I guess that nearly everyone looking at this framework website will be familiar with the Boston Matrix – the dogs, cash cows, question marks and stars. If you need to remind yourself about it, click on the link at the bottom of the blog.
The framework seems, or rather seemed, to make a lot of sense. If you were managing a conglomerate it would make sense to have a classification which provides a guideline as to the types of companies within it. You need cash cows to generate money to finance the question marks and the stars. The dogs need to be got rid of.
I was reminded of this framework and possibly its inappropriateness as I have been reading about Henry Kravis and George Roberts who are stepping down from KKR following their 45 years at the helm.
These two individuals are cousins and set up their boutique investment company just less than 50 years ago. It has grown into a behemoth. KKR employs 800,000 people and is comparable in size to industrial giants such as General Electric, Lockheed Martin and 3M. There are 200 companies within the group and they make no cohesive sense. They include a garage door factory in Illinois, a shampoo company in Switzerland, and an animal feed producer in Vietnam. It used to be thought that companies that managed sprawling operations of this nature were inefficient and needed the discipline of the Boston Matrix to distil into a manageable core. KKR has proved this thesis to be wrong.
Their model or framework is simple. Kravis and Roberts run an investment company which is public. That means you can buy KKR shares. However, a significant part of their investments are in private equity. This involves traditional management buyouts as well as minority investments in private and public companies where they seek to "leverage their industry expertise and operational capabilities". And how do they do this? They seek out highly charged executives to run their companies and incentivise them with a generous share of the profits. Crucially they insist they put some of their own money into the operations. The people who are running KKR business have “skin in the game!”.
This laissez fair KKR framework gives top executives rewards from the profits that they control. At head office the decisions are devolved to the operating units. This said, the importance of driving greater efficiencies is fully understood and internal consulting arms and purchasing teams exist to drive a hard bargain with suppliers. Unlike some of the old-fashioned conglomerates with their cash cows, question marks and so on KKR insist that each operating unit justifies its own emoluments. There are no private jets unless one of their managers wants to finance one out of their own pocket.
If CEOs are up to it, they can and do turn their products into gold without much interference and control from the centre. And if they fail, they are out. You could say that this is a hard and tough model and that would be true. It’s not unlike the model used by Jack Welch when he presided over GE in the final decades of the last millennium. He was ruthless in looking for fast growth in a slow-growth economy.
It makes you think. The sweet symmetry of the Boston matrix that I have believed in for so long may just be clever consultancy speak. It’s much simpler than that. What really matters is how you motivate and reward the leaders of those who manage the businesses.