Portfolio Analysis Bcg

Portfolio Analysis And BCG Matrix

The Growth Share Matrix •

It evaluates the strength of a firm from the portfolio of businesses or products the firm has in different stages of PLC, which are required for future growth.

•

It analyses the impact of investing resources in different SBUs on the corporate’s future earnings and cash flow.

SBUs are evaluated from two ways 1.

Industry attractiveness (market growth) And

2.

Competitive strength (relative market share)

The Growth Share Matrix A Matrix is created considering the market growth and relative market share of all the businesses in their respective industries and businesses are placed in that matrix for analysis and evaluation.

Market Growth Rate

The Boston Consulting Group’s Growth-Share Matrix

20%18%16%14%12%10%8%6%4%2%0

10x 4x 2x 1.5x 1x

.5x .4x .3x .2x .1x

Relative Market Share

The Growth Share Matrix •

The market growth rate on the vertical axis is the proxy measure for the industry Attractiveness.

•

The relative market share is proxy for its competitive strength in the industry.

BCG Growth-Share Matrix In BCG approach, the company classifies all its SBUs into 4 types as “star”, “cash cow”, “question mark” and “dog” according to their market growth and relative market share.

The BCG Matrix

Market growth rate

High

Stars

Question marks

Cash cows

Dogs

Low High

Relative market share

Low

Source: Perspectives, No. 66, “The Product Portfolio,” Adapted by permission from The Boston Consulting Group, Inc., 1970.

BCG Matrix Problem Child

Market growth rate

Stars

? $ Cash Cows

Dogs

Relative market share

BCG Matrix Problem Child

Market growth rate

Stars Revenue ++++ Expenses _ _ _ Net +

Revenue + + + ++ Expenses _ Net +++ + Cows Cash

Revenue Expenses _ Net

+ ___ ___

Revenue + + Expenses _ _ _ _ Net ___

Relative market share

Dogs

BCG Market Share/Market Growth Matrix

BCG Matrix 

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



Dogs are businesses that have a very small share of a market that is not expected to grow. Cash cows are businesses that have a large share of a market that is not expected to grow substantially. Question marks are businesses that have only a small share of a quickly growing market. Stars are businesses that have the largest share of a rapidly growing market.

Stars are high-growth, high-share businesses or products. They often need heavy investment to finance their rapid growth. Therefore, they may not be producing a positive cash flow. The business strategy will generally be for growth fueled by externally acquired capital. Eventually, their growth will slow, and they will turn into cash cows.

Cash cows are low-growth, high-share businesses or products. These established and successful SBUs need less investment to keep their market share. They produce a lot of cash to be used for other business units of the company. They are either milked for investment in stars or question marks or harvested if there is little optimism for a stable future.

Question marks sometimes called problem children, are lowshare business units in high-growth markets. They need a lot of cash to keep and increase their share; they can not generate enough cash themselves. Management must decide which question mark it should build into stars and which should phase out.

Dogs are low-growth, low-share businesses and products. They often have poor profitability. Therefore, the business strategy for a dog is most often to divest, but occasionally to hold for possible strategic repositioning as a question mark or cash cow.

Portfolio Strategies BUILD Does the SBU have the potential to be a star? HOLD Can you maintain and preserve market share?

Four Portfolio Strategies

HARVEST . Increase the short-term return without impacting long-run prospects. DIVEST Is it appropriate to dump SBU’s with low-growth potential?

Limitations of the BCG Matrix 1.

Market Growth rate is an inadequate descriptor of overall industry attractiveness.

2.

Relative market share is inadequate as a descriptor of overall competitive strength.

3.

The analysis is highly sensitive to how growth and share are measured.

4.

It provide little guidance on how best to implement the investment strategies.

6.

The model implicitly assumes that business units are independent or one another except for the flow of cash.

How to Identify SBUs? •

It is the basic competitive unit of a company.

•

It has a specific and identifiable group of customers.

•

It has specific and identifiable competitors.

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It can be measured as an independent entity in terms of profit and loss.

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Therefore, it may require a separate marketing strategy.