By prof swati modi

Strategic Analysis

The business portfolio is the collection of businesses and products that make up
the company. The best business portfolio is one that fits the company's strengths
and helps exploit the most attractive opportunities.
The company must:
(1) Analyse its current business portfolio and decide which businesses should
receive more or less investment, and
(2) Develop growth strategies for adding new products and businesses to the
portfolio, whilst at the same time deciding when products and businesses should no
longer be retained.
Methods of Portfolio Planning
The two best-known portfolio planning methods are from the Boston Consulting
Group and by General Electric/Shell. In each method, the first step is to identify
the various Strategic Business Units ("SBU's") in a company portfolio. An SBU is
a unit of the company that has a separate mission and objectives and that can be
planned independently from the other businesses. An SBU can be a company
division, a product line or even individual brands - it all depends on how the
company is organised.
In this kind of matrix business unit appears as a circle
The size of the circle represents the % age of revenues in the overall corporate
portfolio. The dimensions used are
Relative market share which is the ratio of businesss market share to the market
share by the largest rival company in the industry
Market share is measured in terms of unit of sales rather value of sales.

 BOSTON CONSULTING GROUP (BCG) MATRIX is developed by

BRUCE HENDERSON of the BOSTON CONSULTING GROUP IN THE
EARLY 1970s.
According to this technique, businesses or products are classified as low or high
performers depending upon their market growth rate and relative market share.

The Boston Consulting Group Box ("BCG Box")

Using the BCG Box

dimensions:

a company classifies all its SBU's according to two

On the horizontal axis: relative market share - this serves as a measure of SBU
strength in the market
On the vertical axis: market growth rate - this provides a measure of market
attractiveness
By dividing the matrix into four areas, four types of SBU can be distinguished:
Stars - Stars are high growth businesses or products competing in markets
where they are relatively strong compared with the competition. Often they
need heavy investment to sustain their growth. Eventually their growth will

slow and, assuming they maintain their relative market share, will become
cash cows. Stars are leaders in business.
They also require heavy investment, to maintain its large market share.
It leads to large amount of cash consumption and cash generation.
Attempts should be made to hold the market share otherwise the star will
become a CASH COW.

Cash Cows - Cash cows are low-growth businesses or products with a

relatively high market share. These are mature, successful businesses with
relatively little need for investment. They need to be managed for continued
profit - so that they continue to generate the strong cash flows that the
company needs for its Stars. They are foundation of the company and often
the stars of yesterday.
They generate more cash than required.
They extract the profits by investing as little cash as possible
They are located in an industry that is mature, not growing or declining.

Question marks - Question marks are businesses or products with low market
share but which operate in higher growth markets. Also known as problem
children and shown in upper right quadrant representing Rapid market growth
and Relative market share. Also known as cash hogs Investment required for rapid
growth and product development. In this Internal cash generations are low
Large inflow of cash is required to keep pace with the growth
Strategic options: aggressive invest and expand strategy
and Divestiture
This suggests that they have potential, but may require substantial
investment in order to grow market share at the expense of more powerful

competitors. Management have to think hard about "question marks" - which

ones should they invest in? Most businesses start of as question marks.
They will absorb great amounts of cash if the market share remains
unchanged, (low).
Question marks have potential to become star and eventually cash cow but
can also become a dog.
Investments should be high for question marks.

Dogs
Dogs are the cash traps.
Dogs do not have potential to bring in much cash.
Number of dogs in the company should be minimized.
Business is situated at a declining stage.

Benefits
BCG MATRIX is simple and easy to understand.
It helps you to quickly and simply screen the opportunities open to you, and
helps you think about how you can make the most of them.
It is used to identify how corporate cash resources can best be used to
maximize a companys future growth and profitability.
Limitations
BCG MATRIX uses only two dimensions, Relative market share and market
growth rate.
Problems of getting data on market share and market growth.

 High market share does not mean profits all the time.
Business with low market share can be profitable too.

Conventional strategic thinking suggests there are four possible strategies

for each SBU:
(1) Build Share: here the company can invest to increase market share (for
example turning a "question mark" into a star)
(2) Hold: here the company invests just enough to keep the SBU in its
present position
(3) Harvest: here the company reduces the amount of investment in order to
maximise the short-term cash flows and profits from the SBU. This may
have the effect of turning Stars into Cash Cows.
(4) Divest: the company can divest the SBU by phasing it out or selling it in order to use the resources elsewhere

 GE Nine Cell Matrix : Developed by McKinsey & Company in

1970s.
GE is a model to perform business portfolio analysis on the SBUs.
GE is rated in terms of Market Attractiveness & Business Strength
It is an Enlarged & Sophisticated version of BCG.
The GE/McKinsey Matrix is a nine-cell (3 by 3) matrix used to perform business
portfolio analysis as a step in the strategic planning process. The GE/McKinsey
Matrix identifies the optimum business portfolio as one that fits perfectly to the
company's strengths and helps to explore the most attractive industry sectors or
markets. The objective of the analysis is to position each SBU on the chart
depending on the SBU's Strength and the Attractiveness of the Industry Sector or
Market on which it is focused. Each axis is divided into Low, Medium and High,

giving the nine-cell matrix as depicted below.

Industry Attractiveness
Annual market growth rate

Overall market size

Historical profit margin
Current size of market
Market structure
Market rivalry
Demand variability
Global opportunities

Up to 10 different factors can be used to define Industry Attractiveness.

Major factors are Market Size, Market Growth Rate, Demand variability,
Industry Profitability, Competitive Rivalry, Global Opportunities, Entry and
exit barriers, Capital requirement, Macro environmental Factors (PEST) Up
to 10 factors can also be used to define SBU Strength. Typical factors are
Market Share, Distribution Channel Access, Financial Resources, R&D
Capability, Brand equity, Production Capacity, Knowledge of customer and
market, Caliber of management. Relative cost position The factors and their

relative weightings are selected. The rating values for each Current
market share
Brand image
Brand equity
Production capacity
Corporate image
Profit margins relative to competitors
R & D performance
Managerial personal
Promotional effectiveness
factor are entered for each SBU and Industry. GE Nine Cell Matrix

GE Nine Cell Matrix:

Each factor can be given a different weighting in calculating the overall
attractiveness of a particular industry. The sum of weights must be 1. Use 1-10
rating scale and assign appropriate weights to each factor. Multiply the weights
with the ratings of the respective factor. Typically: Industry Attractiveness =
Attractiveness Factor 1 Value by Factor 1 weighting + Attractiveness Factor 2
Value by Factor 2 weighting, etc. Business Unit Strength = Strength Factor 1 Value
by Factor 1 weighting + Strength Factor 2 Value by Factor 2 weighting, etc. GE
Nine Cell Matrix

GE Nine Cell Matrix:

Market Size is represented by size of circle. Market share is represented by using
the circle as a pie chart. The expected future position of circle is represented by an
arrow .

Grow Business units that fall under grow attract high investment. Firms may go
for product differentiation or Cost leadership. Huge cash is generated in this phase.
Market leaders exist in this phase.
Hold Business units that fall under hold phase attract moderate investment.
Market segmentation, Market penetration, imitation strategies are adopted in this
phase. Followers exist in this phase.
Harvest - Business units that fall under this phase are unattractive. Low priority is
given in these business units. Strategies like divestment, Diversification, mergers
are adopted in this phase . GE Nine Cell Matrix
GE Nine Cell Matrix:
Strength/ Advantages
a) It allows intermediate ratings between high and low and between strong and
week.
b) It helps in channeling the corporate resources to business and achieving
competitive advantage and superior performance.
c) It helps in better strategic decision making and better understanding of business
scope.
Weakness/ Drawbacks

It tends to obscure business that are become to winners because their industries are
entering at exit stage. Assessment of business in terms of two factors is not fair.