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Business Portfolio Analysis

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.

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Business Portfolio Analysis

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  1. Business Portfolio Analysis Asia-Pacific Marketing Federation Certified Professional Marketer Copyright Marketing Institute of Singapore

  2. Outline • Introduction • BCG (Boston Consulting Group) Matrix • PIMS (Profit Impact of Market Strategy) • GE(General Electric)/McKinsey Multi-Factor Matrix

  3. 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 models

  4. 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)

  5. Product Sales Growth Rate Relative Market Share (Log Scale) BCG Product Portfolio Matrix Dimensions

  6. 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

  7. 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

  8. Relative Market Share High Low High Product Sales Growth Rate Low Matrix Quadrants

  9. 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

  10. Strategic Perspectives of Products in Different Quadrants Four different strategic perspectives • Investment • Earnings • Cash-flow, and • Strategy Implications

  11. 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

  12. Stars • Investment—continue to invest forcapacity 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

  13. Cows • Investment—Capacity maintenance • Earnings—High • Cash-flow—Positive (net cash contributor) • Strategy Implications • Maintain market share and cost leadership until further investment becomes marginal

  14. 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

  15. Relative Market Share High Low High Product Sales Growth Rate Low Example of a BCG Matrix for a Fastener Supplier in South East Asia 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

  16. 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

  17. Relative Market Share High Low High Market Growth Rate Low Three Paths to Success (cont’d)

  18. 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

  19. Relative Market Share High Low High Market Growth Rate Low Three Paths to Failure (cont’d)

  20. 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

  21. 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

  22. 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

  23. 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)

  24. 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

  25. 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

  26. GE Multifactor Portfolio Matrix Industry Attractiveness High Medium Low Invest to Build Protect Position Build selectively High Selectively manage for earnings Limited expansion or harvest Build selectively Invest/Grow Medium Business Strengths Selectivity /earnings Protect & refocus Manage for earnings Low Harvest /Divest Divest

  27. Industry Attractiveness High Medium Low High Medium Business Strengths Low GE Multifactor Portfolio Matrix (Cont’d) Invest/Grow Selectivity /earnings Harvest /Divest

  28. 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 • Sensitive to how a product market is defined

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