This approach fails to provide any portfolio assessment of the various parts of the enterprise considered as a group. Therefore, capital can flow to a mediocre division or product line as fast as it flows to a high-potential division, or even faster. This simply perpetuates the status quo, frequently negating the value of the strategic planning at the corporate level. In other words, the CEO’s all-important decision of allocating capital is blurred and in fact abdicated.
One simple but powerful approach some multibusiness managers are using today is to sort their individual businesses into three broad portfolio categories: sources of growth (future earnings); sources of current and intermediate earnings; and sources of immediate cash flow. One of my colleagues has suggested that these categories relate directly to the so-called product lifecycle curve which can also, for these purposes, be termed a business-lifecycle curve. When a company views its operations in this manner, some interesting implications for the capital-allocation process may emerge.