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 MultiFactor Matrix
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
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)
BCG Product Portfolio Matrix Dimensions
Product Sales Growth Rate
Relative Market Share (Log Scale)
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
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
Matrix Quadrants Relative Market Share High Low High Product Sales Growth Rate Low
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
Strategic Perspectives of Products in Different Quadrants Four different strategic perspectives Investment Earnings Cash-flow, and Strategy Implications
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
Stars
Investment—continue to invest for
capacity 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
Cows
Investment—Capacity
maintenance Earnings—High Cash-flow—Positive (net cash contributor) Strategy Implications
Maintain market share and cost
leadership until further investment
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
Example of a BCG Matrix for a Fastener Supplier in South East Asia Relative Market Share High Low High
Anchoring Systems
Product Sales Growth Rate Low
Cable Tray Systems Electric Power Tools
Powder Actuated Tools
Concrete Lifting Systems
Note that the Anchoring System SBU is forecasted to move to new positio
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
Three Paths to Success (cont’d) Relative Market Share High Low High Market Growth Rate Low
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
Three Paths to Failure (cont’d) Relative Market Share High Low High Market Growth Rate Low
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
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
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
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)
Limitations of PIMS
Key market-share variable is
sensitive to product-market definition Other variables depend on subjective judgements Inherent limitations of crosssection analysis Sample biased toward larger firms that are industry leaders
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
GE Multifactor Portfolio Matrix High
Business Strengths
High
Industry Attractiveness Medium Low
Protect Position
Invest to Build
Build selectively
Selectively Limited Build Medium selectively manage for expansion earnings or harvest Low
Protect & Manage for refocus earnings
Divest
Invest/Grow Selectivity /earnings Harvest /Divest
GE Multifactor Portfolio Matrix (Cont’d) High
Industry Attractiveness Medium Low
Business Strengths
High
Medium
Invest/Grow Selectivity /earnings
Low
Harvest /Divest
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