The intellectual history of portfolio theory in corporate strategy is complex (Wind and Mahajan 1981). Therefore, for this section purpose its is adequate to use as an example the famous BCG Matrix (Henderson 1979).
Bruce Henderson, founder of the Boston Consulting Group, argued that all business cost followed a well-know pattern: units costs dropped by one-third every time volume (or turnover) doubled. Therefore, Henderson postulated a relationship, known as the experience curve, between unit costs and volume. This relationship leads to some generic strategic advice: gain market share, for if a firm gains market share, its units costs will fall and profit potential will increase. He argued that any business could be categorized into one of four types depending on how its industry was growing and how large a share of the market it had: (1) high growth/high share businesses ("stars"), which generate substantial cash but also require large investments if their market share is to be maintained or increased; (2) low growth/ high share businesses ("cash cows"), which generate large cash flows but require low investment and therefore generate profits that can be used elsewhere; (3) low growth/low share businesses ("dogs"), which produce little cash and offer little prospect of increased share; and (4) high growth/low share businesses ("question marks"), which would require substantial investment in order to become stars or cash cows (the question is whether the investment is worth it).
The strength of portfolio approaches is that they provide a method for measuring entities of some sort (e.g, businesses, or investment options) against dimensions that are deemed to be of strategic importance (e.g., share and growth or position and attractiveness) for purposes of analysis and recommendation.
The weaknesses of such approaches include the difficulty of knowing what the appropriate strategic dimensions are; difficulties of classifying entities against dimensions; and the lack of clarity about how to use the tool as part of a large strategic planning process.