Business Portfolio Business Portfolio AnalysisAnalysis
Asia-Pacific Marketing Asia-Pacific Marketing FederationFederation
Certified Professional MarketerCertified Professional MarketerCopyrightCopyright
Marketing Institute of SingaporeMarketing Institute of Singapore
OutlineOutline
IntroductionIntroduction BCG (Boston Consulting BCG (Boston Consulting
Group) MatrixGroup) Matrix PIMS (Profit Impact of PIMS (Profit Impact of
Market Strategy)Market Strategy) GE(General GE(General
Electric)/McKinsey Multi-Electric)/McKinsey Multi-Factor MatrixFactor Matrix
IntroductionIntroduction
The creation of SBUs enables the setting The creation of SBUs enables the setting of SBU’s mission and objectives and the of SBU’s mission and objectives and the allocation of resources across SBUs in allocation of resources across SBUs in the organizationthe organization
Senior management need to have a Senior management need to have a framework to evaluate SBUs and to framework to evaluate SBUs and to assign limited resources among them; assign limited resources among them; hence portfolio analysishence portfolio analysis
Many models but only 3 are covered Many models but only 3 are covered here: BCG, PIMS, & GE modelshere: BCG, PIMS, & GE models
BCG (Boston Consulting BCG (Boston Consulting Group) MatrixGroup) Matrix
Provides a framework for senior Provides a framework for senior management in allocating management in allocating resources across business units resources across business units in a diversified firm byin a diversified firm byBalancing cash flows among Balancing cash flows among
business units, andbusiness units, andBalancing stages in the product Balancing stages in the product
life-cycle (PLC)life-cycle (PLC)
BCG Product Portfolio Matrix BCG Product Portfolio Matrix DimensionsDimensions
Relative Market Share (Log Scale)
Product Sales Growth Rate
BCG Matrix (cont’d)BCG Matrix (cont’d)
The horizontal axis is the Relative The horizontal axis is the Relative Market Share shown in a log scaleMarket Share shown in a log scale
Vertical line is Vertical line is usuallyusually set as 1.0 set as 1.0 Relative Market ShareRelative Market Share
An SBU to the left of this line means it An SBU to the left of this line means it is the market leader in the industry or is the market leader in the industry or segment in which it operatessegment in which it operates
Conversely, an SBU to the right of this Conversely, an SBU to the right of this line (1.o RMS) means it is not the line (1.o RMS) means it is not the leaderleader
BCG Matrix (cont’d)BCG Matrix (cont’d)
The vertical axis is the growth rateThe vertical axis is the growth rate 5 levels may be used: product, product 5 levels may be used: product, product
lines, market segment, SBU and business lines, market segment, SBU and business growth rategrowth rate
Horizontal line is Horizontal line is usuallyusually set as 10% Growth set as 10% Growth RateRate
SBUs above the set value (10% line) SBUs above the set value (10% line) represents high growth ratesrepresents high growth rates
Conversely, SBUs below this value depicts Conversely, SBUs below this value depicts slower growth rateslower growth rate
Matrix QuadrantsMatrix Quadrants
High Low
High
Low
Product Sales Growth Rate
Relative Market Share
Key Assumptions of BCG Key Assumptions of BCG MatrixMatrix
Stable cost/price relationshipStable cost/price relationshipNot valid if the firm is pricing on Not valid if the firm is pricing on
projected lower average unit costs in projected lower average unit costs in the futurethe future
Market leader influences the Market leader influences the average costsaverage costs
Profit margin is a function of Profit margin is a function of market sharemarket shareThis ignores profitable nichesThis ignores profitable niches
Strategic Perspectives of Products Strategic Perspectives of Products in Different Quadrantsin Different Quadrants
Four different strategic Four different strategic perspectivesperspectives
InvestmentInvestment
EarningsEarnings
Cash-flow, and Cash-flow, and
Strategy ImplicationsStrategy Implications
Question Marks Question Marks (Problem Children)(Problem Children)
Investment—heavy initial capacity Investment—heavy initial capacity expenditures and high R&D costsexpenditures and high R&D costs
Earnings—negative to lowEarnings—negative to lowCash-flow—negative (net cash Cash-flow—negative (net cash
user)user)Strategy ImplicationsStrategy Implications
If possible to dominate segment, go If possible to dominate segment, go after share. If not, redefine the after share. If not, redefine the business or withdrawbusiness or withdraw
StarsStars
Investment—continue to invest forInvestment—continue to invest for capacity expansioncapacity expansion
Earnings—Low to high earningsEarnings—Low to high earnings
Cash-flow—Negative (net cash user)Cash-flow—Negative (net cash user)
Strategy ImplicationsStrategy ImplicationsContinue to increase market share—Continue to increase market share—
even at the expense of short-term even at the expense of short-term earningsearnings
CowsCows
Investment—Capacity maintenanceInvestment—Capacity maintenance
Earnings—High Earnings—High
Cash-flow—Positive (net cash Cash-flow—Positive (net cash contributor)contributor)
Strategy ImplicationsStrategy ImplicationsMaintain market share and cost leadership Maintain market share and cost leadership
until further investment becomes marginaluntil further investment becomes marginal
DogsDogs InvestmentInvestment
Gradually reduce capacityGradually reduce capacity
Earnings—High to lowEarnings—High to lowCash-flowCash-flow
Positive (net cash contributor) if Positive (net cash contributor) if deliberately reducing capacitydeliberately reducing capacity
Strategy ImplicationsStrategy ImplicationsPlan an orderly withdrawal to Plan an orderly withdrawal to
maximize cash flowmaximize cash flow
Example of a BCG Matrix for a Example of a BCG Matrix for a Fastener Supplier in South East AsiaFastener Supplier in South East Asia
HighHigh LowLow
High High
Low Low
Product Product Sales Sales Growth Growth RateRate
Relative Market ShareRelative Market Share
Anchoring Anchoring SystemsSystems
Powder Powder Actuated Actuated ToolsTools
Cable Tray Cable Tray SystemsSystems
Electric Electric Power Power ToolsTools
Concrete Concrete Lifting Lifting SystemsSystems
Note that the Anchoring System SBU is forecasted to move to new position
BCG MatrixBCG Matrix((Three Paths to Success)Three Paths to Success)
Continuously generate cash cows and use Continuously generate cash cows and use the cash throw-up by the the cash throw-up by the cash cowscash cows to to invest in the question marks that are not invest in the question marks that are not self-sustainingself-sustaining
Stars Stars need a lot of reinvestments and as the need a lot of reinvestments and as the market matures, stars will degenerate into market matures, stars will degenerate into cash cows and the process will be repeated.cash cows and the process will be repeated.
As for As for dogsdogs, segment the markets and nurse , segment the markets and nurse the dogs to health or manage for cashthe dogs to health or manage for cash
Three Paths to Success Three Paths to Success (cont’d)(cont’d)
High Low
High
Low
Market Growth Rate
Relative Market Share
BCG MatrixBCG Matrix((Three Paths to Failure)Three Paths to Failure)
Over invest in cash cows and Over invest in cash cows and under invest in question marksunder invest in question marksTrade further opportunities for Trade further opportunities for
present cash flowpresent cash flow
Under invest in the starsUnder invest in the starsAllow competitors to gain share in a Allow competitors to gain share in a
high growth markethigh growth market
Over milked the cash cowsOver milked the cash cows
Three Paths to Failure (cont’d)Three Paths to Failure (cont’d)
High Low
High
Low
Market Growth Rate
Relative Market Share
PIMS (Profit Impact of PIMS (Profit Impact of Marketing Strategy) ProgramMarketing Strategy) Program
Database of nearly 3,800 SBUs Database of nearly 3,800 SBUs Representing more than 500 firmsRepresenting more than 500 firms
Member firms have been in the Member firms have been in the program from 2 to 12 yearsprogram from 2 to 12 years
The program providesThe program providesPar ROI (Return of Investment)Par ROI (Return of Investment)Prediction of how ROI would change if Prediction of how ROI would change if
policy change is madepolicy change is made
Important Strategic Principles Important Strategic Principles Derived From PIMSDerived From PIMS
In the long run, product quality is the single In the long run, product quality is the single most important factor affecting performancemost important factor affecting performance
Market share and profitability closely Market share and profitability closely correlatedcorrelated
High-investment intensity reduces profitabilityHigh-investment intensity reduces profitability Cash implications of growth rate and relative Cash implications of growth rate and relative
market share are affected by many factorsmarket share are affected by many factors Vertical integration is profitable for some Vertical integration is profitable for some
business onlybusiness only Most factors that boost ROI also contribute to Most factors that boost ROI also contribute to
valuevalue
Examples of Application of some Examples of Application of some of the Principles of PIMS in of the Principles of PIMS in
ASPAC ASPAC
Pursue of product qualityPursue of product qualityAustralian Quality CouncilAustralian Quality CouncilHong Kong Awards for Industry (Quality Hong Kong Awards for Industry (Quality
cat.)cat.) Japan Quality AwardJapan Quality AwardMalaysia’s Prime Minister's Quality Award Malaysia’s Prime Minister's Quality Award
(Private Sector) (Private Sector) Philippines Quality AwardPhilippines Quality AwardSingapore Quality AwardSingapore Quality AwardSri Lanka’s National Quality AwardSri Lanka’s National Quality AwardThailand Quality AwardThailand Quality Award
Examples of Application of some of Examples of Application of some of the Principles of PIMS in ASPAC the Principles of PIMS in ASPAC
(cont’d)(cont’d)Pursue of market sharePursue of market share
Nova Group and Europa Holdings of Singapore Nova Group and Europa Holdings of Singapore expanding their pubs and restaurants business expanding their pubs and restaurants business (Source: The Straits Times; Dec 10, 1992; pp.2)(Source: The Straits Times; Dec 10, 1992; pp.2)
High investment reduces profitabilityHigh investment reduces profitability The acquisition of new machinery caused a The acquisition of new machinery caused a
reduction in SM Summit Holdings gross margin reduction in SM Summit Holdings gross margin SM SM (Source: SM Summit Holding’s Annual Report (Source: SM Summit Holding’s Annual Report 2000)2000)
Limitations of PIMSLimitations of PIMS
Key market-share variable is Key market-share variable is sensitive to product-market sensitive to product-market definitiondefinition
Other variables depend on Other variables depend on subjective judgementssubjective judgements
Inherent limitations of cross-section Inherent limitations of cross-section analysisanalysis
Sample biased toward larger firms Sample biased toward larger firms that are industry leadersthat are industry leaders
GE(General Electric)/McKinsey GE(General Electric)/McKinsey Multi-Factor MatrixMulti-Factor Matrix
Originally developed by GE’s Originally developed by GE’s planners drawing on McKinsey’s planners drawing on McKinsey’s approachesapproaches
Market attractiveness is based on as Market attractiveness is based on as many relevant factors as are many relevant factors as are appropriate in a given contextappropriate in a given context
Business-position assessment also Business-position assessment also made on a many factorsmade on a many factors SBU needs to be rated on each factorSBU needs to be rated on each factor
GE Multifactor Portfolio MatrixGE Multifactor Portfolio MatrixIndustry Attractiveness
Bu
sin
ess
Str
engt
hs
High
High
Medium
Medium
Low
Low
Invest/Grow
Selectivity/earnings
Harvest /Divest
Protect Position
Invest to Build
Build selectively
Build selectively
Selectively manage for earnings
Limited expansion or harvest
Protect & refocus
Divest
Manage for earnings
GE Multifactor Portfolio Matrix (Cont’d)GE Multifactor Portfolio Matrix (Cont’d)
Invest/Grow
Selectivity/earnings
Harvest /Divest
Industry AttractivenessIndustry AttractivenessB
usi
nes
s S
tren
gth
sB
usi
nes
s S
tren
gth
s
HighHigh
HighHigh
MediumMedium
MediumMedium
LowLow
LowLow
Some Limitations of the GE Some Limitations of the GE ModelModel
Subjective measurements across SBUsSubjective measurements across SBUsProcess also highly subjectiveProcess also highly subjective
From the selection and weighting of factors to From the selection and weighting of factors to the subsequent development of both a firm’s the subsequent development of both a firm’s position and the market attractiveness position and the market attractiveness
Businesses may have been evaluated with Businesses may have been evaluated with respect to different criteriarespect to different criteria
Sensitive to how a product market is Sensitive to how a product market is defineddefined