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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
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
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 (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’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
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)
 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
 Investment—continue to invest for
capacity 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
Cows
Investment—Capacity
maintenance
Earnings—High
Cash-flow—Positive (net cash
contributor)
Strategy Implications
 Maintain market share and cost
leadership until further investment
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

Anchoring
High Systems Cable Tray
Systems
Product Electric
Sales Power
Growth Tools
Rate
Low Powder
Actuated
Tools Concrete
Lifting
Systems
Note that the Anchoring System SBU is forecasted to move to new positio
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
(cont’d)
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 (cont’d)
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
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)
 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
 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
 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
Industry Attractiveness
High Medium Low

Protect Invest to Build


High Position Build selectively
Business Strengths

Selectively Limited
Build
Medium selectively manage for expansion Invest/Grow
earnings or harvest
Selectivity
/earnings
Protect & Manage for
Low refocus earnings Harvest
Divest /Divest
GE Multifactor Portfolio Matrix (Cont’d)
Industry Attractiveness
High Medium Low

High
Business Strengths

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 firm’s position
and the market attractiveness
 Businesses may have been
evaluated with respect to different
criteria