When all business units have been evaluated, an appropriate strategic role for each unit is developed and each role is integrated into an overall strategic policy for the entire organization.
One of the best known examples of the portfolio strategy is the “portfolia frame work” or BCG Matrix, advocated by Boston Consulting Group. This matrix compares various businesses in an organization’s portfolio on the basis of relative market share and market growth rate. Its goal is to develop a balance among business units that use up cash and those that supply cash.
BCG matrix consists of four cells with market share along the horizontal dimension and market growth rate on the vertical dimension. It is used to categorize a business according to whether it is high or low on the two dimensions of market share and market growth rate.
Managers try to position each business on the BCG matrix and label it either a cash cow, a star; a question mark or a dog and strategic decisions about these businesses are made according to their positions. The matrix is shown as follows.
A “cash cow” is a business with low growth rate and high market share and it generates more resources than it needs. These are well established businesses in mature markets. They generate high profits and these profits may be used in the development of businesses in other categories such as stars and question marks.
A “star” holds a high market share of a high-growth market. Initially, its cash flow may be slightly positive or slightly negative, but its potential for generating high profits is high. Managers generally use a growth strategy to transform a star into a cash cow, when the market growth rate slows down.
A “question mark” is a business with negative returns in a high growth market but with a low market share. Question marks, also known as “wild cats” have an uncertain future. Such businesses require substantial cash infusions and may or may not become a “star”. The choice here is between growth and retrenchment strategies.
A “dog” holds a low share of a low growth market. It does not require much cash and it does not generate much cash. Moving a dog to another category can require enormous resources. Faced with a dog, managers, usually employ a retrenchment strategy either by keeping it until it fails, or by selling the business or by abandoning it completely.
The BCG matrix provides corporate managers with specific guidance as to how to allocate and shift resources among its various businesses to improve the performance of the portfolio as a whole. A majority of business units within the corporation should be “cash cows” since these provide the cash needed for others.
Only a few businesses should be question marks since they can be converted into “star” with significant cash infusion. Relatively more businesses should be “stars” because they have the potential to become cash cows. “Dogs” should be managed extremely carefully or they should he eliminated.
Even though BCG matrix is a useful tool, it does have its shortcomings. For example, it does not address the issue of such businesses which have average market shares in markets of average growth (the matrix has only high and low categories). Another difficulty is that all businesses do not clearly fit into one or the other category.
Furthermore, it provides little guidance as to which “question marks” to support and which “dogs” to eliminate. Finally, the terminology in the matrix is not very pleasant. According to one executive, “we try to avoid the use of words such as cash cows and dogs like the plague. If you call a business “dog”, it will respond like one.”