The product portfolio matrix approach propounded by the Boston Consulting Group may be related to the product life cycle by letting the introduction stage begin in the question mark quadrant; growth starts toward the end of this quadrant and continues well into the star quadrant. Going down from the star to the cash cow quadrant, the maturity stage begins. Decline is positioned between the cash cow and the dog quadrants. Ideally, a company should enter the product/market segment in its introduction stage, gain market share in the growth stage, attain a position of dominance when the product/market segment enters its maturity stage, maintain this dominant position until the product/ market segment enters its decline stage, and then determine the optimum point for liquidation.

Balanced and Unbalanced Portfolios Unbalanced portfolios may be classified into four types:

1. Too many losers (due to inadequate cash flow, inadequate profits, and inadequate growth).

2. Too many question marks (due to inadequate cash flow and inadequate profits).

3. Too many profit producers (due to inadequate growth and excessive cash flow).

4. Too many developing winners (due to excessive cash demands, excessive demands on management, and unstable growth and profits).

The company has just one cash cow, three question marks, and no stars. Thus, the cash base of the company is inadequate and cannot support the question marks. The company may allocate available cash among all question marks in equal proportion. Dogs may also be given occasional cash nourishment. If the company continues its current strategy, it may find itself in a dangerous position in five years, particularly when the cash cow moves closer to becoming a dog. To take corrective action, the company must face the fact that it cannot support all its question marks. It must choose one or maybe two of its three question marks and fund them adequately to make them stars. In addition, disbursement of cash in dogs should be totally prohibited. In brief, the strategic choice for the company, considered in portfolio terms, is obvious. It cannot fund all question marks and dogs equally. The portfolio matrix focuses on the real fundamentals of businesses and their relationships to each other within the portfolio. It is not possible to develop effective strategy in a multiproduct, multimarket company without considering the mutual relationships of different businesses.

Conclusion The portfolio matrix approach provides for the simultaneous comparison of different products. It also underlines the importance of cash flow as a strategic variable. Thus, when continuous long-term growth in earnings is the objective, it is necessary to identify high-growth product/market segments early, develop businesses, and preempt the growth in these segments. If necessary, short-term profitability in these segments may be forgone to ensure achievement of the dominant share. Costs must be managed to meet scale-effect standards. The appropriate point at which to shift from an earnings focus to a cash flow focus must be determined and a liquidation plan for cash flow maximization established. A cash-balanced mix of businesses should be maintained. Many companies worldwide have used the portfolio matrix approach in their strategic planning. The first companies to use this approach were the Norton Company, Mead, Borg-Warner, Eaton, and Monsanto. Since then, virtually all large corporations have reported following it. The portfolio matrix approach, however, is not a panacea for strategy development. In reality, many difficulties limit the workability of this approach. Some potential mistakes associated with the portfolio matrix concept are

1. Overinvesting in low-growth segments (lack of objectivity and “hard” analysis).

2. Underinvesting in high-growth segments (lack of guts).

3. Misjudging the segment growth rate (poor market research).

4. Not achieving market share (because of improper market strategy, sales capabilities, or promotion).

5. Losing cost effectiveness (lack of operating talent and control system).

6. Not uncovering emerging high-growth segments (lack of corporate development effort).

7. Unbalanced business mix (lack of planning and financial resources).

Thus, the portfolio matrix approach should be used with great care.

MULTIFACTOR PORTFOLIO MATRIX

The two-factor portfolio matrix discussed above provides a useful approach for reviewing the roles of different products in a company. However, the growth raterelative market share matrix approach leads to many difficulties. At times, factors other than market share and growth rate bear heavily on cash flow, the mainstay of this approach. Some managers may consider return on investment a more suitable criterion than cash flow for making investment decisions. Further, the twofactor portfolio matrix approach does not address major investment decisions between dissimilar businesses. These difficulties can lead a company into too many traps and errors. For this reason, many companies (such as GE and the Shell Group) have developed the multifactor portfolio approach. It is worthwhile to mention that the development of a multifactor matrix may not be as easy as it appears. The actual analysis required may take a considerable amount of foresight and experience and many, many days of work. The major difficulties lie in identifying relevant factors, relating factors to industry attractiveness and business strengths, and weighing the factors.

Strategy Development The area of the circle refers to the business’s sales. Investment priority is given to products in the high area (upper left), where a stronger position is supported by the attractiveness of an industry. Along the diagonal, selectivity is desired to achieve a balanced earnings performance. The businesses in the low area (lower right) are the candidates for harvesting and divestment. Acompany may position its products or businesses on the matrix to study its present standing. Forecasts may be made to examine the directions different businesses may go in the future, assuming no changes are made in strategy. Future perspectives may be compared to the corporate mission to identify gaps between what is desired and what may be expected if no measures are taken now. Filling the gap requires making strategic moves for different businesses. Once strategic alternatives for an individual business have been identified, the final choice of a strategy should be based on the scope of the overall corporation vis-à-vis the matrix.

For example, the prospects for a business along the diagonal may appear good, but this business cannot be funded in preference to a business in the highhigh cell. In devising future strategy, a company generally likes to have a few businesses on the left to provide growth and to furnish potential for investment and a few on the right to generate cash for investment in the former. The businesses along the diagonal may be selectively supported (based on resources) for relocation on the left. For an individual business, there can be four strategy options: investing to maintain, investing to grow, investing to regain, and investing to exit. The choice of a strategy depends on the current position of the business in the matrix (i.e., toward the high side, along the diagonal, or toward the low side) and its future direction, assuming the current strategic perspective continues to be followed. If the future appears unpromising, a new strategy for the business is called for. Analysis of present position on the matrix may not pose any problem. At GE, for example, there was little disagreement on the position of the business. The mapping of future direction, however, may not be easy. A rigorous analysis must be performed, taking into account environmental shifts, competitors’ perspectives, and internal strengths and weaknesses. Strategy to maintain the current position may be adopted if, in the absence of a new strategy, erosion is expected in the future. Investment will be sought to hold the position; hence, the name invest-to-maintain strategy. The second option is the invest-to-grow strategy. Here, the product’s current position is perceived as less than optimum vis-à-vis industry attractiveness and business strengths. In other words, considering the opportunities furnished by the industry and the strengths exhibited by the business, the current position is considered inadequate.

A growth strategy is adopted with the aim of shifting the product position upward or toward the left. Movement in both directions is an expensive option with high risk. The invest-to-regain strategy is an attempt to rebuild the product or business to its previous position. Usually, when the environment (i.e., industry) continues to be relatively attractive but the business position has slipped because of some strategic past mistake (e.g., premature harvesting), the company may decide to revitalize the business through new investments. The fourth and final option, the invest-to-exit strategy, is directed toward leaving the market through harvesting or divesting. Harvesting amounts to making very low investments in the business so that in the short run the business will secure positive cash flow and in a few years die out. (With no new investments, the position will continue to deteriorate.) Alternatively, the whole business may be divested, that is, sold to another party in a one-time deal. Sometimes small investments may be made to maintain the viability of business if divestment is desired but there is no immediate suitor. In this way the business can eventually be sold at a higher price than would have been possible right away.

Unit of Analysis The framework discussed here may be applied to either a product/market or an SBU. As a matter of fact, it may be equally applicable to a much higher level of aggregation in the organization, such as a division or a group. Of course, at the group or division level, it may be very difficult to measure industry attractiveness and business strengths unless the group or division happens to be in one business. In the scheme followed in this article, the analysis may be performed first at the SBU level to determine the strategic perspective of different products/ markets. Finally, all SBUs may be simultaneously positioned on the matrix to determine a corporate-wide portfolio.

Directional Policy Matrix

A slightly different technique, the directional policy matrix, is popularly used in Europe. It was initially worked out at the Shell Group but later caught the fancy of many businesses across the Atlantic. The two sides of the matrix are labeled business sector prospects (industry attractiveness) and company’s competitive capabilities (business strengths). Business sector prospects are categorized as unattractive, average, and attractive; and the company’s competitive capabilities are categorized as weak, average, and strong. Within each cell is the overall strategy direction for a business depicted by the cell. The consideration of factors used to measure business sector prospects and a company’s competitive capabilities follows the same logic and analyses discussed above.

PORTFOLIO MATRIX: CRITICAL ANALYSIS In recent years, a variety of criticisms have been leveled at the portfolio framework. Most of the criticism has centered on the Boston Consulting Group matrix.

1. A question has been raised about the use of market share as the most important influence on marketing strategy. The BCG matrix is derived from an application of the learning curve to manufacturing and other costs. It was observed that, as a firm’s product output (and thus market share) increases, total cost declines by a fixed percentage. This may be true for commodities; however, in most product/market situations, products are differentiated, new products and brands are continually introduced, and the pace of technological changes keeps increasing. As a result, one may move from learning curve to learning curve or encounter a discontinuity. More concrete evidence is needed before the validity of market share as a dimension in strategy formulation is established or rejected.

2. Another criticism, closely related to the first, is how product/market boundaries are defined. Market share varies depending on the definition of the corresponding product/market. Hence, a product may be classified in different cells, depending on the market boundaries used.

3. The stability of product life cycles is implicitly assumed in some portfolio models. However, as in the case of the learning curve, it is possible for the product life cycle to change during the life of the product. For example, recycling can extend the life cycle of a product, sparking a second growth stage after maturity. A related subissue concerns the assumption that investment is more desirable in high-growth markets than in low-growth ones. There is insufficient evidence to support this proposition. This overall issue becomes more problematic for international firms because a given product may be in different stages of its life cycle in different countries.

4. The BCG portfolio framework was developed for balancing cash flows. It ignores

the existence of capital markets. Cash balancing is not always an important consideration.

5. The portfolio framework assumes that investments in all products/markets are equally risky, but this is not the case. In fact, financial portfolio management theory does take risk into account. The more risky an investment, the higher the return expected of it. The portfolio matrix does not consider the risk factor.

6. The BCG portfolio model assumes that there is no interdependency between products/markets. This assumption can be questioned on various grounds. For instance, different products/markets might share technology or costs. These interdependencies should be accounted for in a portfolio framework.

7. There is no consensus on the level at which portfolio models are appropriately used. Five levels can be identified: product, product line, market segment, SBU, and business sector. The most frequent application has been at the SBU level; however, it has been suggested that the framework is equally applicable at other levels. Because it is unlikely that any one model could have such wide application, the suggestion that it does casts doubt on the model itself.

8. Most portfolio approaches are retrospective and overly dependent on conventional wisdom in the way in which they treat both market attractiveness and business strengths. For example, despite evidence to the contrary, conventional wisdom suggests the following:

a. Dominant market share endows companies with sufficient power to maintain price above a competitive level or to obtain massive cost advantages through economies of scale and the experience curve. However, the returns for such companies as Goodyear and Maytag show that this is not always the case.

b. High market growth means that rivals can expand output and show profits without having to take demand out of each other’s plants and provoking price warfare. But the experience of industries as different as the European tungsten carbide industry and the U.S. airline industry suggests that it is not always true.

c. High barriers to entry allow existing competitors to keep prices high and earn high profits. But the experience of the U.S. brewing industry seems to refute conventional wisdom.

9. There are also issues of measurement and weighting. Different measures have been proposed and used for the dimensions of portfolio models; however, a product’s position on a matrix may vary depending on the measures used. In addition, the weights used for models having composite dimensions may impact the results, and the position of a business on the matrix may change with the weighting scheme used.

10. Portfolio models ignore the impact of both the external and internal environments of a company. Because a firm’s strategic decisions are made within its environments, their potential impact must be taken into account. Day highlights a few situational factors that might affect a firm’s strategic plan. As examples of internal factors, he cites rate of capacity utilization, union pressures, barriers to entry, and extent of captive business. GNP, interest rates, and social, legal, and regulatory environment are cited as examples of external factors. No systematic treatment has been accorded to such environmental influences in the portfolio models. These influences are always unique to a company, so the importance of customizing a portfolio approach becomes clear.

11. The relevance of a particular strategy for a business depends on its correct categorization on the matrix. If a mistake is made in locating a business in a particular cell of the matrix, the failure of the prescribed strategy cannot be blamed on the framework. In other words, superficial and uncritical application of the portfolio framework can misdirect a business’s strategy. As Gluck has observed: Portfolio approaches have their limitations, of course. First, it’s just not all that easy to define the businesses or product/market units appropriately before you begin to analyze them. Second, some attractive strategic opportunities can be overlooked if management treats its businesses as independent entities when there may be real advantages in their sharing resources at the research or manufacturing or distribution level. And third, like more sophisticated models, when it’s used uncritically the portfolio can give its users the illusion that they’re being rigorous and scientific when in fact they’ve fallen prey to the old garbage-in, garbage-out syndrome.

12. Most portfolio approaches suggest standard or generic strategies based on the portfolio position of individual SBUs. But these kinds of responses can often result in lost opportunities, turn out to be impractical or unrealistic, and stifle creativity. For example, the standard strategy for managing dogs (SBUs that have a low share of a mature market) is to treat them as candidates for divestment or liquidation. New evidence demonstrates, however, that, with proper management, dogs can be assets to a diversified corporation. One recent study of the performance of more than a thousand industrial-product businesses slotted into the four cells of the BCG matrix found that the average dog had a positive cash flow even greater than the cash needs of the average question mark. Moreover, in a slow-growth economy, more than half of a company’s businesses might qualify as dogs. Disposing of them all would be neither feasible nor desirable. Yet the portfolio approach provides no help in suggesting how to improve the performance of such businesses.

13. Portfolio models fail to answer such questions as (a) how a company may determine whether its strategic goals are consistent with its financial objectives, (b) how a company may relate strategic goals to its affordable growth, and (c) how relevant the designated strategies are vis-à-vis competition from overseas companies. In addition, many marketers have raised other questions about the viability of portfolio approaches as a strategy development tool. For example, it has been claimed that the BCG matrix approach is relevant only for positioning existing businesses and fails to prescribe how a question mark may be reared to emerge as a star, how new stars can be located, and so on. Empirical support for the limitations of portfolio planning methods come from the work of Armstrong and Brodie. According to them, the limitations are so serious that portfolio matrices are detrimental since they produce poorer decisions.

In response to these criticisms, it should be pointed out that the BCG portfolio framework was developed as an aid in formulating business strategies in complex environments. Its aim was not to prescribe strategy, though many executives and academicians have misused it in this way. As one writer has noted: No simple, monolithic set of rules or strategy imperatives will point automatically to the right course. No planning system guarantees the development of successful strategies. Nor does any technique. The Business Portfolio (the growth/share matrix) made a major contribution to strategic thought. Today it is misused and overexposed. It can be a helpful tool, but it can also be misleading or, worse, a straitjacket.