Page 14 - Portfolio Analysis

In the introduction it was pointed out that the BCG approach was based on
the assumption that lower costs are the most likely explanation for higher
profits in market segments where price levels are relatively uniform. Some
further fundamental; premises, detailed by Bruce Henderson of BCG,
underpin the BCG Matrix. These are:

a) The higher the market share, relative to competitors, the greater
the earnings potential.

b) Sales and revenue growth requires investment whether it be a
product requiring increased advertising or a division requiring
revenue for plant expansion

c) High market share must be earned and/or acquired. In either case
investment will have to be increased.

d) No product/service/division can grow indefinitely

Profitability is, therefore, affected by a combination of market growth,
market share, and the stage in the life cycle. An organisation could, and
indeed should, expect at any one time to find some of its products or
services or divisions at different stages of profitability. Some will be
generating profits with others needing these profits to develop their
potential. The strategic dilemma is to determine which of these products or
services or divisions offer the best prospects for generating future profits.