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
