Introduction
The business portfolio is the
collection of businesses and products that make up the company. The best
business portfolio is one that fits the company's strengths and helps exploit
the most attractive opportunities.
The company must:
(1) Analyse its current business
portfolio and decide which businesses should receive more or less investment,
and
(2) Develop growth strategies for
adding new products and businesses to the portfolio, whilst at the same time
deciding when products and businesses should no longer be retained.
Methods of Portfolio Planning
The two best-known portfolio
planning methods are from the Boston Consulting Group (the subject of this
revision note) and by General Electric/Shell. In each method, the first step is
to identify the various Strategic Business Units ("SBU's") in a
company portfolio. An SBU is a unit of the company that has a separate mission
and objectives and that can be planned independently from the other businesses.
An SBU can be a company division, a product line or even individual brands - it
all depends on how the company is organised.
The Boston Consulting Group Box
("BCG Box")
Using the BCG Box (an example is
illustrated above) a company classifies all its SBU's according to two
dimensions:
On the horizontal axis: relative
market share - this serves as a measure of SBU
strength in the market
On the vertical axis: market growth
rate - this provides a measure of market
attractiveness
By dividing the matrix into four
areas, four types of SBU can be distinguished:
Stars - Stars are high growth businesses or products competing in
markets where they are relatively strong compared with the competition. Often
they need heavy investment to sustain their growth. Eventually their growth
will slow and, assuming they maintain their relative market share, will become
cash cows.
Cash Cows - Cash cows are low-growth businesses or products with a
relatively high market share. These are mature, successful businesses with
relatively little need for investment. They need to be managed for continued
profit - so that they continue to generate the strong cash flows that the
company needs for its Stars.
Question marks - Question marks are businesses or products with low market
share but which operate in higher growth markets. This suggests that they have
potential, but may require substantial investment in order to grow market share
at the expense of more powerful competitors. Management have to think hard
about "question marks" - which ones should they invest in? Which ones
should they allow to fail or shrink?
Dogs - Unsurprisingly, the term "dogs" refers to
businesses or products that have low relative share in unattractive, low-growth
markets. Dogs may generate enough cash to break-even, but they are rarely, if
ever, worth investing in.
Using the BCG Box to determine
strategy
Once a company has classified its
SBU's, it must decide what to do with them. In the diagram above, the company
has one large cash cow (the size of the circle is proportional to the SBU's
sales), a large dog and two, smaller stars and question marks.
Conventional strategic thinking
suggests there are four possible strategies for each SBU:
(1) Build Share: here the company can invest to increase market share (for
example turning a "question mark" into a star)
(2) Hold: here the company invests just enough to keep the SBU in its
present position
(3) Harvest: here the company reduces the amount of investment in order
to maximise the short-term cash flows and profits from the SBU. This may have
the effect of turning Stars into Cash Cows.
(4) Divest: the company can divest the SBU by phasing it out or selling
it - in order to use the resources elsewhere (e.g. investing in the more
promising "question marks").
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