Large, diversified organizations commonly use a
number of these strategies in combination. For example, an organization may
simultaneously seek growth through the acquisition of new businesses, employ a
stability strategy for some of its existing businesses, and divest itself of
other businesses. Clearly, formulating a consistent organizational strategy in
large, diversified companies is very complicated, because a number of different
business – level strategies need to be coordinated to achieve overall
organizational objectives. Business portfolio models are designed to help managers
deal with this problem.
Business portfolio models are tools for analyzing
(1) the relative position of each of an organization’s businesses in its
industry and (2) the relationships among all the of the organization’s
businesses. Two well-known approaches to developing business portfolios
Consulting Group (BCG) growth – share matrix
Electric’s (GE’s) multi-factor portfolio matrix.
BCG’s Growth – Share Matrix
The Boston Consulting
Group, a leading management consulting firm, developed and popularized a
strategy formulation approach called the growth – share matrix, which is shown
in Figure 9-3. The basic idea underlying this approach is that a firm should
have a balanced portfolio of businesses such that some generate more cash than
they use and can thus support other businesses that need cash to develop and
become profitable. The role of each business is determined on the basis of two
factors: the growth rate of its market and the share of that market that it
Relative Market Share
Figure9-3 BCG’s Growth – Share Matrix (Source:
Adapted from B. Hedley, “Strategy and the Business Portfolio,” Long Range
Planning, February 1977, p.12.
The vertical axis indicates the market growth rate,
what is the annual growth percentage of the market (current or forecasted) in
which the business operates. The horizontal axis indicates market share
dominance or relative marker share. It is computed by dividing the firm’s
market share (in units) by the market share of the largest competitor).
The growth – share matrix has four cells, which
reflect the four possible combinations of high and low growth wit high and low
market share. These cells represent particular types of businesses, each of
which has a particular role to play in the overall business portfolio. The
cells are labeled:
marks (sometimes called problem children) Company business that operate in a high-growth market but have low
relative market share. Most businesses start off as question marks, in that
they enter a high – growth market in which there is already a market leader. A
question mark generally requires the infusion of a lot of funds. It has to keep
adding plant, equipment, and personnel to keep up with the fast – growing
market, and it wants to overtake the leader. The term question mark is well
chosen, because the organization has to think hard about whether to keep
investing funds in the business or to get out.
Stars They are
question – mark businesses that have become
successful. A star is the market leader in a high – growth market, but it
does not necessarily provide much cash. The organization has to spend a great
deal of money keeping up with the market’s rate of growth and fighting off
competitors’ attacks. Stars are often cash – using rather than cash –generating
Even so, they are usually profitable in time.
in markets whose annual growth rate is less
than 10 percent but that still have the largest relative market share. A
cash cow is so called because it produces a lot of cash for the organizations.
The organization does not have to finance a great deal of expansion because the
market’s growth rate is low. And the business is a market leader, so it enjoys
economies of scale and higher profit margins. The organization uses its
cash-cow businesses to pay its bills and support its other struggling
that have weak market shares in low-growth
markets. They typically generate low profits or losses, although they may
bring in some cash. Such businesses frequently consume more management time
than they are worth and need to be phased out. However, an organization may
have good reasons to hold onto a dog, such as an expected turnaround in the
market growth rate or a new chance at market leadership.
After each of an organization’s
businesses is plotted on the growth – share
matrix, the next step is to evaluate whether the portfolio is healthy and well
balanced. A balanced portfolio has a number of stars and cash cows and no too
many questions marks or dogs. This balance is important because the
organization needs cash not only to maintain existing businesses but also to
develop new businesses. Depending on the position of each business, four basic
strategies can be formulated:
market share This strategy is appropriate for question marks that must increase their share in
order to become stars. For some businesses, short-term profits may have to be
forgone to gain market share and future long-term profits.
market share This strategy is appropriate for cash cows with strong share positions. The cash
generated by mature cash cows is critical for supporting other businesses and
financing innovations. However, the cost of building share for cash cows is
likely to be too high to be a profitable strategy.
involves milking as much short-term cash from a business as possible, even allowing market share to decline if
necessary. Weak cash cows that do not appear to have a promising future are
candidates for harvesting, as are question marks and dogs.
involves selling or liquidating a business because the resources devoted to it can be invested more profitably in
other businesses. This strategy is appropriate for those dogs and question marks that are not worth
investing in to improve their positions.
the growth share matrix is not fool proof. It has the following loopholes.
1. Focuses on balancing cash flows only but
organizations are mostly interested in return on investments.
2. Is not always clear what share of what market is
relevant in the analysis. 3. Believes that there is a strong relationship
between market share and return on investment. But research proves that only a
10% change in market share is associated with only ‘percent change in return on
investment. 4. The other factors like size and growth profile of
the market and distinctive competences of the firm, competition etc is not
5. It does not provide direct assistance in comparing
different businesses in terms of investment opportunities. For example it is
difficult to decide between two question marks and decide which should be
developed into a star. 6. Offers only general strategy recommendations
without specifying how to implement them.
Ge Multi-Factor Port Folio Matrix This approach has a variety of names, including the
nine -cell GE matrix, GE’s nine-cell business portfolio matrix, and the market
attractiveness – business strengths matrix. The basic approach is shown in
Figure 9-4. Each circle in this matrix represents the entire market, and the
shaded portion represents the organization’s business market shareEach of an organization’s businesses is plotted in
the matrix on two dimensions, industry attractiveness and business strength.
Each of these two major dimensions is a composite measure of a variety of
factors. To use this approach, an organization must determine what factors are
most critical for defining industry attractiveness and business strength. Table
below lists some of the factors that are commonly used to locate businesses on
The next step in developing this matrix is to weight each variable on
the basis of its perceived importance relative to the other factors (hence the
total of the weight must be 1.0). Then managers must indicate, on a scale of 1
to 5, how low or high their business scores on that factor. Table 9-3 Factors Contributing to Industry
Attractiveness and Business Strength.
on where businesses are plotted on the matrix, three basic strategies are
Businesses falling in the cells that form a
diagonal from lower left to upper right are medium-strength businesses that
should be invested in only selectively. Businesses in the cells above and to the
left of this diagonal are the strongest; they are the ones for which the
company should employ an invest/grow strategy. Businesses in the cells below
and to the right of the diagonal are low in overall strength and are serious
candidates for a harvest/divest strategy.
This approach has several advantages over the
1. First, it
provides a mechanism for including a host of relevant variables in the process
of formulating strategy.
as we have noted, the two dimensions of industry attractiveness and business
strength are excellent criteria for rating potential business success. 3. Third,
the approach forces managers to be specific about their evaluations of the
impact of particular variables on overall business success. However,
the multifactor portfolio matrix also suffers some of the same limitations as
the growth –share matrix. 1. It does
not solve the problem of determining the appropriate market, and it does not
offer anything more than general strategy recommendations.
measures are subjective and can be very ambiguous, particularly when one is
considering different businesses. Portfolio models provide graphical frameworks for
analyzing relationships among the businesses of large, diversified
organizations, and they can yield useful strategy recommendations. However, no
such model yet devised provides a universally accepted approach to dealing with
these issues. Portfolio models should never be applied in a mechanical fashion,
any conclusion they suggest must be carefully considered in the light of sound
managerial judgment and experience.