PPT

1. 3.2. Portfolio Analysis

2. A business portfolio
• A business portfolio : is the collection of Strategic Business
Units that make up a corporation..
• Portfolio matrix models can be useful in re-examining a
company's present portfolio.
• The purpose is to help a company understand and consider
changes in its portfolio of businesses, and also to think about
allocation of resources among the different business
elements.

3. Business portfolio
• The two primary models (planning tools) are the BCG Growth-
Share Matrix and the GE Business Screen.
• These models consider and display on a two-dimensional graph
each major SBU in terms of some measure of its industry
attractiveness and its relative competitive strength
 The BCG Growth-Share Matrix
• The BCG growth-share matrix, being both simple and easily
quantifiable is often a useful first step in portfolio analysis
• It suggests that the desirability of the market can best be
expressed by the market growth rate, and that the best
summary indication of a firm’s strength in a market is its relative
market share.

4. Business portfolio
• dimensions:
 Industry growth rate
 Relative market share position of the
businesses
• SBUs plotted as circles with area proportional
to their contribution to overall corporate sales

5. BCG Matrix
Dogs
Cash Cows
Question Marks
Stars
Relative Market Share Position
High
1.0
Medium
.50
Low
0.0
Industry
Sales
Growth
Rate
High
+20
Low
-20
Medium
10

6. Business portfolio
The Growth Dimensions:
Of all the characteristics of a market, why select growth as the single
indicator of its desirability? The reasons include the following:
• Growth is perhaps the best measure of the product life cycle, a key
strategic consideration.
• Market share is assumed to be more easily gained in a growth
context when new users with no developed loyalties are attracted
to the product class.
• Furthermore, competitors may react less aggressively to the loss
of new customers than to the loss of their base of existing
customers.
• Share gain is important, in part, because of its link to the
experience curve.

7. Business portfolio
The Growth Dimensions:
• A market position in a growth market will be worth more in the
future as the market grows, if we assume the position can be
retained. It is normally easier to retain market share than to
gain it.
• In a growth market, demand often exceeds supply; excess
demand will support premium prices and profit levels.
• By aggressively entering in to a growth market and establishing
a sustainable competitive advantage, a firm can discourage
competitors from entering the market

8.  The Market-Share Dimension
Relative market share is selected as the single indicator of a firm’s
position for several reasons:
• The largest-share firm will very likely enjoy advantages of size
such as economies of scale, high brand recognition, channel
dominance, and the strongest bargaining position with
customers and suppliers.
• The market leader is the best position to exploit the experience
curve because it will accumulate experience faster than
competitors. The experience curve suggests that cumulative
production experience will result in lower unit costs because of
learning effects, technological improvements in production
/operations, and product redesign.
• Empirical evidence indicates that market share is related to
profitability

9. The matrix and its cast of characters
1. Stars: contains the high-share SBUs operating in high-
growth markets.
• Because they are in growth contexts, the model predicts
that they will have a heavy need for cash to support that
growth.
• they will be both users and providers of large cash flows
2. Cash cows: are high-share SBUs operating in a low-growth
market. Because of their market position, their cash
generation should be high.
• Because the market is mature, the cash investment needs
should be small and these businesses should therefore be a
source of substantial amount of cash that can be channeled
to other areas

10. 3. Dogs:
• because growth is low, expansion of share is assumed to
be very costly
• Dogs are often cash users and possibly even “cash trap”-
--products that perpetuate absorb cash, in part because
of the investment required to maintain position.
4. Problem children: also called question marks or
wildcats
• are assumed to have cash needs because, although they
need to fund growth, they generate little cash because
they are not far down the experience curve

11. Strategy implications
• The general strategy is to take cash from the
cash cows to fund R&D, the source of future
SBUs, and those problem children that have
the potential to gain share to achieve star
status.
• The cash cows should receive a maintenance
investment level, but any tendency to
automatically reinvest the cash they are
generating should be recoded. Stars, on the
other hand, should be of lesser concern.

12. • Given that the stars are adequately financed, a limited
number of the most promising problem children can be
selected for investment to try to improve their shares.
• The other problem children neither should nor receive
investment. They should be held, abandoned, or
molded for whatever cash they can produce.
• The dogs, usually the most prevalent category, present a
challenge, several alternatives are available.
• First, a dog can sometimes become very profitable
through the pursuit of a “focus” segmentation strategy,
on which the business specializes in a small niche where
it can dominate.

13. • In effect, it would then be the star or cash cow
of the redefined market. Second, investment
can be sold or simply liquidated.
• Managers should be wary of “turn-around”
plans for dogs, particularly when there is no
fundamental change in the market or
environment.

14. Assumption and limitations
• The BCG growth-share matrix is usually easy to develop,
because measures on the two dimensions are often
readily available and the baseline conclusions are usually
clear.
• The fact that the model is so simple also means that its
assumptions are both evident and vulnerable in many
contexts.
• The assumption that market share affects cost. The
motivation for using relative share to describe
competitive position is based on the assumption that
market share will affect costs because of economies of
scale and experience curve effects.

15. GE
Business
position
1. Invest/grow
2. Selective
investment
3. Harvest/divest
Market
Attractiveness
Hig
h
Me
diu
m
Low
1 1 2
1 2 3
2 2 3
High
Medium
Low

16. Application
• The industry attractiveness-business position matrix is much richer
than the growth-share matrix. As a result, it is not limited to
“volume” industries, but can be applied in other competitive
settings as well.
• Furthermore, its structure can be adapted more easily to higher-
level investment-allocation decisions such as those across divisions.
• A business-Position and a market-attractiveness rating may both
represent averages of several component businesses.

17. • Thus, the growth-share-matrix logic is unlikely to
apply when a business consists operating on its
own experience curve. Thus, it is rarely helpful in
allocating investment over divisions or groups of
SBUs.
• Furthermore, an experience-curve-based, low-
cost strategy is only of several ways to complete.
Relative market share will not be as likely to be
relevant to differentiate or focus strategies, for
example

18. Evaluating the Ability to compete Evaluating Market Attractiveness
Size, growth Share by segment,
Customer loyalty,
Margins ,
Distribution,
technology
skills,
Patents
Marketing,
Flexibility
Organization
Size, Growth
Customer
Satisfaction Levels,
Competition; quantity, types,
effectiveness,
Commitment
Price levels
Profitability
Technology
Governmental regulations
Sensitivity to economic trends

19. Limitations
• more subjective an ambiguous, especially across business units.
• The selection and weighting of factors and the subsequent
development of both a firm’s position and market attractiveness
are highly subjective processes
• They can be unduly influenced by historical perspectives and
performance and by individual biases and backgrounds.
• The final evaluating are bound to be somewhat unreliable in that
different people will obtain different evaluations.
• Furthermore, different business units will undoubtedly require
consideration of different factors, both in assessing business
positions ad in determining market attractiveness