The Boston Consulting Group (BCG), a leading manufacturing consulting firm, developed and popularized a portfolio analysis tool that helps managers develop organizational strategies based on market share of businesses and the growth of markets in which businesses exist.

The first step in using the BCG Growth-Share Matrix is identifying the organization’s strategic business units (SBUs). A strategic business unit is a significant organizational segment that is analyzed to develop organizational strategy aimed at generating future business or revenue. Exactly what constitutes an SBU varies from organization to organization. In larger organizations, an SBU could be a company division, a single product, or a complete product line. In smaller organizations, it might be the entire company. Although SBUs vary drastically in form, each has the following four characteristics:²⁵

1. It is a single business or collection of related businesses.

2. It has its own competitors.

3. It has a manager who is accountable for its operation.

4. It is an area that can be independently planned for within the organization.

After SBUs have been identified for a particular organization, the next step in using the BCG Matrix is to categorize each SBU within one of the following four matrix quadrants (see Figure 7.4):

• Star—An SBU that is a star has a large share of a high-growth market and typically needs large amounts of cash to support rapid and significant growth. Stars also generate large amounts of cash for the organization and are usually segments in which management can make additional investments and earn attractive returns.

• Cash Cow—An SBU that is a cash cow has a large share of a market that is growing only slightly. Naturally, these SBUs provide the organization with large amounts of cash, but because the market is not growing significantly, the cash is generally used to meet the financial demands of the organization in other areas, such as the expansion of a star SBU.

• Question Mark—An SBU that is a question mark has a small share of a high-growth market. Such SBUs are dubbed “question marks” because it is uncertain whether management should invest more cash in them to gain a larger share of the market or deemphasize or eliminate them. Management will choose the first option when it believes it can turn the question mark into a star and will choose the second when it thinks further investment would be fruitless.

• Dog—An SBU that is a dog has a relatively small share of a low-growth market. Such SBUs may barely support themselves; in some cases, they actually drain off cash resources generated by other SBUs. Examples of dogs are SBUs that produce typewriters or cash registers.

Companies such as Westinghouse and Shell Oil have successfully used the BCG Matrix in their strategic management processes. This technique, however, has some potential pitfalls. For one thing, the matrix does not consider such factors as (1) various types of risk associated with product development; (2) threats that inflation and other economic conditions can create in the future; and (3) social, political, and ecological pressures. These pitfalls may be the reason for recent research results indicating that the BCG Matrix does not always help managers make good strategic decisions.²⁶ Managers must therefore remember to weigh such factors carefully when designing an organizational strategy based on the BCG Matrix.

With the help of McKinsey and Company, a leading consulting firm, the General Electric Company (GE) developed another popular portfolio analysis tool. Called the GE Multifactor Portfolio Matrix, this tool helps managers develop organizational strategy that is based primarily on market attractiveness and business strengths. The GE Multifactor Portfolio Matrix was intentionally designed to be more comprehensive than the BCG Growth-Share Matrix.

Its basic use is illustrated in Figure 7.5. Each of the organization’s businesses or SBUs is plotted on a matrix in two dimensions: industry attractiveness and business strength. Each of these two dimensions is actually a composite of a variety of factors that each firm must determine for itself, given its own unique situation. As examples, industry attractiveness might be determined by such factors as the number of competitors in an industry, the rate of industry growth, and the weakness of competitors within an industry; business strength might be determined by such factors as a company’s financially solid position, its good bargaining position over suppliers, and its high level of technology use.

Several circles appear in Figure 7.5, each representing a company line of business or SBU. Circle size indicates the relative market size for that line of business. The shaded portion of a circle represents the proportion of the total SBU market that a company has captured.

Specific strategies of a company are implied by where its businesses (represented by circles) fall on the matrix. Businesses falling in the cells that form a diagonal from lower left to upper right are medium-strength businesses, which should be invested in only selectively. Businesses above and to the left of this diagonal are the strongest and the ones that a company should invest in and help to grow. Businesses in the cells below and to the right of the diagonal are low in overall strength and are serious candidates for divestiture.

Portfolio models are graphic frameworks for analyzing relationships among the businesses of an organization, and they can provide useful strategy recommendations. However, no model yet devised gives managers a universally accepted approach for dealing with these issues. Portfolio models, then, should never be applied in a mechanistic fashion, and any conclusions they suggest must be carefully considered in light of sound managerial judgment and experience.

Differentiation, the first of Porter’s strategies, focuses on making an organization more competitive by its developing a product or products that customers perceive as being different from products offered by competitors. Differentiation includes uniqueness in such areas as product quality, design, and level of after-sales service. Examples of products that customers commonly purchase because they perceive them as being different are Nike’s Air Jordan shoes (because of their high-technology “air” construction) and Honda automobiles (because of their high reliability).

Cost leadership is a strategy that focuses on making an organization more competitive by its producing products more cheaply than competitors can. According to the logic behind this strategy, by producing products more cheaply than its competitors, an organization will then be able to offer products to customers at lower prices than competitors can and will thereby increase its market share. Examples of tactics managers might use to gain cost leadership are obtaining lower prices on product parts purchased from suppliers and using technology such as robots to increase organizational productivity.

Focus is a strategy that emphasizes making an organization more competitive by targeting a particular customer. Magazine publishers commonly use a focus strategy in offering their products to specific customers. Working Woman and Ebony are examples of magazines that are aimed, respectively, at the target markets of employed women and African Americans.

Growth is a strategy adopted by management to increase the amount of business that an SBU is currently generating. The growth strategy is generally applied to star SBUs or to question mark SBUs that have the potential to become stars. Management generally invests substantial amounts of money to implement this strategy and may even sacrifice short-term profit to build long-term gain.²⁸

Managers can also pursue a growth strategy by purchasing an SBU from another organization. Black & Decker held the leadership position in power tools for many years, but the company wanted to extend its reach beyond that product line. Rather than attempt to develop its own line of power tools, Black & Decker purchased General Electric’s small-appliance business. Through this purchase, Black & Decker hoped that the amount of business it did would grow significantly over the long term. Similarly, President Enterprises, the largest food company in Taiwan, bought the American Famous Amos brand of chocolate chip cookies. Despite a downturn in the U.S. cookie market, management at President saw the purchase as important for company growth because it would give the company a nationally recognized product line in the United States.²⁹

Stability is a strategy adopted by management to maintain or slightly improve the amount of business that an SBU is generating. This strategy is generally applied to cash cows because these SBUs are already in an advantageous position. Management must be careful, however, that in its pursuit of stability, it does not turn cash cows into dogs.

In this strategy, retrench is used in the military sense: to defend or fortify. Through retrenchment strategy, management attempts to strengthen or protect the amount of business an SBU is currently generating. This strategy is generally applied to cash cows or stars that are beginning to lose market share.

Divestiture is a strategy adopted to eliminate an SBU that is not generating a satisfactory amount of business and that has little hope of doing so in the near future. In essence, the organization sells or closes down the SBU in question. This strategy is usually applied to SBUs that are dogs or question marks that have failed to increase market share but still require significant amounts of cash.