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Chapter 9 Generating Alternative Strategies through the Use of Portfolio Models

Chapter 9 Generating Alternative Strategies through the Use of Portfolio Models. LEARNING OBJECTIVES. After reading this chapter, you should be able to: Construct a BCG model to assist in generating strategies relevant to the situation Construct the General Electric Model

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Chapter 9 Generating Alternative Strategies through the Use of Portfolio Models

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  1. Chapter 9Generating Alternative Strategies through the Use of Portfolio Models

  2. LEARNING OBJECTIVES • After reading this chapter, you should be able to: • Construct a BCG model to assist in generating strategies relevant to the situation • Construct the General Electric Model • Construct the Shell model • Construct the the Internal–External matrix • Identify the characteristics needed for a portfolio model • Differentiate amongst various portfolio models

  3. MODELS COVERED IN THIS CHAPTER • BCG • General Electric • Shell • The Internal–External Matrix

  4. THE BOSTON CONSULTING GROUP MODEL • Also known as BCG Growth–Share matrix because of the two dimensions selected to be used in its analysis • Select the most important external and internal factor • External: industry attractiveness; growth rate of the said industry • Internal: competitive advantage; relative market share was preferred

  5. THE BCG GROWTH–SHARE MATRIX • For T/S: Insert Figure 9.1 of page 137 (PDF) file here • The x axis accommodates the relative market share matrix • is divided into two sections high and low • the y axis represents the industry growth rate • high at the top half and a low at the bottom half • The resulting figure is a 2 × 2 matrix and the four quadrants

  6. THE BCG GROWTH–SHARE MATRIX • The mid point of the y-axis: the growth rate dimension • To differentiate those that are experiencing a high or low growth rate need to be rationally derived • A riskless rate would be: • at the government bond rate • bank’s basic lending rate • bank’s fixed deposit rate or • even the overall country’s economic growth rate (opportunity costs) • Malaysia’s economic growth rate (5–6%) would be a better indicator to classify whether an industry’s growth rate is the same or better than that of the country’s (to be categorized as high)

  7. THE BCG GROWTH-SHARE MATRIX The mid point of the x- axis The mid point of x- axis: the relative market share dimension Relative market share = your company’s market share largest competitor’s market share OR = your company’s annual sales largest competitor’s annual sales Mid point ranges from 0.8 – 1.2

  8. THE BCG GROWTH–SHARE MATRIX • The four quadrants position: • The Question Mark: low relative market share and high growth rate • The Star: high relative market share and a high growth rate • The Cash Cow: low growth rate but a high relative market share • The Dog: low in both relative market share and growth rate

  9. THE BCG GROWTH–SHARE MATRIX (cont.) • The four quadrant strategies • Question Mark: Need to increase the market share and therefore do aggressive marketing, sales effort, promotion, expansion, and even product development, so as to move the portfolio towards the left of the chart • Star: Maintain the high market share by expansion, product development, add value to the products, continue marketing efforts, to meet the high growth rate • Cash Cow: Sustain the market share, product development, concentric diversification, integration to cut costs, promotion for loyalty purposes • Dog: Conglomerate diversification to get out of the industry, divest, selective liquidation and sell-off and liquidation

  10. THE BCG GROWTH–SHARE MATRIX (cont.)

  11. GENERAL ELECTRIC MODEL • Characteristics of GE Model • McKinsey and Company analysed GE’s portfolio • Developed a nine-cell matrix • Later known as the GE /McKinsey matrix • Used two dimensions: • “Industry Attractiveness” • “Business Unit Strength” • It proposes 3 × 3 matrix cells with an additional “medium” category inserted between the “high” and “low” of the two dimensions. The GE matrix therefore has nine cells

  12. GENERAL ELECTRIC MODEL (cont.) The GE Model

  13. GENERAL ELECTRIC MODEL (cont.) • The Y-Axis; Industry Attractiveness (IA) • IA is at the vertical axis of the matrix • is determined by factors as in SPACE’s IA or SWOT’s EFE as shown in Table 7.1 • Weighted score of the IA as in SPACE can be used but for this model it needs to be done for each of the portfolios • Factors related to: • Market and sales • The demand trends and volume • Competitor’s strengths • Their competitiveness • Other environmental factors related to the portfolios (Table 9.2)

  14. GENERAL ELECTRIC MODEL (cont.) Illustration of IA through a Table (The columns a, b, and c denote weights, capability and weighted capability for a particular product, respectively)

  15. GENERAL ELECTRIC MODEL (cont.) • The IA components • Other possible factors that could also be incorporated into the analysis if they are of importance are: • Market growth rate • Industry profitability • Market size • Demand variability • Global opportunities • Industry rivalry • Macro-environmental factors (pest), etc.

  16. GENERAL ELECTRIC MODEL (cont.) • The Business Strengths • Business Unit Strength the x-axis • Factors that can be used to determine business unit strength include: • Market share • Distribution channel access • Brand equity • Production capacity • Growth in market share • Relative profit margins • Production efficiency

  17. GENERAL ELECTRIC MODEL (cont.) Illustration of BS through a Table

  18. GENERAL ELECTRIC MODEL (cont.) Drawing the chart For Project Manager: same Figure has been used in Slide No 12 also, author need to be consulted on this whether he really wants same fig in slides 12&19 both the places?

  19. GENERAL ELECTRIC MODEL (cont.) • Interpreting the position in the chart • At north-west square denotes high in IA and BS. This is similar to the Star as in the BCG model • A portfolio in the south-eastern matrix will be regarded as a Dog situation • A Cash Cow situation will be that at the south-west corner • Question Mark situation will be at the north-eastern corner

  20. SHELL DIRECTIONAL POLICY MATRIX The Chart: also a 3X3 matrix The strategic choice will not be far from the choices made available as in the BCG model.

  21. THE INTERNAL–EXTERNAL MATRIX IE Matrix the chart

  22. THE IE MATRIX • The dimensions • Dimensions used are the internal and external weighted scores of the various portfolios to be analysed • Thus, if five portfolios are to be analysed, then for each of them, a SWOT analysis need to be performed on them separately • At the end of the analysis the respective portfolios would have the two weighted scores of the portfolios as in Figure 9.4(see on page 143 of the book)

  23. THE IE MATRIX (cont.) • Illustration through analysis • For a motorcycle manufacturer, with five different models • Model D being in a weak and medium quadrant would normally be considered for a Dog quadrant treatment • Models B and E would be an expansion strategy • If all the five portfolios are independent of one another then such strategies will be a rationale one

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