Business Portfolio Analysis: BCG and GE–McKinsey Matrices

A consumer goods company sells packaged tea, snacks, ready-to-eat meals and agarbattis. It has ₹100 crore to invest this year. Giving each business ₹25 crore looks fair, but it is rarely wise.

Guided by its mission and objectives, management should plan the portfolio that best fits the company's strengths and weaknesses to the opportunities in its environment. Large firms such as Nestlé or Hindustan Unilever manage complex portfolios of businesses and brands.

Two steps.

1. Analyse the current portfolio and decide which businesses should get more, less or no investment.
2. Shape the future portfolio with strategies for growth and for downsizing.

The units analysed are strategic business units (SBUs): a company division, a product line within a division, or sometimes a single product or brand. Each has its own mission and objectives and can be planned independently. In this company, each of the four product lines is an SBU.

Portfolio analysis rates each SBU on two dimensions: the attractiveness of its market or industry, and the strength of its position there. Strong resources go to the more profitable businesses; weaker ones are phased down or dropped. Businesses that fit the firm's core philosophy and competencies deserve support.

The BCG and GE–McKinsey matrices that follow turn these two ratings into a grid.

Don't confuse an SBU with a department. An SBU faces its own customers and competitors and can be planned on its own. A department, such as finance or HR, serves the whole firm and has no market of its own.

Where it breaks. Portfolio analysis treats each business as separate, yet many share plants, brands, buyers and sales teams. Selling one can raise the others' costs. Formal analysis also takes time and money, and it classifies today's businesses better than it plans tomorrow's.

In practice. Use the ratings to start the argument about where money goes, not to end it. Ask what each business shares with the others before cutting it.

Rate each business on market attractiveness and its own strength.

The consumer goods company's tea business earns more cash than it can usefully reinvest. Its ready-meals business burns cash and may never lead its market. The BCG matrix shows how one can pay for the other.

The Boston Consulting Group developed it under Bruce Henderson around 1970. Each SBU is placed by its market growth rate (the vertical axis, a measure of market attractiveness) and its relative market share (the horizontal axis, a measure of strength). Each SBU is drawn as a circle whose area is proportional to its sales.

For the market leader, the comparison is with the next-largest firm. A common textbook convention draws the dividing lines at 10% market growth and a relative share of 1.0.

The company's SBUs, worked. The figures are illustrative.

For each SBU the firm can build share by investing more, hold share at its current level, harvest short-term cash flow whatever the long-term effect, or divest by selling or phasing it out and using the resources elsewhere.

Movement over time. Many SBUs start as question marks, become stars if they succeed, turn into cash cows as market growth slows, and finally become dogs. The firm needs a steady flow of new products so that some become stars and later cash cows that fund the rest.

Don't confuse relative market share with market share. A 20% share makes a firm a leader if the next rival has 10% (relative share 2.0). The same 20% makes it a follower if the leader has 40% (relative share 0.5).

Where it breaks. Two single measures stand in for attractiveness and strength. High market share does not always mean high profit. A ‘dog’ may still have strategic value, for example if it completes a range that shops want to stock whole. The result also depends on how the market is defined: draw it narrowly enough and almost any brand leads.

For exams. Expect a description to place in a cell, the four strategies, and the usual path from question mark to dog. Check which way the share axis runs before answering.

Stars, cash cows, question marks, dogs: build, hold, harvest, divest.

The snacks market grows at 15% a year, so the BCG matrix calls it attractive. But it is crowded, margins are thin and big retailers set the terms. Growth alone overstates how attractive it is.

McKinsey and Company developed it in the early 1970s for General Electric, which needed a way to decide where to invest across its many SBUs. It plots industry (market) attractiveness on the vertical axis against business unit strength (competitive position) on the horizontal axis.

Each axis is a weighted score built from several factors, then divided into high, medium and low. That gives a 3 × 3 grid of nine cells, a finer assessment than the BCG's four.

A weighted score, worked. The company scores its snacks business. Weights add up to 1; ratings run from 1 (poor) to 5 (excellent). All figures are illustrative.

Say the company calls scores below 2.33 low, 2.33 to 3.67 medium, and above 3.67 high. Attractiveness of 3.1 is medium; strength of 3.8 is high. One high and one medium puts snacks in the invest/grow zone.

Don't confuse the GE–McKinsey matrix with the BCG matrix. The BCG uses one measure on each axis (market growth, relative share) and four cells. The GE–McKinsey uses composite, weighted scores and nine cells, so it is richer but more subjective.

Where it breaks. The factors, weights and ratings are all judgements. Managers can tilt them, knowingly or not, toward the businesses they favour. Like the BCG matrix, it shows where each business stands today, not where its market is heading.

In practice. Agree the factors and weights before scoring any business, and score with a group rather than one manager. Then test whether a small change in one weight moves a business to another zone. If it does, the decision needs more evidence.

For exams. Know the two axes, which factors feed each, the three zones, and how the matrix differs from the BCG.

Nine cells, three zones: grow, hold, harvest.