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We are back as promised to discuss company-wide strategic planning and its four steps. This topic is pretty much big, so decided to divide it into one more session. Today we will discuss the third step which is designing the business portfolio. And in our next post we will talk about the last step of this topic.

Designing the business portfolio

In our previous post, we discussed how a company sets its mission statement, objectives, and goals. Following the mission statement and objectives now management must plan the business portfolio. Business portfolio defined as the collection of business and products that makes a company. Management must find best business portfolio which is the one that best fits company’s strengths and weakness to opportunities in the environment. Designing best business portfolio includes two steps. First step involves analyzing and determining the businesses (strategic business unit - SBU)  should receive more, less or no investment. Second step includes shaping the future portfolio by developing strategies for growth and downsizing.

Analyzing the current business portfolio

The most important job a company performs in strategic planning is analyzing current business portfolio where management evaluates the product and businesses (strategic business unit- SBU) that make up a company. Obviously, a company will want to put its more resources to the businesses that are profitable and drop down the weaker ones. Management first step in analyzing business portfolio is to identify key businesses that make up the company which is called strategic business unit (SBUs). So that, the company can assess the attractiveness of its various SBUs and decide how much support each one needs. An SBU can be a company division, a product within the division or a single product or brand.

BCG Matrix

To analyze current business portfolio, Boston Growth-Share Matrix should be applied, which is developed by Boston Consulting Group. It helps management evaluate SBUs and determine how much attention each one should receive. BCG Matrix classifies a company’s all SBUs according to its market growth rate which is on the vertical axis and relative market share that is on horizontal axis of below figure. Market growth rate measures the market attractiveness and market share measure strength of the company in that market.
what is bcg matrix
The market growth and relative market share of each SBU lead to one of four categories:
  • Stars: Stars are the market leader in the high-growth industries. Stars usually require a large investment to maintain its market growth and defend the leadership. If a star can maintain its relative market share, then eventually it will become cash cow when growth rate will start decreasing. So management should always focus on increasing or maintaining the market share of star so that it can become next cash cow and ensure future cash generation
  • Cash cows: A cash cow is a market leader of yesterday. A cash cow is a low growth rate and high market share SUB. A cash cow needs less investment to hold the market share and generate cash so company can invest on other SBUs.
  • Question mark: Every business start as a question mark. Question mark is the low market share and high growth rate SBU. Question mark requires lots of investment, but if question mark becomes a success then it will become star of future. A question mark can become a cash cow too or a dog. So management should analyze question mark carefully to find out if it’s worth investing.
  • Dog: Dogs have a low market share and low growth. A dog does not generate much cash or consume much cash. Dogs are considered as cash traps because it has very little potential.

Limitation of BCG Matrix

Everything has an advantage and disadvantage. BCG matrix is not unique, it has some limitation mentioned below:
  • It considers market growth and relative market share are the only factors to determine industry attractiveness and competitive advantage ignoring two other factor which are important to determine profitability.
  • It uses high and low and Form four categories which is too simplistic.
  • It ignores independence and synergy.

Developing Strategies for growth and downsizing

Designing business portfolio includes a company finding businesses and product which it should consider in future. A company needs growth if they want to compete more effectively, satisfy stakeholder and attract top talent. But company must make sure that growth is profitable and marketing has that responsibility. Marketing needs to identify, evaluate and select market opportunities and establish strategies to capture them.

Product/market expansion grid

One device that is helpful in identifying opportunities is product/market expansion grid. Product/market expansion grid includes:
what is product-market expansion grid

  • Market penetration: When a product exists in the current market it can still grow. The marketing efforts of a company to offer its existing product in current is known as market penetration strategy. And the best way to do that is to attract competitor’s customers and encourage current consumer to buy more. Now a company can attract competitor’s customer or can encourage their current customer in many ways such as cutting the price, making a comparison promotion etc. Have you ever heard the name Bangladesh? It’s a south Asian country and almost ninety percent people are Muslim. In 2002, Aromatic soap a local soap company actually beats Unilever Lux soap. Lux market share was dropping consistently. Now question arises what aromatic soap did? To attract competitor’s customer, it just promoted that Aromatic soap is 100% Halal.
  • Market Development: Market development strategy involves developing a new market for the existing company. A company can develop market on a geographical basis such city, country, region etc. and demographical basis such as age, sex, class etc.
  • Product development: Developing a new product or modifying existing product and offering it to the existing market is call product development strategy. Most companies follow this strategy to get all potential customers. Suppose, ABC Company develops a detergent power ‘K’ which price is bit high. Because of high price ABC Company was losing lower class customer. To get these lower class customer ABC Company developed another detergent powder ‘M’ which price affordable for lower class people.
  • Diversification: Diversification is a strategy for company growth through starting up business outside company current products and market. That means company is developing new product and market
In our next post we will discuss the last step of this topic which is planning marketing: partnering to build customer relationship
Designing business portfolio with BCG matrix and Product-market expansion grid
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