Although portfolio planning is a useful tool, this tool has important limitations. First, portfolio planning oversimplifies the reality of competition by focusing on just two dimensions when analyzing a company’s operations within an industry. Many dimensions are important to consider when making strategic decisions, not just two. Second, portfolio planning can create motivational problems among employees. For example, if workers know that their firm’s executives believe in the BCG matrix and that their subsidiary is classified as a dog, then they may give up any hope for the future. Similarly, workers within cash cow units could become dismayed once they realize that the profits that they help create will be diverted to boost other areas of the firm. Third, portfolio planning does not help identify new opportunities. Because this tool only deals with existing businesses, it cannot reveal what new industries a firm should consider entering.
KEY TAKEAWAY
- Portfolio planning is a useful tool for analyzing a firm’s operations, but this tool has limitations; The BCG matrix is one of the most widely used approaches to portfolio planning.
EXERCISES
- Is market share a good dimension to use when analyzing the prospects of a business? Why or why not?
- What might executives do to keep employees within dog units motivated and focused on their jobs?
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