Page 38 - Portfolio Analysis

STRENGTHS AND LIMITATIONS OF THE BCG

A key task for top management of companies, such as multinational
enterprises, which operate in a variety of different product market areas is
the successful operation of a portfolio of businesses spread across a
number of geographic markets.

These managers, of large corporations, cannot possibly be familiar with all
the relevant strategic aspects of each unit of their organisational structure.
Consequently, the management challenge of the future is simply a
question of how best to manage diversity. To this end portfolio planning
recognises that diversified companies are a collection of businesses, each
of which makes a distinctive contribution to the overall corporate
performance and which should be managed accordingly.

The major strength of the BCG matrix lies in its ability to focus
management attention on the cash flow or return on investment
associated with the differing businesses in their portfolio and from this
decide which businesses should be disposed of and which should be
promoted. It may also allow assessments on the advisability of adding new
businesses to the portfolio.

However, there are a number of shortcomings associated with the BCG
matrix not the least of which is its simplistic assumptions of market
conditions. The matrix uses only two dimensions, market share and
industry growth, whilst ignoring all others such as differentiation within a
specified market segment.

If the matrix is used for decision making then it is essential that products or
businesses are positioned correctly. Here a problem arises when deciding
what growth rate is appropriate for separating high and low growth
markets. Most firms will find only a few of their products or businesses in
high growth markets whilst the rest are in low growth ones. The decision
on where to position the product or business is crucial as it will determine
whether it is treated as a question mark or a dog or as a cash cow or a
star.