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- . : r - : i ; - . r " . . . . : t : - , j . : ; - , . . , , * . r _ : : - -tF

PortfolioStrategy 177considered profitability (P), gron'th rate (G) and opportunities/threats (O/T) forthis purpose and suggested a weighted mean

I A : c P + B G + y ( O / T ) ,0 < c , 9 , T < 7 , c + B + y = 1 .

Thus, choice of dimersion is very important for developing a porffolio matrix.Along each climension, one has to idenfify major in{luencing characters and sug-gest a conposite measure for evaluation of the state of the portfolio, under consid-eration, in respect of that dimension. Mostly one goes for tn'o dimensions - onedimension representing tire industry situation and the other dimension represent-ing the business itr"ration f the firm.f7.2.1. BCG l \{atr ix N{ethod./ The Po*o-n99-n5qlring-GroupBCG)nrahix (1974), lso knou,n as the gron,th--sha enr a r r , ir *' " ri ri pffi .arq,jn&a,rr po*f p1o_a:iirGfi . Ithas tu'o dimensions.For each dimension, here s onlv one character. ndustrv

situad6frE;fr6;,su1_e{ly-.geffiiallpio rA*pJ_gL6lli. B'";i;;;;;idti." iiffiai-q.9dff-ihg .ffi. ;c@; :,&g!-tluii, tn f ait, to ""r"r" .6rpe bility, nkrt* laryk tslwrgb being used l place absol_ute q1let share.By relativemarket share wemean he ratio of a division'sonn market share o the n.raximummarketshareoftix:tar$trffi iltej.oil$ngl9-Le-q+*"fnfqdtiiiierari'"ai.eoittte?aiti"e."-urtetshareposition s less han 0.5we consider t as a low value. f, on the other hand,the relative market sharepGition lies between 0*.STild:lwe consider t aqe bighv4lge" Thus, trvo distinct classes high.relative"-rnarket h41e*pp_s_i!.qnnd kty_tei5frrremarketshareposition,describele dimersionof business ituation.Similarlv,mdd4,"sa:1ds"gi:oi^/tfr'raien percendge from is tt"i"g "i"d i" poittly indusfrsituation. A positive industry gron'th rate in sales(reasonably,higher than theaverage ate of gror.r'th f the economy) epresents igh growth rat and a negativeindustry gron'th rate represenb ow growth rate. v ,Because f a two-way classification vith eachdimeruion hqyingJW_o_catego-ries there are altogetherLau;.cells." f.o@he?ottovt'ing figurerepresentst l reBCGmatrix,rt ,here@.Theareroi th"circle is i" pfgpg:ligf1to-r:e-\Lenue#Gr-a!e-*U@_grt. The pie slice*'i hint :=l: Tf "!":k .p*.sBegs:f-rp:g** lt l::lT::"1_1T i""

n'here

c)(g

o 0 )! O -a v-o g.

3

t(High)

0(Medium)Questianmarks

t ll l

StarsIV

Dogs

i l l

Cashcows(low) 0. 0 (low) 0.5 f imedium) 1.00 (high)

Relativemarket hareposit ionBCGMATRIXDiagram 7.1

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1 7 8 Discourseson Strategic ManagementIt may be noted from the above figure that the gga_drant represents question

pa1ks,.gu1f,ra1!.]I represenrs*qtr, q"ggdfgnt III repreients eapl:pty, uni {rua_rant IV represents *os" Let uf expliin these termi in details.(eV*:: lfirks are those divisions, which have a lou, retative-.mar!-e-!--s_!_argp9!t_fi,9" rllhe p-roduct field. rvhich is ha'u,ing hjgh ina;;/ sales grg)r:th liieThese mean that divisions failing under q"es-tion rarks regitn require high vol-ume of cash if tl-re irm dec_ideso strengthen these divisioni for .or",titrrL,g it tn"concerned product fields. Lou' generation of cash from these division-. miy alsoprornpt firm management to retreat from thesebusinesses.Thus, a maior decisionq!.gllj_r!91g$Sl*g.g-f dr,vgg$g.r! t9 be r4!g;in leqpectof e_aqli.Gi"& f"llft5lftffllt quadrant.of h.qBCGmakix. one*rire, ttteyryix_ll9lomL.usn rpilSrreEgrc-ghqlcesremostly reshicted o ggrglh -s-trategynd divesLment trategy.

ftcrJ are thosedivisions,u'hich have.a.highlglqtiye..4arketshale positiilin aproduct field having n:gl *dUggy-dt95ptlh_gtu Here, both cashgenera-lglJ8lqt:) and caqh-iryrgslne-rr-t.ere^hlgh,s u ies"tt, ry!_qffh_g9ldat_ed byadivision, falling under this category,ls lgr,* These*ea.rlo6if investmentsarerequiredto retainthe strgngposi{g_1 f thedivisioirTfiele investineii6'Aie-to eaimed at elirh-iniiingmarginal competitors'and educingsharesof formidableplayers.The um may go for vertical ntegrationn bothdirections, roduct devel-opment for achieving differentiation, hoiizontal integration,marklt penetration,market deveiopmentand mergers or eliminationof coirpetition.Thus,itars are theprestigious livisions heregrowthstrategiesre ollowedandare he uturebaseof the firrft,, .QwluurLs epresent he basicbusinesses.ofhe frrm u,here he relati.ve r4r,ketl!3re-position is very.-hign b;ilfi6-in--d;iFy*,qeler-grq-wth rate is ra[tre1,_t.ow.Becauseof the dominantpos-1ti'ry_.ofhesedivisio* L their concernedproductfields, they_can gl"_fglg}lgl1.._e,p!Gtqss). The invesrment equiremenrsare com_paratively ow bJca'seofifr'J;iiiitaglag,qr._oJthage Br,oduir.fields. s a resurr,net cashgenerated rom thesedivisions are arso""ty irgn. ri ir "*tru !.3,q!_ggrr-etltqa !y q-tlt qory1!'31lg"gqe"d-hyjhe-tu--srfo-r-nqw-gry"sirels, for strenstheninsqwffin**.a;I;;-al;reSetgdise"r"sgrex!]rq_.eiesr",_ie|i1#.p--rf;strategyor any other suitable variant of ttte iiilie gio*tnltr-utegy is most suitedstrategy for a cashcow division of the firfr.)

. . iW*2are the weak divisionsof the firn/where relatiye4ark-etslqr,ep,ositionis low and the industry-se]e*s-r'*wth rq,!g-i9.ar5gow. In "E* of tn" weak internalpb-sltionand unatrracive e*ternal situation, theseclivisionsposereal problems tothe management.Nelc4r*h*generated-from-dogsre=-grfls,rg.trgy*negativend ift!-eii-e-9J4!es-are.all5ire-agg..ontinue,he future-of th;;;;ariiseif ge_t rocked.fJe*t}*.ateful-planning.is-lequired foi thesedivisiors u' i if ,-,"Jd"d timelyliggida!9n,sf-a!,egiesmay be adopted.By carefulplanning we meana well-drawnturnaround strategy. n that case, he dqg joay_b*e*a$g-to*boq1f.q!g.S-ko becomea pr-ofitableunit. iGenerallya division starts rom quadrant I, i.e., the questionmark state.S::-:g::i.{.--qJ9*..!b-9kf.gy helps it in entering into quadrant rI i.e. the star

?' :a:- ---: -t-,-ry ,:.:..::...e1:-:1i:. nl

' t ' 1 ;, , : . 1 :'.t',:..1i

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i

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Portfolio Strategy 179position (see Ansoff, 1984).Unsuccessful gron'th strategv pushes it down to dogstate i.e. the quadrant IV. A division belonging to today's star position gracluallygets converted into a cash cou'unit in future, i.e., t moves to quadrant III with theslowing don'n in the industry growth rate. From quadrant III the final state of adivision may reach the dog statervhen it frequently becomesa burden for tl,e firm.Sometimes,because of a re-excitement created in the industry, dogs become ques-tion marks and the cycle gets repeated.

Less frequentiy, stars come out as question marks, question marks becomedogs, dogs reach the cash co$' position and the cash cows turn into stars. Herethe state of development follon's clockwise movement. For some cases,no cyclicalmovement can be obsen'ed.

When the first oil crisis took place rn 1973, corporate planners had to facedeteriorating performalce r,r'ithout any clue to move out. BCG mahix filled up thisvacuum by providing with a tool to planners for reasserting control over itsdifferent divisions.

{rrre ryflg1*b-e-19lle--pf a BCG matti-x are its *qry-lg !1.r4ty-qj!eq!ia[ t c3sh{g11jly.gf tnren-t-requirements, to develoLfuLulglljlis:Lonal phalggies and to.+-ssignpriorities among dir-is-io-ns.t is also eaSylS-Utde$tand and help-fu1-fpj":ryleg,g-ta,[on. Simpie strategic prescriptions like sustaia the cash con' units, divest orharvest dogs, invest in question marks and increase he market shares of stars areappealing to many managersfsee Hedley, 1977).

Hou'ever, the major problem with portfolio makix, as pointed out by Collisand Montgomery (1995), ies in its inability to address hon value is being createdacross divisions. It only takes into consider the cash based relafionship. Someautlrors like Hofer and Schendel, (1978) believe that a four-cell presentation/ciassification is an oversimplification of business portfolio analysis, as it does notkeep any room for average performance. A few authors also believe that theassumption of carrying out business under self-sufficiency in capital is erroneous.Cash, needed in futu re, need not be generated internally. There is no scope ofincorporating into the model the ability for external generation of cash. Further, itdoes not take into consideration the most important aspect of a business i.e. thebusiness life cycle. In the absence of business life cycle information, it may bedifficult to make a choice between two alternafive pure shategies. For example, aquestion mark position during introduction and the same state during maturity donot call for the same strategic planning. Hofer and Schendel (1978) believe thatchoice of growth rate in place of profitability is not a proper measure of attractive-nessof an industry. Christensen et al., (1981)are also against the BCG prescriptionfor Dog units. According to Abell and Hammond (1979), within cell comparisonis not possible under BGC matrix method. This iast criticism, however, is equallyapplicable for most of the matrix models.7.2.2. GE l\{ultifactor Matrix MethodGeneral Electric company, in their annual planning cycle, rates the business unitsin terms of business strengths and industry attractiveness. This has led to thedevelopment of GE Multifactor Matrix Method, also known as GE Stop light method

-, -'.:r----:l-j

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1 8 0 Discourses n StrategicManagement

and GE Nine-cellPlanning Gid. The first dimension of GE matrix is ittdustryattracttueness, easured th"roughmarket size,salesgrou'th rate, degree of compe-irio", chakrgeof technologica'iobsolescence, ocial image and profitability' De-f"r.,a-g o.,ih" product fieii one may add a few more factors like market diversity,"r,rirori*".rtal, legal and human factors and pricing flexibility.

Effects of thesefactors are combiied to arrive at the overall index of industry attractiveness'

Thus, iJ the weight of the i-th factor is w,(>0) and- f f is the rating of anindustry in respect oi l-tn factor, then the overall weighted rating for industryattractiveness 1ia; is given by IIA = I w,R, , which represents the attractivenessof that industry in relation to the chosen factors'

Evaluation of Industry AttractivenessFactors Weights Ratings WeightedratingsMarket sizeSalesgrowth rateDegree of comPetitionChance of technologicalobsolescenceSocial imageProfitabilityTotal

wt, "

w"

wu-.1.00

W,R,W,R,w^R"wnRnw-R-W,R,

f w.Rt l

R1rJ,4 2R"R4

JDI\ ,

The other dimersion of GE matrix is brrsiness trength measured throughmarket share, market size,businesssalesgrowth late, plant capaclty, profit mar-gin, corporate image, and technological strength' Depending. cfn the nature of theiroa.r.i field, onJmay add, a fei more_ aitors Like location and distributionihar'rels, worgorce, htor-o.rurrugement relationship, corporate resource/manage-ment,competenciesanddegreeo"fpollution-Thecombinedmeasureintheformofan index of business streri[th can be developed in the following way:

Evaluation of Business StrengthFactors Weights Ratings WeightedratingsMarket shareMarket sizeBusiness sales growth ratePlant capacitYProfit marginCorporate imageTechnological strengthTotal

v.oYz

1.00

trS-,vrs,v^S"vnS,v-S.3 JV,S,uF,

F v.S.l t

qJs

sJs

s"7

I

YzV.

v.5

- 1s2

if:i,iiIi:!.i: :

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iirL" .- ,

PortfolioStrategy 1 8 1Thus, the index of business strength (B$ is given by the total rveighted rating,i.e.,fBS.= r.',S,, n'here v,(>0) is the weight o, the i-th factor and s, is lhe rating Jfthe business unit of the firm in respect of i-th factor. Generally, .uting, 1n,and'S,)are measured on a 10-point scale aking values from 1 to 10. In that case,both IIAand IBS *'ill vary betu'een 1 and 10. If 10 represents the best position and 1represenis the *.orst position, then the range of IIA and IBS can be broken downinto three parts to indicate high, medium and lorv situations. Let [1,4)correspondto lo'rv situation, [4,7) correspond to medium situation and [2,10] correspoird tohigh situation. This three-class ategorization of both businessstrength o.t.l ir-td,rr-try athactiveness results in nine-cell planning grid for GE matrix as shown belou,:

_ n the diagram 7.2 ndustry atLractivenesss presented along the vertical axisand business strength is presented along the horizontal axis. Concerned businessportfolio is drarvn in the form of a circle. Area of the circle represents the size ofthe total market and the pie wedges n'ithin the circle ,"p."runl the market shareof the fum. The nine cells of GE matri-xare further divided into three regions - greenregron,)'ellow region and red region. "Go" businesses al l under the g-reen egion,"Go u'ith caution" businesses al l under the yellou'region and "Stop businJssesfall under the red region. GE's " go" businesses re like stars and cash cows of BCGMatrix, "go with caution" business are like question marks of BCG matri-r and"stop" businessesare like dogs of BCG matri-x.i * i + * * * + , i (* + * * * * * * ** * t * * * * * ** * * * * * * * *

***7"\\****{ ) Y. . \ -" f 'Al\,/\/\ /\/a/\ /\/a.A/\^./VI /\/\^,A,,\ /\/\ /\ n/\ /\,A,A^'/1

-;\---_-.4;* * * * * * * * * * * * *+ + * * * * * * * * * * *

n/\n^n^ n nn^nl\AnA/\,/\n nn

n/\n n.^.^/1^ .^/\n/\ /\nA' ,A,A/\^/\

AI!> \ lL Ic

g)ao)cq)X Oo ( d

1 0High

7Medium

A

Low

1 1 Low 4 Medium 7 High 10Indexof business trength* ,+ * Green egion

Yellow egionnn A Red reoion

GE MATRIXDiagam 7.2

. , Thus, the yellow regions require managerial discretion for strategic planningwith choicesvarying between growth and divestment strategies.The iediegion ii

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182

' ,.i;q._ -r.,;.:.: : _-;i i;__;._:.;,;4r{;

Discourseson StrategicManagementbest suited for turnaround, retrenchment and liquidation strategies. rhe greenregion deserves growth or stable growth as strate ic choice.This choice of two dimensions of GE matrix, according to Kotrer (7994), canmake excellent rating of a business from marketing point"of vieu,. In attractiveproduct field, a business 3Tt yith high streng*, ca""gi"e the best performance.if 1.y one of these two is lacking, the perfoimur-,.u ".u. never be good. If theindustry is attractive but the business ,r.,it iu weak, it cannot do very rt,ell. simi_Iarly, if the business unit is strong but the industry is unattractive then also theperformance of the firm camot be note worthy.

Hofer (7977) criticized GE planning gricl becauseof inadequate representa_tion of new businesses n nen'industries that are going to grow in future. Accord_tng to Cutoff (7975), it may not be possible to assign J"ririt" weights to differentfactors of measurement becausenumerical evaluatiir of factors of business shengthand industry athactiveness may not be feasible. some authors are of the opini"onthat the nine -c911 lanning grid of GE is basically a three-region classification ofbusiness porffolios. rn thisiense, it is not an improvement ove;BCG mahix thoughevaluation process in GE matrix is exhaustive and extensive.7.2.3. Directional policy Matrix (DpM) MethodRoyal Dutch Shell Group (1975)has developed DirectionalpoticyMatrix(DpM) for thepurpose of their porffolio analysis. The two dimensions of this matrix are ndustryProspects nd business urLit's ContpetitiueCapabilitits.Each dimension is measured interms of multiple factors ajld classified into three categoriesviz. high, medium ardlow' For industry prospecb, these three categories are termecl as afhactive, averageand unathactive prospects. For business ,rrit', .o*p"titive capabilities the corre-t-p""9*g categoriesare kno*n as shong, average and *,eak.upubilitr"r. Regardingthe choice of two seb of faciors for thesJ two diirensions, *" ,qf", to earlier discus-sion on GE mahix where the concept of weighted rating has'been introduced. Asimilar approach will be used for evaluating the two dinensions of DpM and is

indicateci below. The iist of factors is of cour-seexpandable or modifiable.Evaluation of Industry prospectsFactors Weights Ratings WeightedratingsAvailability of factor inputs w, R,

n2R3

w^w-w,w-)w.W,w.w^

1.00

W,R,*rR,w"R"wrR,w-R-J )w.R.o owrR,w^Rd Uw^R^

I w,R,

Factor priceMarket sizeMarket growth rateProfitabilityDegree of compeuucnEntry barriersEase of ExitState of ar tTotal

i?R-5I\

R7l\ ^ dR^

-f'$.t =..,=.,'..ui.:::: r=r:a., :.::!;-:rrr.:1.ry::,:::a.:-Fr*5..:111j,r:-1.:1;31r:11.:''-:i:TT.r:-:T1T:=ri+:

_..i ...r.;;.f*;r.,_',j

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IL

Portfolio Strategy '!83The Index of Industry prospects(IIps) is gwen by the total weightedratingof all the factors nfiuencing ndustry prospect.Thus,III'S = I u,,R,.

Evaluationof business nit,scompetitive apabil i t iesFactors Weights Ratings Weighted ratingsMarket shareMarket sizeBusiness sales growth rateBranci mageProduct qualityAfter sales serviceCost of productionP.roductiontecirnologyCore competenciesTotai

VtV," 3

" e" s1.00

-,]s2scutqe"a\75S

" at 5Vu

trS,trS,v^S^vnS,v-S-v.S.vF,trS,tnSn

I v s .Index of Businessunit's competitive capabilities 0BCC) is given by the totaln'eighted ratings of ai l the factors affecting competitive capabilTties.Thus,I B C C = I t , S , . tIf ratings for each factor and for each dimension vary bet*,een 1 and 10 witha higher value indicating a better rating, then both ilirs and iBCC will varybetween 1 and 10. In that casea value in the interval [7, 4) will indicate ]ow value[4, \ 'n l indicate an average value and t7,10] wil rnaiiate a high varue. usingthis three-classcategorization and p."r"ntir'rg II-PS long the vertical direction andIBCC along the horizontal direction *" .ur",d".velop tte DpM as shown below.

1 0 Double rquit Tryharder Leadel

Phasedwithdrawal Custodial Growth

Disinvesl Phasedwithdrawal Cashgenerationi Weak 4 Average7 Strong 10

Business nits ompetitiveapabilitiesDIRECTIONALOLICYMATRIXDiagram7.3

0_

f,

Attractive

Average

Unattractive

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1 8 4 Discourseson StrategicManagementIn the diagram 7.3, nine cells indicate different strategic zones.Each zone is

having its prefJrred strategy as indicated in the cells. Let us briefly explain thesestrategies.

Leader: When industry is attractive and competitive capabilities of the firmare high, the concerned business unit performs extremely n'ell and is expected toIead tie industry. This leadership may be in terms of technology or productqualitl . It may aiso be in terms of cost of production. Absolute priority should beassigned to such units for maintaining the industry leadership. In case he indus-try frospect is average but bwiness unit is cornpetitively very strong, managementmay trywith leadershiP strategY.

Growth: Business unit falling in this zone are having strong competitivecapabilities with average industry plospects. Growth strategy is most suited in thjszone to gain future leadership and to increase he prospect of the business sectolalso.ThJgrowth may be achieved in terms of salesand operation for t'hich plantcapacity iJ to Ue simultaneously increased.There may

be product development orp-."r, development to suppoit product differentiation or cost eadership or both'

Try harder: ln'this zone business unit should try to increase competitivecapabilites to make the best out of the athactive market. Allocation of resourcesshtuld be liberal and concentration of efforts should be high. Otherwise, a busi-ness unit belonging to this zone may become a cash trap for the company'

Double or quit: when industry prospect is quite high but the business unitis weak there may be two courses of action. ln case the business unit can havebrighter future, the allocation of resourcesshould be increased by manifold so asto ;ouble the competitive capabilities at the earliest. If the management does_notfind much scope with the present busjness, it should immediately quit the productfield to searctlfor a betteialternative. This zone is comparable with the'questionmark' zone of the BCG matrix.Cash generation: From the zone of unathactive induslry prospect but strongcompetitive capability the firm can earn high profit and can generate cash fo1inveitment in other aieas. Business units falling in this zone are comparable'n'ithcash cows of the BCG matrix.

Custodial: In this zone of average industry prospects and average competi-tive capabilities the best course of action is to bear with the business unit and waitfor an emerging trend. No drastic decision should be taken for such units becausea unit belonging to this region has the chance of moving into any zone.

Phased withdrawal: \Ahen the industry Prospectsare avelage and competi-tive capabilities of the business unit are low, the best course of action is to retreatfrom the product field in a phased manner and invest the generated

resources in*or" p.oiituble industriur. Si*ilut should be the coulse of action when the indus-try is unathactive and the business capabilities are average'

Disinvest: This zone, comparable with dogs of the BCG matrix, Ieplesentsbusiness units r,r'ith weak competitive capabilities and unattractivr industry Fros-pects. Most of the units belonging to this cell ale loss-maki. - 'irtjtres having

ii:

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Portfolio Strategy

of !!9"gorypa1y.

1 8 5uncertain future. An early divestment can be a better alternative than an inevitablemoyement towards bankruptcy.

tg'.2,4. Hofer's l\{odelHofer criticized both BCG matrix method and GE matrix method on manv counts.Hisbasic ritiafmjtpliesgqgailyo DPMmetiroa. t ui"*edigl-gfee,p-"t",I]gj,qf(1e74F;oposea-*tnoa _or-ary\prnggejteps-q-{trollqr$Fllqgl*m"Sq_ryeSri{ys p-o5ttioxT,f*th,9-business nd t}re fi{U.q.$l__eyoh1!"onhe preferred the termproduct/market evolution). He corsidered three stgtgsof c_o*qrpetitiveosifion ofthe businessnamely.streng: "y.Sggglndjyilk He also ia_"r,ti{i"!_ff"::9g-"jjl*_{tthy evolution. Accordingly, he developed a m4!r8 q[_fif*tgeSce_Ilsld prS.posed to depict eachportrplip in tlrg fqfm pf.e cqgf_qrypresenting tteS-ize oj_theg_o*qc,94g$*!1rdu9try.he pie iy*q4ge,s*ry_ilbqtg S:rcle ndicate the parke!.qh-4;es

+I.FboiU)=ro

Development

GroMh

Shakeout

Maturity

Decline

Weak AverageCompetitiveposition ------------|

Strong

::HOFER'SMODEL

Diagram 7.4Strategic Choice According to Competitive Position and Industry Maturity

CompetitivePosition Development Industry evolutionGrowth Maturitv Decline

iir:t;:i:..]11rl::ir":1la::;.::-1a.1-:I'r..'.-r?=::'::17i'-::---r.i:--!-:!.-rj':--::'.r::--:i:-r:r.1-sl

Shong Attempt to imp- Improve position; Hold position Hold positionrove position; all- push for share or harvestout push for shareContd...

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1 8 6 Discou seson Strategic ManagementCompetitive

Position DevelopmentIndustryevolution

Growth Maturity DeclineAverage Selective or all- Selective pushout push for share for share

Weak Up or ou t Turnaroundorquit

Find niche and Harvestattempt toprotect

Turnaround or QuiiphasedwithdrawalWhiie Hofer did not spell out the choice of factor for evaluation of thecompetit ive posirion an d thelnciustiy evolution, the first one_canbe_rneasured

{opg the-]ingq-f_GE-ntatrix and__D..1,_matrixnd the second one can be meas,uredin terms sales volume, sa,tgg rowth rate and the age of the industry. The work ofde l,Quy'v9r-(1977)ncludes lglglFFtive procedure for identifying cycle.s! indus-try evolution. Regarding the choice of porffolio strategy we refer to the work o!.Patel and Younger (7978) n'ho, hon'ever, did not corsider the shake out stae.'7.3. PROBLEMS WITH PORTFOLIO APPROACH; Though portfolio matrices provide with analytical tools in the hands of corporateplanners for best mlr of product/business, yet the management has to face quitea few problems while taking decisions based on pordolio approach. practicalproblems are more acute for hansnationai companies. For exaSnple,consider thetask of determining market share and market growth rate for a business spreadover two or more countries. Based on the concept of relative market share if weassign a very high score to a firm that focus different major players in differentgeograpl-ricalareas, the entire analysis will go wrong. similarly, there may bevariation among performances in different areas and an overall measure may notbe depicting any of the situations. Formulation of strategy based on theoreticalmeasures may fail in each market. To be more specific, the same business of a firmmay have star position in one country and dog position in another and the overallposition may be that of a question mark.

Another problem is related to estimation of sales growth rate. This measuresuffers from periodic effects of a business. As a result, it is difficult to comparegrowth rate of one business with the growth rate of another business if they donot have the same periodic variation. Thus, oversimplified measures may lead towrong strategic decision from misleading information. It is difficult to adjust theperiodic effect because business cycles are not very clearly identifiabte, unlessobserved over a very long time span.The portfolio analysis compares individual business units in isolation. Abusiness unit in the red light zone may have synergic affect with a unit falling inthe green light zone. Divestment of the weaker unit may weaken the position ofthe star unit, affecting badly the overall performance of th" fit*. Alternatively,porffolios may be examined in groups. But no theoretical approach is available in

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PortfolioStrategy 187the literature that can suggest the procedure of grouping and translation of ananalysis into a strategic action. Some times, a businessunit may be classified asa dog due to negative synergic effect of another unit on the same.The effecls of inflationary factors have also been ignored in the porffolioapproach. We all know that inflationary factors can badly affect the cash flow andprofit posilions of any business unit. Mostly, inllationary effects may vary frombusiness to business. Thus, the overail cash flow and profit position of differentbusinessesn'ill carry different effects of the inflationary forces. In case profits ofdifferent unit are compared through a common yardstick, there will be significantdistortion in structurilg of pordolios on the porffolio matrix. Strategic decisionswill invariably be wrong if inflationary effects are not correctly adjusted.

Administrative probiems may also creep in while implementing strategicdecisions based on portfolio analysis. For example, BCG matrix may suggestmilking of a business unit belonging to cashcow region and diversion of generatedcash into another business unit belonging to question mark region. But, themanagers of ihe cas h cow unit may not l ike this concept of supporting an'ildcat business ( i.e. question mark business). They may, instead, l ike tobounce back into the star position to retain the past status. Further, th ere ma ybe strategic dilemma. A custodial firm may be fit for growth strateg-y o havea major break through. It may be suitable for stable growth strategy to wait forthe future direction. To some others it may be an appropriate case or sequentialdivestment. Extreme administrative problem may arise if strategic businessunits (SBUs) are not ciearly demarkable. Two interconnected business units,not properly demarcateci,may create problem fo r strategic impleq-rentatio n, ftheir business strategies ar e polar opposite.7.4" SEARCH FOR NEW PORTFOLIOSPorffolio matrices are more popular for analysis of existing porffolios. Quite oftena planner has to search for new porffolios. For a new porffolio, standard methodof evaluation may not be applicable.For example, market share of a new porffoliowill be zero, which may distort the overall measure of business strength orcompetitive capabiiities. It may also be kept in mind that a portfolio does notnecessarily mean a product. It may be a market too. Even if the firm wants toremain busy with the existing offers, it may like to grow through new marketsalong rvith the existing ones. For such situations, porffolio matrices are to besuitably modified to accommodate the special nature of the problem. Two non-quantitative approaches are also available in the literature for searching newproduct portfolios or new market porffolios. One is gap-analysis and the other iscascadeapproach. Let us brieflv explain these two approaches, which may be ofuse eyyt'of a single SBU firm.-,dEup Analysis. In gap analysis the task of the plarurer is to ej{am,ure_:uhelherthe existing buSueqs-lyiil !g eb-l-q._t.ochieve-the.p;imary__-objectiv_e_o*fhe film. Incase the answer is negativr, one qe! Ig4qg_n3bly--eSn-c_lqde_th_ethere exists al$irg gap, which=iiEi_tp_!*trdO4_b*nruking u-es-qf tiifuq,tir;-e-_bu;{u.ps_s

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188 Discourseson StrategicManagementoptions.ln case the answer ir g!Ir:13gsr in nature the planner can either rap--e-!helevel of objective or remain satisfied with the current objeetive-t.{ggy ll{ch.Ttrus, tTr-e tp dnaly_silhglgs in determ_inqg ftg_Tilig_lggg$.e--91-ae-q9& -

Existence of a gap betu'een the iikely !gg14-e_ss-achieyemertnd the firm'sobjective initiates_tire-p1ere;ggf 5_e-v1ery!1ghe existing p-ro-ductmarket strat-eg1-. irip.o.esi.u"'g"tt"tJ" uti"i"itlu6 strategic iJeil lJecuuse the majorfactors creating the ga p can be identified during this stage. Of course, ad-equate information should be made avaiiable to the reviewers for wide scan-ning of the causes of gap. What is iep,qrlA_lf! ip_tle ilitlal g_"ql111lig-l_ofh.ealtglltly_e {iatggiqs so that only the moglpqteatal ideas can b^e-ex,a.m,rt_e-d_!ndetailp.lq-1 making the final qhgl.".,

CascadeApproach. The AdaphaeSearch pproachof Ansoff (1968)also knownas Cascarle pproacitmakes use of a muitistage procedure for successiveiy refiningthe strategic alternatives and arriving at the final choice. The first stage relates tochoice of geographical areas of operation. Once a decision is taken on the geo-graphic area (for a multinational company this means choice of countries ofdestination) of operation, the next decision to be taken is the route of entry. It isthe second stage of cascacie lanning that finalizes the mode and media of entry.In the third stage, choice of the product fieid and the production technology aremade. Thus, the first three stagesdefine the concept of business and the jurisdic-tion of business.

Nou', depending on ihe environmental factors,one mav generate arge numberof aiternative strategies. In the fourth stage some criteria are fixecl up for initialscreening of the alternatives to finally pick up a limited numbe'r of most potentialporffolios. Cost is definitely an important criterion for this initial screening. In thefifth stage feasibility testing is being carried out by comparing resource require-ments n'ith resource availabilify. Sixth stage s the stage of synergisfic test. In casean alternative does not have positive synergy with the existing business, it maybe dropped at this stage of decision-n"raking. n the seventh stage, i.e., the finalstage, oniv a handful of strategic alternatives are matched against the objective ofthe firm anci the most suitable one is picked up.

QUESTIONS / DISCUSSIONS7 .2 .3 .4 .5 .6 .7.8 .

What do you mean by portfolio strategy?Explain the needs or portfolio strategy.What is a portfolio matrix? Discuss.Describehorv BCG matrix can be used for porffolio analysis.What are the merits and demeritsof BCG matrix?Explain the nine-cellplanning grid of GE. What are its limitations?Describehe cell wisestrategyof a DPM model.What do you mean by industry evolution? Alhichmodel incorporates hisconcept or portfolio analysisand how?