Business Portfolio Analysis
Business Portfolio Analysis
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
Matrix Quadrants
Relative Market Share High Low High Product Sales Growth Rate Low
Market leader influences the average costs Profit margin is a function of market share
This ignores profitable niches
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
Strategy Implications
Plan an orderly withdrawal to maximize cash flow
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
BCG Matrix
(Three Paths to Failure)
Over invest in cash cows and under invest in question marks
Trade further opportunities for present cash flow
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
Size BUSINESS POSITION Market Growth Prici Market Diversity Competitive Structur Medium Low Industry Profitability Technical Role Social Environment Legal Human
Competition
Type of competitors Degree of Concentration
Sociopolitical
Social attitudes & trends Laws & government regulations
Competition
Strength of product, promotion, price, distribution, financial resources, management relative to competition
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
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
Businesses may have been evaluated with respect to different criteria Sensitive to how a product market is defined
STRONG
FAVORABLE
TENTATIVE
WEAK
STAGE OF INDUSTRY MATURITY
AVERAGE
STRONG
NATURAL OWNER
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