Business Portfolio Analysis

Introduction BCG (Boston Consulting Group) Matrix GE(General Electric)/McKinsey Multi-Factor Matrix Business profile matrix Directional Policy Matrix MACS Model PIMS (Profit Impact of Market Strategy)

Introduction
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 Many models but only 3 are covered here: BCG, PIMS, & GE models

BCG (Boston Consulting Group) Matrix

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)

BCG Product Portfolio Matrix Dimensions

Product Sales Growth Rate

Relative Market Share (Log Scale)

BCG Matrix (contd)

The horizontal axis is the Relative Market Share shown in a log scale Vertical line is usually set as 1.0 Relative Market Share An SBU to the left of this line means it is the market leader in the industry or segment in which it operates Conversely, an SBU to the right of this line (1.o RMS) means it is not the leader

BCG Matrix (contd)

The vertical axis is the growth rate
5 levels may be used: product, product lines, market segment, SBU and business growth rate Horizontal line is usually set as 10% Growth Rate SBUs above the set value (10% line) represents high growth rates Conversely, SBUs below this value depicts slower growth rate

Matrix Quadrants
Relative Market Share High Low High Product Sales 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

Example of a BCG Matrix for a Fastener Supplier in South East Asia

Relative Market Share High Low High Product Sales Growth Rate Low Anchoring Systems Cable Tray Systems Electric Power Tools

Powder Actuated Tools

Concrete Lifting Systems

Note that the Anchoring System SBU is forecasted to move to new position

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 Low High Market Growth Rate 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 milked the cash cows

Three Paths to Failure (contd)

Relative Market Share High Low High Market Growth Rate Low

Portfolio Analysis
GE Tool for Analyzing Opportunities & Ability to Compete

GE Portfolio Analysis
Classification of SBUs/products into nine cell matrix based on
Market Attractiveness
Multiple Indicators

Business Strength
Multiple Indicators

COMPANY POSITION/INDUSTRY ATTRACTIVENESS SCREEN

Criteria Criteria
Size Growth Share Position Profitability Margins Technological Position Strength/ Weakness Image Pollution People MARKET ATTRACTIVENESS High High

Size BUSINESS POSITION Market Growth Prici Market Diversity Competitive Structur Medium Low Industry Profitability Technical Role Social Environment Legal Human

Steps In Developing GE Matrix

1. Select Factors & Indicators. 2. Assign each indicator a weight (total = 1) based on its importance. 3. Rate the industry on industry indicators and company on business indicators on scale of 1(weak) 5 (strong). 4. Multiply weight times rating and total for summary measures.

GE Portfolio Analysis Sample Industry/Market Indicators

Market Factors
Size Growth Rate Cyclicality Seasonality

Competition
Type of competitors Degree of Concentration

Financial & Economic

Contribution Margins Barriers to Entry or Exit

GE Portfolio Analysis Industry/Market Indicators

Technological
Patents & copyrights Will it become obsolete

Sociopolitical
Social attitudes & trends Laws & government regulations

GE Portfolio Analysis Business Strength Indicators

Market
Companys Market Share Companys Sales or Share Growth Rate

Competition
Strength of product, promotion, price, distribution, financial resources, management relative to competition

Financial & Economic

Companys Margins Economies of scale

GE Portfolio Analysis Business Strength Indicators

Technological
Companys ability to cope with change Technological skills Patent Protection

Sociopolitical
Companys responsiveness & flexibility

GE Portfolio Example
Market Factor Size Growth Profit Margins Business Market Share Product Quality Distribution Net .33 .33 .34 1 5 2 .33 1.65 .68 2.66 Weight .33 .33 .34 Rating (1- 5) 5 3 2 Value 1.65 .99 .68 3.32

GE Portfolio Analysis
Business High High Market Medium Low Medium Low

Competitive
Market
Attractiveness

Position Medium
Challenge Leader
Invest to Build Selectively Reinforce Strengths

Strong
Maintain Leadership Invest to Grow
Concentrate on Maintaining Strength

Weak
Overcome Weakness, Find Niche or Quit
Build Selectively

High
Medium

Challenge Leader/Build Selectively

In most attractive markets Or counter competition Emphasize profitability by raising productivity

Manage for Earnings

Protect existing programs Concentrate on profitable, less risky segments

Harvest (Gradual Withdrawal) or Limited Expansion

Look ways to expand without high risk Or Minimize investment

Low

Generate Cash
Manage for current earnings Concentrate on attractive Segments Defend Strengths

Harvest
Minimize Investment Protect positions in most profitable segments

Divest
Sell at time that will maximize cash value Cut fixed costs and avoid investment

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

BUSINESS PROFILE MATRIX

EMBRYONIC GROWTH DOMINANT COMPETITIVE POSITION MATURE AGEING

STRONG

FAVORABLE

TENTATIVE

WEAK
STAGE OF INDUSTRY MATURITY

DIRECTIONAL POLICY MATRIX

PROSPECTS FOR SECTOR PROFITABILITY
UNATTRACTIVE AVERAGE ATTRACTIVE

WEAK COMPANYS COMPETITIVE POSITION

AVERAGE

STRONG

MACS MODEL OF PORTFOLIO ANALYSIS

HIGH MEDIUM LOW

VALUE CREATING CAPABILITY IN THE SBU

NATURAL OWNER

ONE OF THE PACK

VALUE CREATION POTENTIAL IN THE BUSINESS

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

Examples of Application of some of the Principles of PIMS

Pursue of product quality
Australian Quality Council Hong Kong Awards for Industry (Quality cat.) Japan Quality Award Malaysias Prime Minister's Quality Award (Private Sector) Philippines Quality Award Singapore Quality Award Sri Lankas National Quality Award Thailand Quality Award

Limitations of PIMS
Key market-share variable is sensitive to productmarket definition Other variables (Policy choices) depend on subjective judgements Inherent limitations of cross-section analysis Sample biased toward larger firms that are industry leaders