Part 2. MM4XL Tools > 1. Strategic Tools > BCG Matrix > The Portfolio Balance Concept

BCG Portfolio Analysis

The Portfolio Balance Concept

There are two major assumptions behind the Product Portfolio Analysis, which help to allocate resources whilst reducing risk:

  1. Investments in products in growing markets must be higher than investments in stagnant or recessive markets.
  2. The total cash flow of market leaders must be higher than cash flow of non-leaders.

The following map depicts the four discussed product typologies.

Matrix BCG Software for Brand Portfolio Analysis and Management

If we translate the two rules above as equations and also include the equilibrium and the opposite of each rule, we have six different conditions:

1. Investment(Stars + Question marks) > Investment(Cows + Dogs)
2. Investment(Stars + Question marks) = Investment(Cows + Dogs)
3. Investment(Stars + Question marks) < Investment(Cows + Dogs)

4. Cash(Stars + Cows) > Cash(Question marks + Dogs)
5. Cash(Stars + Cows) = Cash(Question marks + Dogs)
6. Cash(Stars + Cows) < Cash(Question marks + Dogs)

Combining the six outcomes gives nine possibilities when defining a portfolio, representing five major classes of product portfolios, respectively:

Each of the five positions implies certain peculiarities.

Matrix BCG Software for Brand Portfolio Analysis and Management

1. Equilibrium

A product portfolio in equilibrium is not necessarily a good one. The financial resources are very limited and, should it also be the result of a mix of products competing in growing markets, the competitive power can be very weak and perhaps not worth the risk.

2. Profit maximization

A profit-maximizing portfolio can generate cash in the short term, yet this is hardly a position to be held long term. Investments are low and can be insufficient to maintain the current market share level, however, it can be an interesting position to be held for a short time. A useful stop-gap while building resources to be used against a specific target, such as a competitor or market niche .

3. Negative balance

This is the result of an unbalanced portfolio, which will normally survive for a very short time only, unless action is taken to reduce the investments or enlarge the cash flow.

4. Optimum

The optimal condition is given by a portfolio whose products lie in fast growing markets, investing more than those in stagnant or recessive markets and the cash flow of leaders is larger than for non leader products.

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