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
Multi-Factor 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 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 (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 becomes marginal
 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

Anchoring
High Systems Cable Tray
Systems
Product Electric
Sales Power Tools
Growth
Rate
Low Powder
Actuated
Tools Concrete
Lifting
Systems
Note that the Anchoring System SBU is forecasted to move to new position
 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
 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
 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 cross-section
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
Industry Attractiveness
High Medium Low

Protect Invest to Build

High Position Build selectively
Business Strengths

Selectively Limited
Build
Medium selectively manage for expansion Invest/Grow
earnings or harvest
Selectivity
/earnings
Protect & Manage for
Low refocus earnings Harvest
Divest /Divest
GE Multifactor Portfolio Matrix (Cont’d)
Industry Attractiveness
High Medium Low

High
Strengthss
Business Strength

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
 Sensitive to how a product market is defined