TECHNIQUES FOR ANALYZING CORPORATE DIVERSIFICATION STRATEGIES

The most popular analytical technique for probing the overall makeup of a diversified group of
business units involves constructing a business portfolio matrix, a two-dimensional graphic
portrait of the comparative positions of different businesses. Matrixes can be constructed using
any pair of strategically relevant variables, but in practice the revealing variables have proved to
be industry growth rate, market share, long-term industry attractiveness, competitive strength, and
stage of product/market evolution. Use of two-dimensional business portfolio matrixes as a tool
of corporate strategy evaluation is based on the relative simplicity of constructing them and on the
clarity of the overall picture that they produce. Three types of business portfolio matrixes have
been used the most frequently: the Boston Consulting Group’s growth-share matrix, the GE 9-cell
matrix, and the Hofer—Arthur D. Little product/market evolution matrix.

The four-cell BCG growth-share matrix

The first business portfolio matrix to receive widespread usage was a four-square grid pioneered
by the Boston Consulting Group (BCG), one of the leading management consulting firms. An
illustrative BCG-type matrix is depicted in the figure below. The matrix is formed using industry
growth rate and relative market share as the axes. Each business unit in the corporate portfolio
appears as a “bubble” on the four-cell matrix, with the size of each bubble or circle scaled
according to the percent of revenues it represents in the overall corporate portfolio.
Industry growth rate

Relative market share position

High (above 1.0) Low (below 1.0)

Stars Question marks/Problem

children

High
(faster than the
economy as a
whole)

Cash cows Dogs

Low
(slower than the
economy as a
whole)

BCG methodology arbitrarily places the dividing line between “high” and “low” industry growth
rates at around twice the real GNP growth rate plus inflation, but the boundary percentage can be
raised or lowered when it makes sense to do so The essential criterion is to place the line so that
business units in the “high growth” cells can fairly be said to be in industries growing faster than

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the economy as a whole and those in the “low growth” cells are growing slower than the
economywide rate and are in industries that merit labels like mature, aging, stagnant, or declining.

Relative market share is defined as the ratio of a business’s market share to the market share held
by the largest rival firm in the industry, with market share being measured in terms of unit
volume, not dollars. For instance, if business A has a 15 percent share of the industry’s total
volume and the share held by the largest rival is 30 percent, then A’s relative market share is 0.5.
If business B has a market-leading share of 40 percent and its largest rival has a 30 percent share,
then H’s relative market share is 1.33. Given this definition, only business units that are market
share leaders in their respective units will have relative market share values greater than 1.0;
business units in the portfolio that trail rival firms in market share will have ratios below 1.0.

The most stringent BCG standard calls for the border between “high” and “low” relative market
share on the grid to be set at 1.0, as shown in the figure. With 1.0 as the boundary, those circles in
the two left-side cells of the matrix identify how many and which businesses in the firm’s
portfolio are leaders in their industry; those falling in the two right-side cells trail the leaders, with
the degree to which they trail being indicated by the size of the relative market share ratio. A ratio
of .10 indicates that the business has a market share only one tenth of the market share of the
largest firm in the market, whereas a ratio of .80 indicates a market share that is four-fifths, or 80
percent as big as the leading firm’s share. A less stringent criterion is to fix the high-tow boundary
so that businesses to the left enjoy positions as market leaders (though not necessarily the leader),
and those to the right are in below-average or underdog market-share positions. Locating the
dividing line between “high” and “low” at about .75 or .8 is a reasonable compromise.

The merit of using relative market share instead of the actual market share percentage to construct
the growth-share matrix is that the former is a better indicator of comparative market strength and
competitive position - a 10 percent market share is much stronger if the leader’s share is 12
percent than if it is 50 percent; the use of relative market share captures this feature. An equally
important consideration in using relative market share is that it is also likely to be a reflection of
relative cost based on experience in producing the product and on economies of large-scale
production.

With these features of the BCG growth-share matrix in mind, we are ready to explore the
portfolio implications for businesses falling into each cell of the matrix.

Question Marks and Problem Children. Business units falling in the upper-right quadrant of the
growth-share matrix have been named by BCG as “question marks” or “problem children”. Rapid
market growth makes such business units attractive from an industry standpoint, but their low
relative market share positions (and thus reduced access to experience curve effects) raise
questions whether the profit potential associated with market growth can realistically be captured
- hence the “question mark” or “problem child” designation. Question mark businesses, moreover,
are typically, “cash hogs” - so labeled because their cash needs are high (because of the
investment requirements of rapid growth and product development) and their internal cash
generation is low (because of low market share, less access to experience curve effects and scale
economies, and consequently thinner profit margins). The corporate parent of a cash hog business
has to decide whether it is worthwhile to invest corporate capital to support the needs of a
question mark division.

BCG has argued that the two best strategic options for a question mark business are (1) an
aggressive grow-and-build strategy to capitalize on the high growth opportunity, or (2) divestiture
(in the event that the costs of strengthening its market share standing via a grow-and-build
strategy outweigh the potential payoff and financial risk). Pursuit of a grow-and-build strategy is
imperative anytime an attractive question mark business is characterized by strong experience

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curve effects because of the lower-cost position enjoyed by firms with the cumulative production
experience that attends bigger market shares. The stronger the experience curve effect, the more
powerful the competitive position enjoyed by the competitor that is the low-cost producer.
Consequently, according to the BCG thesis, unless a question mark/problem child business is
managed via a grow-and-build type strategy, it will not be in a position to remain cost competitive
vis-a-vis large-volume firms—in which case divestiture becomes the only other viable long-term
alternative. The corporate strategy prescriptions for managing question mark/problem child
business units thus become straightforward: divest those that are weaker and less attractive and
groom the attractive ones to become tomorrow’s “stars.”

Stars. Businesses with high relative market share positions in high growth markets rank as “stars”
in the BCG grid because they offer both excellent profit and excellent growth opportunities. As
such, they are the business units that an enterprise comes to depend on for boosting overall
performance of the total portfolio.

Given their dominant market-share position and rapid growth environment, stars typically require
large cash investments to support expansion of production facilities and working capital needs,
but they also tend to generate their own large internal cash flows due to the low-cost advantage
that results from economies of scale and cumulative production experience. Star-type businesses
vary as to whether they can support their investment needs totally from within or whether they
require infusions of investment funds from corporate headquarters to support continued rapid
growth and high performance. According to BCG, some stars (usually those that are well
established and beginning to mature) are virtually self-sustaining in terms of cash flow and make
little claim on the corporate parent’s treasury. Young stars, however, often require substantial
investment capital beyond what they can generate on their own and may thus be cash hogs.

Cash Cows. Businesses with a high relative market share in a low-growth market have been
designated as “cash cows” by BCG because their entrenched position tends to yield substantial
cash surpluses over and above what is needed for reinvestment and growth in the business. Many
of today’s cash cows are yesterday’s stars. Cash cows, though less attractive from a growth
standpoint, are nonetheless a valuable corporate portfolio holding because they can be “milked”
for the cash to pay corporate dividends and corporate overhead; they provide cash for financing
new acquisitions; and they provide funds for investing in young stars and in those problem
children that are being groomed as the next round of stars (cash cows provide the dollars to “feed”
the cash hogs). Strong cash cows are not “harvested” but are maintained in a healthy status to
sustain long-term cash flow. The idea is to preserve market position while efficiently generating
money to reallocate to business investments elsewhere. Weak cash cows, however, may be
designated as prime candidates for harvesting and eventual divestiture if their industry becomes
unattractive.

Dogs. Businesses with low growth and low relative market share carry the label of “dogs” in the
BCG matrix because of their weak competitive position (owing, perhaps, to high costs, low-
quality products, less effective marketing, and the like) and the low profit potential that often
accompanies slow growth or impending market decline. Another characteristic of dogs is their
inability to generate attractive cash flows on a long-term basis; sometimes they do not even
produce enough cash to adequately fund a rear-guard hold-and-maintain strategy - especially if
competition is brutal and profit margins are chronically thin. Consequently, except in unusual
cases, the BCG corporate strategy prescription is that dogs be harvested, divested, or liquidated,
depending on which alternative yields the most attractive amount of cash for reallocating to other
businesses or to new acquisitions.

Implications for Corporate Strategy. The chief contribution of the BCG growth-share matrix is
the attention it draws to the cash flow and investment characteristics of various types of

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businesses and how corporate financial resources can be shifted from business unit to business
unit in an effort to optimize the long-term strategic position and performance of the whole
corporate portfolio. According to BCG analysis, the foundation of a sound, long-term corporate
strategy is to utilize the excess cash generated by cash cow business units to finance market-share
increases for cash hog businesses—the young stars still unable to finance their own growth
internally and those problem children that have been singled out as having the best potential to
grow into stars. If successful, the cash hogs eventually become self-supporting stars and then,
when the markets of the star businesses begin to mature and their growth slows down, they will
become the cash cows of the future. The “success sequence” is thus problem child/question mark
to young star (but perhaps still a cash hog) to self-supporting star to cash cow.

The weaker, less attractive question mark businesses not deemed worthy of the financial
investment necessary to fund a long-term grow-and-build strategy are often portfolio liabilities.
These question marks become prime divestiture candidates unless they can be kept profitable and
viable with their own internally generated funds (all problem child businesses are not untenable
cash hogs; some may be able to generate the cash to finance a “hold-and-maintain” strategy and
thus contribute enough to corporate earnings and return on investment to justify retention in the
portfolio). Even so, such question marks still have a low-priority claim on corporate financial
resources; as market growth slows and maturity-saturation sets in, they will move vertically
downward in the matrix, becoming less and less a source of corporate growth.

Dogs should be retained only as long as they can contribute positive cash flow and do not tie up
assets and resources that could be more profitably reallocated. The BCG recommendation for
managing a weakening or already weak dog is to employ a harvesting strategy. If and when a
harvesting strategy is no longer attractive, then a weak dog business becomes a candidate for
elimination from the portfolio.

There are two “disaster sequences” in the BCG scheme of things: (I) when a star’s position in the
matrix erodes over time to that of a problem child and then falls to become a dog, and (2) when a
cash cow loses market leadership to the point where it becomes a dog on the decline. Other
strategic mistakes include overinvesting in a safe cash cow; underinvesting in a question mark so
that instead of moving into the star category it tumbles into a dog; and spreading resources over
many question marks rather than concentrating them on the best question marks to boost their
chances of becoming stars. Relative market share
Profit margins relative to competitors
Strategy prescription
The Nine-Cell GE Matrix Ability to compete on price and quality
Knowledge of customer and market
Long-term industry attractiveness

Grow and build

Competitive strengths and weaknesses
An alternative matrix approach of the BCG matrix has beencapability
Technological pioneered by General Electric, with
help from the Hold and maintain
consulting firm of
McKinsey &Caliber
Company. The GE effort is nine-cell portfolio
of management
matrix based on the two dimensions of long-term product-market attractiveness and business
Harvest/divest
strength/competitive position. In this matrix, shown in figure below, the area of the circle is
proportional to the size of the industry, and the pie slices within the circle reflect the business’s
market share. The vertical axis represents each Business
industry’s long-term attractiveness
strength/Competitive position (defined as a
composite weighting of market growth rate, market size, historical and projected industry
profitability, market structure and competitive intensity, scale economies, seasonality and cyclical
influences, technological and capital requirements, emerging threats and opportunities, and social,
Market size and growth rate
environmental,
Industry
and regulatory
profit margins
influences).
(historical and projected)
Competitive intensity
Seasonality
Cyclicality
Economies of scale
Technology and capital
requirements
Social, environmental, legal,
and human impacts
Emerging opportunities and 4
threats
The procedure involves assigning each industry attractiveness factor a weight according to its
perceived importance, rating the business on each factor (using a 1 to 5 rating scale), and then
obtaining a weighted composite rating as shown below:

Industry Attractiveness Factor Weight Rating Value

Market size .15 5 0.73
Projected rate of market growth .20 1 0.20
Historicel end projected profitability .10 1 0.10
Intensity of competition .20 5 1.00
Emerging opportunities end threats .15 1 0.15
Seasonelity end cyclical influences .05 2 0.10
Technological and capital requirements .10 3 0.30
Environmental impact .05 4 0.20
Social, political, regulatory factors Must be
acceptable --- ---
1.00 2.90

To arrive at a measure of business strength/competitive position, each business is rated (using the
same approach shown above) on such aspects of business strength/competitive position as relative
market share, success in increasing market share and profitability, ability to match rival firms in
cost and product quality, knowledge of customers and markets, how well the firm’s skills and
competencies in the business match the various requirements for competitive success in the
industry (distribution network, promotion and marketing, access to scale economies,
technological proficiency, support services, manufacturing efficiency), adequacy of production
capacity, and caliber of management. The two composite values for long-term product-market
attractiveness and business strength/competitive position are then used to plot each business’s
position in the matrix.

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Corporate Strategy Implications. The nine cells of the GE matrix are grouped into three
categories or zones. One zone (vertical lines) consists of the three cells at the upper left where
long-term industry attractiveness and business strength/competitive position are favorable. The
general strategic prescription here is grow-and-build, and businesses in these zones are accorded a
high priority in allocating investment funds. The second zone (unshaded) consists of three
diagonal cells stretching from the lower left to the upper right; businesses falling into these cells
usually carry a medium investment allocation priority in the portfolio (hold-and-maintain is the
strategy type). The third zone (horizontal lines) is composed of the three cells in the lower right
corner of the matrix; the strategy prescription for these businesses is typically harvest or divest (in
exceptional cases it can be rebuild and reposition using some type of turnaround approach).

The strength of the nine-cell GE approach is threefold: (1) it allows for intermediate rankings
between high and low and between strong and weak; (2) it incorporates explicit consideration of a
much wider variety of strategically relevant variables; and most important, (3) the powerful logic
of GE’s approach is its emphasis on directing corporate resources to those businesses that
combine medium-to-high product-market attractiveness with average-to-strong business strength
or competitive position (the thesis is that the greatest profitability of competitive advantage and
performance lies in these combinations).

However, the nine-cell GE matrix, like the four cell growth-share matrix, provides no real clues or
hints about the specifics of business strategy. The GE matrix analysis yields only general
prescriptions: grow and build, hold and maintain, or harvest-divest. Such prescriptions may
occasionally suffice insofar as corporate-level strategy formulation is concerned, but the issue of
specific competitive approaches remains wide open. Another weakness has been pointed out by
Hofer and Schendel: the GE approach does not depict as well as it might the positions of
The industry’s stage in the evolutionary life-cycle

businesses that are about to emerge as winners because the product/market is entering the takeoff
stage.

The Life-cycle Matrix

To better identify a developing-winner type of business, Hofer developed a 15-cell matrix in

which businesses are plotted in terms of stage of industry evolution and competitive position, as
shown in figure below. Again, the circles represent the sizes of the industries involved and pie
wedges denote the business’s market share. Looking at the plot in figure, business A would appear
to be a developing winner; business C might be classified as a potential loser; business E might
be labeled an established winner;Thebusiness
businessFunit’s
couldcompetitive
be a cashposition
cow; and business G a loser or a
dog. The power of the life-cycle matrix is the story it tells about the distribution of the firm’s
businesses across the stages of industry evolution.

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Actually, there is no need to force a choice as to which type of portfolio matrix to use; any or all
can be constructed to gain insights from different perspectives, and each matrix type has its pros
and cons. The important thing is analytical accuracy and completeness in describing the firm’s
current portfolio position—all for the larger purpose of discerning how to manage the portfolio as
a whole and get the best performance from the allocation of corporate resources.