The major activity in strategic planning is business portfolio analysis, whereby management evaluates the products and businesses that make up the company. The company will want to put strong resources into its more profitable businesses and phase down or drop its weaker ones.

Management’s first step is to identify the key businesses that make up the company, called strategic business units (SBUs). An SBU can be a company division, a product line within a division, or sometimes a single product or brand. The company next assesses the attractiveness of its various SBUs and decides how much support each deserves. When designing a business portfolio, it’s a good idea to add and support products and businesses that fit closely with the firm’s core philosophy and competencies.

The purpose of strategic planning is to find ways in which the company can best use its strengths to take advantage of attractive opportunities in the environment. For this reason, most standard portfolio analysis methods evaluate SBUs on two important dimensions: the attractiveness of the SBU’s market or industry and the strength of the SBU’s position in that market or industry. The best-known portfolio-planning method was developed by the Boston Consulting Group, a leading management consulting firm.5

Using the now-classic Boston Consulting Group (BCG) approach, a company classifies all its SBUs according to the growth-share matrix, as shown in Figure 2.2. On the vertical axis, market growth rate provides a measure of market attractiveness. On the horizontal axis, relative market share serves as a measure of company strength in the market. The growth-share matrix defines four types of SBUs:

Figure 2.2

The BCG Growth-Share Matrix

1. Stars. Stars are high-growth, high-share businesses or products. They often need heavy investments to finance their rapid growth. Eventually their growth will slow down, and they will turn into cash cows.

2. Cash cows. Cash cows are low-growth, high-share businesses or products. These established and successful SBUs need less investment to hold their market share. Thus, they produce a lot of the cash that the company uses to pay its bills and support other SBUs that need investment.

3. Question marks. Question marks are low-share business units in high-growth markets. They require a lot of cash to hold their share, let alone increase it. Management has to think hard about which question marks it should try to build into stars and which should be phased out.

4. Dogs. Dogs are low-growth, low-share businesses and products. They may generate enough cash to maintain themselves but do not promise to be large sources of cash.

The 10 circles in the growth-share matrix represent the company’s 10 current SBUs. The company has two stars, two cash cows, three question marks, and three dogs. The area of each circle is proportional to the SBU’s dollar sales. This company is in fair shape, although not in good shape. It wants to invest in the more promising question marks to make them stars and maintain the stars so that they will become cash cows as their markets mature. Fortunately, it has two good-sized cash cows. Income from these cash cows will help finance the company’s question marks, stars, and dogs. The company should take some decisive action concerning its dogs and its question marks.

Once it has classified its SBUs, the company must determine what role each will play in the future. It can pursue one of four strategies for each SBU. It can invest more in the business unit to build its share. Or it can invest just enough to hold the SBU’s share at the current level. It can harvest the SBU, milking its short-term cash flow regardless of the long-term effect. Finally, it can divest the SBU by selling it or phasing it out and using the resources elsewhere.

As time passes, SBUs change their positions in the growth-share matrix. Many SBUs start out as question marks and move into the star category if they succeed. They later become cash cows as market growth falls and then finally die off or turn into dogs toward the end of the life cycle. The company needs to add new products and units continuously so that some of them will become stars and, eventually, cash cows that will help finance other SBUs.

Problems with Matrix Approaches

The BCG and other formal methods revolutionized strategic planning. However, such centralized approaches have limitations: They can be difficult, time consuming, and costly to implement. Management may find it difficult to define SBUs and measure market share and growth. In addition, these approaches focus on classifying current businesses but provide little advice for future planning.

Because of such problems, many companies have dropped formal matrix methods in favor of more customized approaches that better suit their specific situations. Moreover, unlike former strategic planning efforts that rested mostly in the hands of senior managers at company headquarters, today’s strategic planning has been decentralized. Increasingly, companies are placing responsibility for strategic planning in the hands of cross-functional teams of divisional managers who are close to their markets. In this digital age, such managers have rich and current data at their fingertips and can adapt their plans quickly to meet changing conditions and events in their markets.

Portfolio planning can be challenging. For example, consider GE, the giant $117 billion industrial conglomerate operating with a broad portfolio of products in dozens of consumer and business markets:6

Most consumers know GE for its home appliance and lighting products, part of the company’s GE Lighting unit and former GE Appliances unit. But that’s just the beginning for GE. Other company units—such as GE Transportation, GE Aviation, GE Energy Connections, GE Power, GE Oil & Gas, GE Healthcare, and others—offer products and services ranging from jet engines, diesel-electric locomotives, wind turbines, and off-shore drilling solutions to aerospace systems and medical imaging equipment. GE Capital offers a breadth of financial products and services. However, in recent years, GE has been dramatically shifting its vast portfolio away from consumer products and financial services toward the goal of becoming a more focused “industrial infrastructure company,” one that’s on a mission to “invent the next digital industrial era, to build, move, power, and cure the world.”

Currently, less than 8 percent of GE’s annual revenues come from consumer products, and that percentage continues to dwindle. The company is now in the midst of selling off its huge GE Capital financial services arm, and it recently sold its entire GE Appliances division to Haier. Such portfolio decisions have huge implications for the company’s future. For example, prior to the sale of its appliances unit, GE’s appliance and lighting businesses alone generated more than $8.8 billion in annual revenues, more than the total revenues of companies such as JetBlue, Netflix, Harley-Davidson, or Hershey. Thus, successfully managing GE’s broad portfolio takes plenty of management skill and—as GE’s long-running corporate slogan suggests—lots of “Imagination at work.”

Beyond evaluating current businesses, designing the business portfolio involves finding businesses and products the company should consider in the future. Companies need growth if they are to compete more effectively, satisfy their stakeholders, and attract top talent. At the same time, a firm must be careful not to make growth itself an objective. The company’s objective must be to manage “profitable growth.”

Marketing has the main responsibility for achieving profitable growth for the company. Marketing needs to identify, evaluate, and select market opportunities and lay down strategies for capturing them. One useful device for identifying growth opportunities is the product/market expansion grid, shown in Figure 2.3.7 We apply it here to performance sports apparel maker Under Armour.8

Figure 2.3

The Product/Market Expansion Grid

Less than 20 years ago, Under Armour introduced its innovative line of comfy, ­moisture-wicking performance shirts and shorts with the mission “to make all athletes better through passion, design, and the relentless pursuit of innovation.” Since then, it has grown at a torrid pace. In just the past five years, Under Armour’s sales have more than doubled, making it the nation’s second-best-selling apparel brand behind Nike. Looking forward, the company must look for new ways to keep growing.

First, Under Armour might consider whether the company can achieve deeper ­market ­penetration—making more sales in its current product lines and markets. It can spur growth through marketing mix improvements—adjustments to its product design, advertising, pricing, and distribution efforts. For example, Under Armour offers an ever-increasing range of styles and colors in its original apparel lines. And it recently boosted its spending on advertising and professional athlete and team endorsements by 35 percent over previous years. The company has also added direct-to-consumer distribution channels, including its own retail stores and sales websites. Direct-to-consumer sales have tripled over the past eight years and now account for some 30 percent of total revenues.

Second, Under Armour might consider possibilities for market development—identifying and developing new markets for its current products. Under Armour can review new demographic markets. For instance, the company recently stepped up its marketing to women consumers, with new products and a highly acclaimed $15 million women-focused promotion campaign called “I Will What I Want.” Under Armour can also pursue new geographical markets. For example, the brand is rapidly making a name for itself in international markets, including Japan, Europe, Canada, and Latin America. It recently opened its first-ever brand store in China. Although Under Armour’s international sales grew 70 percent last year, they still account for only 12 percent of total sales, leaving plenty of room for international growth.

Third, Under Armour can consider product development—offering modified or new products to current markets. For example, the company added athletic shoes to its apparel lines in 2006, and it continues to introduce innovative new athletic-footwear products, such as the recently added Under Armour SpeedForm line. Sneaker sales rose 44 percent last year yet still account for only about 13 percent of total sales, again leaving plenty of growth potential.

Finally, Under Armour can consider diversification—starting up or buying businesses outside of its current products and markets. For example, the company recently expanded into the digital personal health and fitness tracking market by acquiring three fitness app companies—MapMyFitness, MyFitnessPal, and Endomondo. It has also partnered with IBM to add artificial fitness tracking technologies that connect fitness, sleep, and nutrition to its products and bind consumers to the brand via technology and services rather than just apparel. Under Armour might also consider moving into nonperformance leisurewear or begin making and marketing Under Armour fitness equipment. When diversifying, companies must be careful not to overextend their brands’ positioning.

Companies must develop not only strategies for growing their business portfolios but also strategies for downsizing them. There are many reasons that a firm might want to abandon products or markets. A firm may have grown too fast or entered areas where it lacks experience. The market environment might change, making some products or markets less profitable. For example, in difficult economic times, many firms prune out weaker, less-profitable products and markets to focus their more limited resources on the strongest ones. Finally, some products or business units simply age and die.

When a firm finds brands or businesses that are unprofitable or that no longer fit its overall strategy, it must carefully prune, harvest, or divest them. For example, over the past several years, P&G has sold off dozens of major brands—from Crisco, Folgers, Jif, and Pringles to Duracell batteries, Right Guard deodorant, Aleve pain reliever, CoverGirl and Max Factor cosmetics, Wella and Clairol hair care products, and its Iams and other pet food brands—allowing the company to focus on household care and beauty and grooming products. And in recent years, GM has pruned several underperforming brands from its portfolio, including Oldsmobile, Pontiac, Saturn, Hummer, and Saab. Weak businesses usually require a disproportionate amount of management attention. Managers should focus on promising growth opportunities, not fritter away energy trying to salvage fading ones.