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 MultiFactor Matrix

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 selfsustaining 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

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

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 in ASPAC

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

 Pursue of market share

Examples of Application of some of the Principles of PIMS in ASPAC (contd)

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 Holdings Annual Report 2000)

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 MultiFactor 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

GE Multifactor Portfolio Matrix

High High Industry Attractiveness 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 Multifactor Portfolio Matrix (Contd)

High High Industry Attractiveness Medium Low

Medium

Invest/Grow Selectivity /earnings

Low

Harvest /Divest

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