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