Portfolio Analysis: Designing the Business Portfolio – Boston Matrix

The business portfolio is one of the most crucial factors for any organization. Why? Because it is about what the organization plans, sells, and stops to sell. The business portfolio must be based on the company’s mission, objectives and strategy, in order to fit the company’s strengths and weaknesses, philosophy and competencies to opportunities in the market environment. To stay in business, a healthy and balanced, innovation-driven portfolio is absolutely crucial! Designing the business portfolio involves analysing the company’s current portfolio by a portfolio analysis, which is addressed here, before strategies for growth and downsizing can be developed. The Boston Growth-Share Matrix, developed by the Boston Consulting Group, is a very helpful tool for the portfolio analysis.

The business portfolio is the complete collection of products and businesses that make up a company. Designing and maintaining a healthy portfolio involves thorough understanding of the firm’s objectives and the markets it wants to serve. Business portfolio planning consists of two steps, in which the Boston Matrix provides a great aid. Firstly, the business must analyse its current business portfolio to determine which businesses (SBUs, see below) should receive more, less, or no investment. This is significantly influenced by the life cycle stage the products are in. Does the product reach the end of its life cycle end soon? Then, it should not receive too much attention anymore. Secondly, the firm must shape its future portfolio, based on the analysis of the current portfolio, by developing strategies for growth and downsizing.

Portfolio Analysis Tool: The Boston Growth-Share Matrix

For the portfolio analysis, the Boston Growth-Share Matrix should be applied. It assists in evaluating the businesses that make up the company and the attention they should receive. The idea behind this is that management will want to put more resources into its more profitable products and businesses and on the contrary, less resources into weaker products and businesses.

The first step that needs to be taken is to identify the key businesses that make up the company: The Strategic Business Units (SBUs). Strategic Business Units may be a division of the company, a product line, a brand or even a single product. Then, the company is able to assess the attractiveness of each SBU in order to decide how much attention, or support, it should receive. Why should the firm do so? Clearly because it helps to find the way in which it should best use its strengths and competencies in order to take advantage of attractive opportunities in the market environment. Therefore, each SBU should be analysed with regard to the attractiveness of its market or industry and the strength of its position in that market or industry.

The Boston Growth-Share Matrix addresses this. It was developed by the Boston Consulting Group (BCG), which is a leading management consulting group, and is today the best-known and most popular portfolio analysis and portfolio planning method. The Boston Matrix classifies all the companies SBUs according to the attractiveness of the SBUs industry or market, which is measured in terms or market growth rate, and the SBUs position in that industry or market, measured in terms of relative market share the company has. On the vertical axis, market growth rate provides a measure for the attractiveness of the SBUs market. On the horizontal axis, relative market share measures the company’s strength in that market.

Portfolio Analysis with the Boston Growth-Share Matrix
Portfolio Analysis with the Boston Growth-Share Matrix

The 4 Categories

The market growth and relative market share of each SBU leads to a classification into one of four categories:

  1. Stars are high-growth, high-share products or businesses. Those often require heavy investments to finance their rapid growth. Once their growth slows down, which will eventually be the case, Stars will turn into Cash Cows.
  2. Cash Cows. Cash Cows are low-growth, but high-share products or businesses. They need less investment to hold their market share, being well-established and successful SBUs. Therefore, Cash Cows produce a lot of cash which the company can use to invest in and support other SBUs that need investments to finance their growth, namely Question Marks and Stars.
  3. Question Marks. Question Marks are low-share Strategic Business Units, but in high-growth markets. To hold their share, not mentioning increasing it which would be desirable, Question Marks require a lot of cash. If Question Marks become a success, they will turn into Stars one day. However, the likelihood that they fail must not be neglected. For that reason, management has to decide carefully which Question Marks will receive attention and investment in order to build them into stars, and which other, less promising ones will be phased out.
  4. Dogs are low-growth, low-share businesses and products. In other words, Dogs are the least desirable SBUs of a company. They may generate enough cash still to maintain themselves. However, Dogs will not be large sources of cash, and should be phased out as soon as they become unprofitable or as soon as the firm can make better use of its resources to support other SBUs.

Usually, products or businesses of a company always start as a Question Mark. If they succeed, they will move on and market share will grow, turning them into Stars. As the market is satisfied and market growth falls, Stars become Cash Cows, a major source of cash for the firm. Finally, even the best Cash Cows become dogs when the end of their life cycle is reached.

Portfolio Analysis: The Connection with the Product Life Cycle

As said before, the classification into Stars, Cash Cows, Question Marks and Dogs is strongly linked to the Product Life Cycle stage the Strategic Business Unit is in. Question Marks are new, innovative products, which may become a large success in the future, but still carry the risk that they will not be a hit. Stars are still growing, while Cash Cows are in the maturity stage when the market is satisfied and does not grow much anymore. Finally, when decline is reached, SBUs can be called Dogs.

Portfolio Analysis is strongly linked with the Product Life Cycle!
Portfolio Analysis is strongly linked with the Product Life Cycle!

Portfolio Analysis: 4 Strategies to deal with each SBU on the portfolio

When the firm has classified the SBUs, it can determine the roles each SBU will play in the future, in order to shape the future business portfolio. The company can choose from four strategies for each business unit. Firstly, it can invest more in the SBU in order to build and grow its market share. This will apply particularly well to Question Marks and Stars. Secondly, it can invest just enough to hold the market share of the SBU at its current level, which applies to Cash Cows. Or, thirdly, it can harvest the SBU, which means milking its short-term cash flows, but regardless of the long-term effect. Finally, the firm can choose to divest the SBU, either by selling it or by phasing it out, in order to make better use of valuable resources elsewhere. This would be done with a Dog on the business portfolio.

After having evaluated the current business portfolio by the portfolio analysis, the company should look at the future. In rapidly changing times, constant innovation is critical to survival in the market. Therefore, the second part of designing the business portfolio involves finding products and businesses the company should consider in the future, by developing strategies for growth and downsizing.

 

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