One Method of Portfolio Analysis
Once we scan the environment, we want to identify the strategic business units (profit and loss centers) in which we can allocate our resources. Two common tools that have been used in the past are the Boston Consulting Group Matrix and the GE Matrix. These tools will help the manager determine goals for the organization by assessing the growth opportunities.
One of the first tools that was developed was the Boston Consulting Group Matrix. This matrix assesses the market share of the firm as compared to the market growth of the industry of the SBU. Business Units are place within the four constraints or boxes. Stars are High Growth, High Share; Question Marks are High Growth, Low Share, Cash Cows are Low Growth, High Share; and finally Dogs are Low Growth, Low Share:
Normally you would invest heavily into the stars to maintain your leadership position; milk your cash cows as they generate cash for future investments into your stars and question marks; and harvest or divest of your dogs so that you can re-allocate resources to your stars and questions marks. This leaves the question mark region. Here you may want to wait and see what happens before making a decision, or you want to invest so that you can move the question market to the star category (increase your market share) or you may want to sell the business and re-allocate your resources.
When using this tool, though it is simple, it does not take into account actions by the competition, your firm's core capabilities, the relationships that you have with your channel members or your suppliers, barriers to entry, or the strength of the buyers. Thus GE felt that rather than using Market Share as the measure of firm's strength, they should look at other factors as well. Furthermore, GE believed that Market Growth was not sufficient to measure the Industry Attractiveness. They redefined the constraints to include Industry Attractiveness and Firm's Strengths. In addition, they believed that high and low were not sufficient but that the matrix should be a 3 by 3 to include an in-between category.
The areas in bright green are those areas, where investments should be increased (either through market development, product development, or market penetration). The areas in yellow are those areas that are often maintained to generate cash, except in the case where the market is attractive but the firm is weak. Businesses units that fall with in this category are often sold off to further investment in diversified markets and products. The areas in the dark shade are usually targeted for reduced investments through harvesting or divesting. The cash from these actions are used to invest in SBU's falling within the bright green categories.
These two tools are just some ways to analyze your strategic business units, when assessing the firm's business portfolios. Criticism has been raised because neither tool takes into consideration the dynamics of the business environment. Thus just like SWOT analysis, neither tool should be used alone to assess the opportunities and resource allocation for the firm. However these tools in conjunction with other tools such as Porter's Five Forces and Diamond Model, begin to help the decision maker evaluate the firm's strategic options.
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