Business Portfolio

Analysis

Outline

Introduction
BCG (Boston Consulting
Group) Matrix
PIMS (Profit Impact of Market
Strategy)
GE(General Electric)/McKinsey
Multi-Factor Matrix

Introduction
The creation of SBUs enables the setting

of SBUs 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 models

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 (contd)

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 (contd)

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)

Investmentheavy initial capacity

expenditures and high R&D costs
Earningsnegative to low
Cash-flownegative (net cash user)
Strategy Implications
If possible to dominate segment, go
after share. If not, redefine the
business or withdraw

Stars

Investmentcontinue to invest for

capacity expansion
EarningsLow to high earnings
Cash-flowNegative (net cash user)
Strategy Implications

Continue to increase market shareeven

at the expense of short-term earnings

Cows

InvestmentCapacity maintenance
EarningsHigh
Cash-flowPositive (net cash
contributor)
Strategy Implications

Maintain market share and cost leadership

until further investment becomes marginal

Dogs

Investment
Gradually reduce capacity
EarningsHigh 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 po

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

(contd)
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 (contd)

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
Most factors that boost ROI also contribute to
value

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
Malaysias Prime Minister's Quality Award
(Private Sector)
Philippines Quality Award
Singapore Quality Award
Sri Lankas National Quality Award
Thailand Quality Award

Examples of Application of some of the

Principles of PIMS in ASPAC (contd)

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 Holdings 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 cross-section
analysis
Sample biased toward larger firms
that are industry leaders

GE(General Electric)/McKinsey
Multi-Factor Matrix

Originally developed by GEs planners

drawing on McKinseys 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 (Contd)

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 firms
position and the market attractiveness

Businesses may have been evaluated with

respect to different criteria
Sensitive to how a product market is
defined