THE FUNDAMENTAL OF BUSINESS
 

 

 

 

 

 

 

 

 

 

 

 

The portfolio matrix focuses on the real fundamentals of businesses and their relationships to each other within the portfolio. It is not possible to develop effec- tive strategy in a multiproduct, multimarket company without considering the mutual relationships of different businesses. The portfolio matrix approach provides for the simultaneous comparison of dif- ferent products. It also underlines the importance of cash flow as a strategic vari- able. Thus, when continuous long-term growth in earnings is the objective, it is necessary to identify high-growth product/market segments early, develop businesses, and preempt the growth in these segments. If necessary, short-term profitability in these segments may be forgone to ensure achievement of the dominant share. Costs must be managed to meet scale-effect standards. The appropriate point at which to shift from an earnings focus to a cash flow focus must be determined and a liquidation plan for cash flow maximization estab- lished. A cash-balanced mix of businesses should be maintained. Many companies worldwide have used the portfolio matrix approach in their strategic planning. The first companies to use this approach were the Norton Company, Mead, Borg-Warner, Eaton, and Monsanto. Since then, virtually all large corporations have reported following it.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The two-factor portfolio matrix discussed above provides a useful approach for reviewing the roles of different products in a company. However, the growth rate- relative market share matrix approach leads to many difficulties. At times, factors other than market share and growth rate bear heavily on cash flow, the mainstay of this approach. Some managers may consider return on investment a more suit- able criterion than cash flow for making investment decisions. Further, the two- factor portfolio matrix approach does not address major investment decisions between dissimilar businesses. These difficulties can lead a company into too many traps and errors. For this reason, many companies (such as GE and the Shell Group) have developed the multifactor portfolio approach. Its two dimensions, industry attractiveness and business strengths, are based on a variety of factors. It is this multifactor characteristic that differentiates this approach from the one discussed in the previous section. In its early attempts with the portfolio matrix, GE used the criteria and measures shown to determine industry attractiveness and business strengths. These criteria and measures are only suggestions; another company may adopt a different list. For example, GE later added cyclicality as a criterion under industry attractiveness. The measure of relative profitability, as shown in the exhibit, was used for the first time in 1985.