Exam 6: Corporate-Level Strategy: Creating Value Through Diversification

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First, they compare SBUs on only two dimensions, making the implicit but erroneous assumption that (1) those are the only factors that really matter and (2) that every unit can be accurately compared on that basis. Second, the approach views each SBU as a stand-alone entity, ignoring common core business practices and value-creating activities that may hold promise for synergies across business units. Third, portfolio models do not explicitly incorporate an SBU's core competencies in the analysis, and they ignore the importance of nurturing and protecting those for the long-term viability and success of a business. Fourth, unless care is exercised, the process can become largely mechanical, substituting an oversimplified graphic model for the important contributions of the CEO's (and other corporate managers') experience and judgment. Fifth, a strict reliance on the rules regarding resource allocation across SBUs can be detrimental to a firm's long-term viability. For example, according to one study, over one-half of all the businesses that should have been cash users (based on the BCG matrix) were instead cash providers. Finally, though it is colourful and easy to comprehend, the imagery of a portfolio matrix can lead to some troublesome and overly simplistic prescriptions.