share of its largest competitor. It serves as a proxy for competitive position, with a higher ratio indicating a stronger position, often linked to economies of scale and competitive advantage.1

Adjusted Growth Share, on the other hand, is a broader analytical approach that incorporates a refined or "adjusted" Relative Market Share, alongside an "adjusted" Market Growth Rate. While Relative Market Share focuses solely on a company's sales or unit volume compared to its leading rival, Adjusted Growth Share considers various qualitative and quantitative factors that might impact the true strategic value and future trajectory of a business unit beyond these raw figures.

The key difference lies in the level of analysis: Relative Market Share is an input metric, whereas Adjusted Growth Share is a comprehensive framework that takes that input and enhances it with additional layers of context and insight, providing a more realistic assessment for strategic decision-making and diversification efforts.

FAQs

Why is it important to "adjust" growth share metrics?

Adjusting growth share metrics is crucial because raw market share and market growth rate figures can often be misleading. They might not account for critical factors like emerging competitive threats, shifts in consumer behavior, regulatory changes, or the true sustainability of a company's competitive advantage. By incorporating these adjustments, a business gains a more realistic understanding of its position and potential, leading to more informed strategic planning and resource allocation.

What kinds of factors are typically considered for adjustment?

Adjustment factors can include a wide range of qualitative and quantitative elements. For market growth, factors like technological disruption, demographic shifts, economic forecasts, and regulatory environments are considered. For relative market share, adjustments might account for brand strength, patent protection, distribution network superiority, customer loyalty, and the intensity of competition in the industry analysis.

Can Adjusted Growth Share be applied to small businesses?

While the underlying principles of market attractiveness and competitive position are universal, the formal Adjusted Growth Share framework, with its emphasis on complex adjustments and product portfolio management, is typically more relevant for larger, diversified companies with multiple business unit offerings. Smaller businesses might benefit more from simpler market analysis tools, though the concept of considering qualitative factors beyond raw numbers remains valuable for any size of organization.

How does Adjusted Growth Share help with investment decisions?

Adjusted Growth Share helps with investment decisions by providing a clearer picture of a business unit's actual strategic standing. It guides management on where to invest capital for maximum return on investment (ROI), where to reduce investment, and where to consider divestment. For instance, a unit that appears to be a "Cash Cow" based on raw data might be revealed as vulnerable through an adjusted analysis, prompting a shift in investment strategy to protect its position or explore new avenues.

Is Adjusted Growth Share a replacement for other strategic tools?

No, Adjusted Growth Share is not a standalone replacement for all other strategic tools. Instead, it serves as an enhancement to traditional portfolio analysis frameworks like the BCG Matrix. It should be used in conjunction with other strategic management tools, such as SWOT analysis, Porter's Five Forces, and detailed financial modeling, to build a comprehensive view of a company's market and competitive landscape and inform its overall strategic planning process.