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Business Portfolio Analysis. Asia-Pacific Marketing Federation Certified Professional Marketer Copyright Marketing Institute of Singapore. Outline. Introduction BCG (Boston Consulting Group) Matrix PIMS (Profit Impact of Market Strategy) GE(General Electric)/McKinsey Multi-Factor Matrix.

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business portfolio analysis

Business Portfolio Analysis

Asia-Pacific Marketing Federation

Certified Professional Marketer

Copyright

Marketing Institute of Singapore

outline
Outline
  • Introduction
  • BCG (Boston Consulting Group) Matrix
  • PIMS (Profit Impact of Market Strategy)
  • GE(General Electric)/McKinsey Multi-Factor Matrix
introduction
Introduction
  • The creation of SBUs enables the setting of SBU’s 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
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 matrix cont d
BCG Matrix (cont’d)
  • 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 cont d7
BCG Matrix (cont’d)

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

Matrix Quadrants
key assumptions of bcg matrix
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
Strategic Perspectives of Products in Different Quadrants

Four different strategic perspectives

  • Investment
  • Earnings
  • Cash-flow, and
  • Strategy Implications
question marks problem children
Question Marks (Problem Children)
  • Investment—heavy initial capacity expenditures and high R&D costs
  • Earnings—negative to low
  • Cash-flow—negative (net cash user)
  • Strategy Implications
    • If possible to dominate segment, go after share. If not, redefine the business or withdraw
stars
Stars
  • Investment—continue to invest forcapacity expansion
  • Earnings—Low to high earnings
  • Cash-flow—Negative (net cash user)
  • Strategy Implications
    • Continue to increase market share—even at the expense of short-term earnings
slide13
Cows
  • Investment—Capacity maintenance
  • Earnings—High
  • Cash-flow—Positive (net cash contributor)
  • Strategy Implications
    • Maintain market share and cost leadership until further investment becomes marginal
slide14
Dogs
  • Investment
    • Gradually reduce capacity
  • Earnings—High 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

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

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
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
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
pims profit impact of marketing strategy program
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
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 in aspac
Examples of Application of some of the Principles of PIMS in ASPAC
  • Pursue of product quality
    • Australian Quality Council
    • Hong Kong Awards for Industry (Quality cat.)
    • Japan Quality Award
    • Malaysia’s Prime Minister's Quality Award (Private Sector)
    • Philippines Quality Award
    • Singapore Quality Award
    • Sri Lanka’s National Quality Award
    • Thailand Quality Award
examples of application of some of the principles of pims in aspac cont d
Examples of Application of some of the Principles of PIMS in ASPAC (cont’d)
  • Pursue of market share
    • Nova Group and Europa Holdings of Singapore expanding their pubs and restaurants business (Source: The Straits Times; Dec 10, 1992; pp.2)
  • High investment reduces profitability
    • The acquisition of new machinery caused a reduction in SM Summit Holdings gross margin SM (Source: SM Summit Holding’s Annual Report 2000)
limitations of pims
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
ge general electric mckinsey multi factor matrix
GE(General Electric)/McKinsey Multi-Factor Matrix
  • Originally developed by GE’s planners drawing on McKinsey’s 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
ge multifactor portfolio matrix
GE Multifactor Portfolio Matrix

Industry Attractiveness

High

Medium

Low

Invest to Build

Protect Position

Build selectively

High

Selectively manage for earnings

Limited expansion or harvest

Build selectively

Invest/Grow

Medium

Business Strengths

Selectivity

/earnings

Protect & refocus

Manage for earnings

Low

Harvest

/Divest

Divest

ge multifactor portfolio matrix cont d

Industry Attractiveness

High

Medium

Low

High

Medium

Business Strengths

Low

GE Multifactor Portfolio Matrix (Cont’d)

Invest/Grow

Selectivity

/earnings

Harvest

/Divest

some limitations of the ge model
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 firm’s position and the market attractiveness
  • Businesses may have been evaluated with respect to different criteria
  • Sensitive to how a product market is defined