Business Portfolio Analysis

The Models
BCG (Boston Consulting Group) Matrix GE (General Electric)/McKinsey MultiFactor Matrix

Portfolio analysis
The creation of SBUs enables the setting of SBUs

mission and objectives and the allocation of resources across SBUs in the organization
Senior management need to have a framework to

evaluate SBUs and to assign limited resources among them; hence portfolio analysis

BCG Matrix
(Boston Consulting Group)
Provides a framework for senior management

in allocating resources across business units in a diversified firm by

Balancing cash flows among business units, and Balancing stages in the product life-cycle (PLC)

Matrix Quadrants
Relative Market Share High Low High Market Growth Rate Low

Key Assumptions of BCG Matrix

Stable cost/price relationship Not valid if the firm is pricing on projected lower average unit costs in the future Market leader influences the average costs

Profit margin is a function of market share This ignores profitable niches

Strategic Perspectives of Products in Different Quadrants

Four different strategic perspectives
Investment Earnings Cash-flow, and Strategy Implications

Question Marks
(Problem Children)
Investmentheavy initial capacity expenditures

and high R&D costs

Earningsnegative to low
Cash-flownegative (net cash user) Strategy Implications If possible to dominate segment, go after share. If not, redefine the business or withdraw

Stars
Investmentcontinue to invest for capacity expansion
EarningsLow to high earnings Cash-flowNegative (net cash user) Strategy Implications

Continue to increase market shareeven at the expense of short-term earnings

Cows
InvestmentCapacity maintenance EarningsHigh Cash-flowPositive (net cash contributor) Strategy Implications

Maintain market share and cost leadership until further investment becomes marginal

Dogs
Investment
Gradually reduce capacity

EarningsHigh to low Cash-flow

Positive (net cash contributor) if deliberately reducing capacity

Strategy Implications
Plan an orderly withdrawal to maximize cash flow

BCG Matrix
(Three Paths to Success)
Continuously generate cash cows and use the cash

throw-up by the cash cows to invest in the question marks that are not self-sustaining
Stars need a lot of reinvestments and as the market

matures, stars will degenerate into cash cows and the process will be repeated.
As for dogs, segment the markets and nurse the dogs to

health or manage for cash

Three Paths to Success (contd) Relative Market Share

High
High Market Growth Rate Low

Low

BCG Matrix
(Three Paths to Failure)
Over invest in cash cows and under invest in question

marks Trade further opportunities for present cash flow

Under invest in the stars

Allow competitors to gain share in a high growth market

Over milk the cash cows

Three Paths to Failure (contd)

Relative Market Share High Low High Market Growth Rate Low

GE(General Electric)/McKinsey Multi-Factor Matrix

Originally developed by GEs planners drawing on

McKinseys approaches
Market attractiveness is based on as many relevant

factors as are appropriate in a given context

Business-position assessment also made on a many

factors
SBU needs to be rated on each factor

Industry Attractiveness
Overall Market size Annual Market growth rate Historical profit margin Competitive intensity Technological requirements Energy requirements Inflation vulnerability Social/ political / legal

Business Strengths

Market share Share growth Product quality Brand reputation Distribution network Promotional effectiveness Productive capacity Productive efficiency Unit costs R & D performance Managerial personnel

GE Multifactor Portfolio Matrix

High Industry Attractiveness High Business Strengths Medium Low

Protect Position

Invest to Build

Build selectively

Selectively Limited Build Medium selectively manage for expansion earnings or harvest
Low

Invest/Grow Selectivity /earnings Harvest /Divest

Protect & Manage for refocus earnings

Divest

GE MODEL
Protect Position Invest to grow Concentrate effort on maintaining strength
Build Selectively

Business Strength
Invest to build Challenge for leadership Build selectively Reinforce vulnerable areas
Selectivity/Manage for earnings
Protect existing program Concentrate investments in segments where profitability is good and risks are relatively low

M A

Build Selectively
Specialize around limited strengths Seeks ways to overcome weakness Withdraw if indications of sustain growth is lacking Limited Expansion or Harvest
Look for ways to expand without high risk ,Otherwise minimize investment and rationalize operations Divest Sell at time that will maximize value Cut fixed costs and avoid investment meanwhile

R K E T A T T R A C T I V E N E S S

High

Medium

Invest heavily in most attractive segments Build up ability to counter competition Emphasize profitability by raising productivity

Low

Protect and Refocus

Manage for current earnings Concentrate on attractive segments Defend strengths

Manage for earnings

Protect position in most profitable segments Upgrade product line Minimize investment

Strong

Medium

Weak

Plotting on GE Matrix The circle represents the complete market and the arc represents the market share of the company
5

a
r k e t a t

3.67 2.97
Scooters

t r

a
c t

2.33 1 5 3.67 3.45 Business strength 2.33 1

I v e n e s s

Some Limitations of the GE Model

Subjective measurements across SBUs
Process also highly subjective
From the selection and weighting of factors to the subsequent development of both a firms position and the market attractiveness

Businesses may have been evaluated with respect to

different criteria
Sensitive to how a product market is defined

PIMS (Profit Impact of Marketing Strategy) Program

Database of nearly 3,800 SBUs Representing more than

500 firms Member firms have been in the program from 2 to 12 years The program provides
Par ROI (Return of Investment) Prediction of how ROI would change if policy change is made

Important Strategic Principles Derived From PIMS

In the long run, product quality is the single most important factor

affecting performance Market share and profitability closely correlated High-investment intensity reduces profitability Cash implications of growth rate and relative market share are affected by many factors Vertical integration is profitable for some business only Most factors that boost ROI also contribute to value

Limitations of PIMS
Key market-share variable is sensitive to product-market

definition Other variables depend on subjective judgements Inherent limitations of cross-section analysis Sample biased toward larger firms that are industry leaders