Milking the Cash Cow
(A critique of the Portfolio Approach Corporate Strategy)
Companies that innovate well, such as Google, Tesla, Amazon, 3M, P&G etc. do so by effectively managing their many diverse portfolios. They don’t put all their eggs in one basket. This way they reduce risk and maximize their return on investments. (1) Allocating resources and investments between different business of the company is not an easy task. The Boston Consulting Group (BCG) Growth Share Matrix, is a framework that helps companies think about the priority that they should give to their different businesses.
The BCG grid teaches managers to milk cash cows, divest dogs, invest in stars, and examine the risks and rewards of question marks.
Image Source: Marketing Mojo
However, the Boston box is no longer of much use to companies today. There are several reasons for this. Firstly, it tends to obsess on market share. For instance, Lego can consider its market to be mechanical toys, but then it would miss the fact that it also competes with companies such as Nintendo for a share of the attention of young kids. (3) Furthermore, there have been many cases wherein companies that come under the category ‘dogs’, can in reality make more money than the ‘cash cows’.
The matrix also overlooks many other factors that come into play such as new, disruptive products entering the market, or rapid shifts in consumer demand. The Growth Share matrix may be a good tool for analyzing strategic positions and options, but it fails as it doesn’t paint the entire picture.
Value Creation
Creating shareholder value has become the mantra of managers. There is a value based approach to portfolio management that focuses on this very maxim. The value based management treats the strategic business units (SBU) as separate entities that are valued based on their cash flows. (4) The VBM metric can be a very useful tool at times, but the general consensus is that companies that have adopted this metric have met with mediocre success. Some have even abandoned the system entirely after a few years. In particular, the multinational telecommunications company, AT&T, tried to incorporate this metric but to no avail. Putting the value based approach into practice requires a great deal of patience, effort, and money. A successful VBM program is really about introducing fundamental changes to a big company’s culture, something that is extremely hard to do, especially in big multinationals.(5) Training needs to be effectively carried out for the VBM system to work. Generally, this involves training of the entire workforce - management as well as technical staff. This however is never done adequately. The value based approach also seems to have little or no effect on a company’s ability to innovate.
Outlook
The portfolio analysis can be a pretty good approach as it helps management decide which of the products and services should be emphasized and which should be phased out. It does, however have some limitations.
The portfolio analysis involves separating a company's products and services into different categories that represent its business portfolio.
But defining the product/market segments is not easy. (6) It also relies too much on forecasted data. Forecasting can help managers form expectations about the future. But they can also turn out to be erroneous, therefore a portfolio analysis does not guarantee optimal return on investment. Personally, I think that, though the portfolio analysis can be useful while implementing strategy, it doesn’t bode too well with the markets of today, where innovative disruption is prevalent, and competition is as high as ever.
Citations
[1] - "Manage with a Portfolio Mindset." Harvard Business Review. N.p., 04 Sept. 2012. Web. 01 Dec. 2015.
[2] - "The Charts That Changed the World." Harvard Business Review. N.p., 01 Dec. 2011. Web. 01 Dec. 2015.
[3] - "Growth Share Matrix." The Economist. The Economist Newspaper, 11 Sept. 2009. Web. 01 Dec. 2015.
[4] – A., De Kluyver Cornelis, and John A. Pearce. "Corporate Strategy: Managing the Portfolio." Strategy: A View from the Top. Upper Saddle River, NJ: Prentice Hall, 2003. N. pag. Print.
[5] - "It's Not Just About the Numbers." Harvard Business Review. N.p., 01 July 2001. Web. 01 Dec. 2015.
[6] - MacMillan, Ian. "Product and Service Portfolio Analysis Matrix." The Forbes Group. N.p., n.d. Web. 1 Dec. 2015.
