The full title of this book by Richard Koch is
“The Star Principle: How it can make you rich“.
In my review on Amazon.co.uk, I gave the book Four Stars. This means it is Good and Well Worth Reading.
Here is my book review.
Putting strategy into owning, investing or working in a business
In 1970, the Boston Consulting Group publicised a two-by-two matrix that became very famous in the business world and is known as the Growth-Share matrix.
Based on ratings on high and low across two dimensions, market growth rate and market share of a particular firm, it creates four categorisations:
1) High-high = Star
2) High share – low growth = Cash Cow
3) Low share – high growth = Question mark or problem child
4) Low – low = Dog
This book takes a detailed look at what it takes to find a star business to work in, to invest in or to own and how it can lead to exciting times and LOTS of money.
The Growth Share Matrix was originally developed to guide top down centralised planning of business units within groups. As such, it quickly became discredited because it glossed over too many issues.
However I agree with the author, as a tool for looking at individual businesses, especially before you get involved, it’s very useful.
The issues lie in how confident you can be about:
1) Looking into the future to correctly determine long term growth prospects. The compounding effects over say 10 years make a huge difference if growth is 30% per annum compared to 10%. (A million turnover business that grows at 10% reaches £2.59 million at the end, but if it grows at 30%, it reaches £13.8 million in the 10 years).
2) Whether market share leadership can be maintained many years into the future. One problem is that the faster the market niche grows and the bigger it gets, the more likely it is to gain the attention of big firms with deep pockets.
There aren’t many star businesses like Google and Amazon that go from strength to strength. Often high early growth can tail off as the market matures and the business drifts into the Cash Cow category. There can still be a very good business but, if you’re investing late in the process, it won’t justify sky-high price-earnings (P/E) ratios over the long term and while profits continue to increase, the share price may reduce as the P/E multiple reduces.
As an investment philosophy therefore, great care needs to be taken to avoid being sucked into a value trap.
I find myself in two minds about the approach depending on which of my two main hats I wear.
As a business coach to small businesses, I think it’s a terrific book for helping you to think about starting in a particular niche or whether you should continue with a struggling business.
As an investor, I have a personal bias towards value investing in profitable, cash positive businesses that are under-valued by the market. These will normally be cash cows and even dogs rather than stars. Question marks are even more speculative and risky. Big money can be made moving one into the Star category by gaining market leadership but it’s a big gamble, especially looking in from the outside where you can be manipulated by hype. I therefore worry that this book can tempt you into making investment decisions that are based more on hope than reality.
It is available to buy from Amazon.co.uk and Amazon.com.
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