POLITEHNICA University of BucharestFaculty of Engineering in Foreign Languages

Business Administration and Engineering in Industry

Individual Research

Business portfolio analysis

Concept definition and tools

Coordinator: Student:

PhD. Cristian POPESCU UȚĂ Andrei

Bucharest2015

Contents

1. What is Business Portfolio Analysis and how it helps?............................................3

2. Variables and factors taken into account...................................................................4

2.1 Product Life Cycle.................................................................................................4

2.2 Market Growth Rate..............................................................................................4

2.3 Relative Market Share............................................................................................5

2.4 Industry attractiveness...........................................................................................5

2.5 Business Strength...................................................................................................5

2.6 Competitive position..............................................................................................6

3. Methods and models for business portfolio analysis.................................................6

3.1 BCG Matrix (growth-share)...................................................................................6

3.2 GE Matrix (internal/external)................................................................................9

3.3 ADL Matrix.........................................................................................................12

3.4 DPM (Shell) Matrix.............................................................................................14

4. Criticism..................................................................................................................15

BCG Matrix...............................................................................................................15

GE Matrix..................................................................................................................15

ADL Matrix...............................................................................................................16

DPM Matrix...............................................................................................................16

5. Conclusions.............................................................................................................17

6. References...............................................................................................................17

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1. What is Business Portfolio Analysis and how it helps?

For a good period of time, let’s say between the industrial revolution and after the second

World War, most of the existing companies were doing their business on their stabile and

relatively narrow market segment, which was very well defined. During the last decades we have

witnessed a dynamically increasing trend of companies to engage in new activities and to

develop new markets bringing up innovative products. Generally speaking, companies and their

activities are becoming more and more complex.

With the increasing complexity and diversification of companies’ activities of course

came an increase in the difficulty of taking strategic decisions and planning in order to grow the

business, to gain competitive advantage and to become more profitable. Thus being said,

managers’ jobs became more and more difficult.

Business Portfolio Analysis is a systematic way to analyse a large company’s (a

corporation) position through the portfolio of strategic business units (SBUs) that it owns and

manages. From the strategic point of view, it is a tool that covers the gap between strategy

formulation and strategy implementation. The methods used for business portfolio analysis are

also used by smaller companies for analysing the portfolio of products or services.

In order for a company to make strategic plans of development and to set growth

objectives or, on the other side, to decide which of their products are not worth investing and

should become obsolete, they must first know very well the current position of their portfolio in

the product life cycle (PLC) relative to the market (Figure 1) and this can be achieved by doing a

business portfolio analysis process, by applying various tools that will be analysed further in this

document. The main benefits of the portfolio analysis is that it offers a clear view of the

company’s position giving an insight into allocating resources for further development of the

business.

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Figure 1 – The Product Life Cycle (PLC) [1]

2. Variables and factors taken into account

The BCG matrix graphically displays differences among business units or products in

terms of relative market share and market growth rate, into a four cell matrix representing the

four strategic types of products or divisions from the point of view of the dimensions taken into

account. The relative market share gives information about how much money the products

generate, while the market growth rate suggest if and how cash resources should be allocated to

sustain the growth of the products or SBUs.

According to their position in the matrix, products or business units are divided into four

categories:

Dogs are products that have low market share compared to their competitors and

are present on markets that are not or very slowly growing, being in the maturity stage of their

life cycle. Dogs barely generate profits and they also tie up capital that can be used more

profitably in other purposes. From the strategic point of view, dogs are products that are reaching

the end of their life cycle and that should be removed from the portfolio, but that is not always

the case. There are situations when dogs are worth keeping on the long run, because they can

contribute to the image of the company by maintaining a wide range of products, they can attract

synergies with other brands or they can even be repositioned on a niche market for a premium

price.

Question Marks are the products that require the most attention as they have low

market share in a fast growing market. Also called Problem child or Wildcat, they generate low

revenues but have high resource requirements in order to keep up with the market’s growth and

their name suggests the uncertainty that they bring to the managers. They do not always succeed

and even after large investments for sustaining their growth, they fail in their struggle for market

share an eventually become dogs. From the strategic point of view, the resources concerning

question marks should be directed to market penetration, product and marketing development.

Stars represent the organisation’s best long run opportunities for growth and

profitability, as they have high relative market share in industries or markets that are growing.

They are the primary units that should receive the company’s investments in order to maintain

their position on the market, but as the market is growing fast new competition arise that can

threat their position, meaning that investments should be very well planned. Good strategies for

managing stars can be vertical or horizontal integration and further product and marketing

development.

Cash Cows are the most profitable assets of the company as they have high

relative market share in an industry that is hardly growing and has reached its maturity. As their

name suggest, those units should be “milked” of the profits and the investments in them should

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be kept as low as possible. Investments only make sense if they are aimed to support their market

share, or in case of business units if they can bring new products that can become stars and

eventually cash cows.

The divisions or products usually evolve over time following the following cycle pattern:

Dogs become Question Marks, Question Marks become Stars, Stars become Cash Cows and

Cash Cows become Dogs, in a counter-clockwise motion on the matrix. The clockwise motion of

the products in the matrix is less frequent.

Using the BCG Matrix involves some stages which are critical in order to perform an

accurate and meaningful portfolio analysis. At first, it is essential to define the units (SBUs,

brands or products) that will be analysed. Then the market should be thoroughly defined in order

to understand the firm’s portfolio position, otherwise it leads to poor classification. The next step

is to compute the relative market share of the entities involved and the market growth rate. The

last step is plotting the matrix by drawing circles for each brand with a diameter proportional

with the revenue they generate.

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Figure 2 – An example of using the BCG Matrix [2]

The business portfolio analysis is based on a multitude of factors and variables,

depending on the method applied. The factors can be external which the company cannot

influence or control and internal which lay completely in the hands of the company’s

management. Below I will present and described the main variables taken into account when

applying the most common tools for portfolio analysis, which will be presented in the next

chapter.

2.1 Product Life Cycle

The PLC is basically a graph representing the revenues generated by the products during

the time it exists and can be divided into several stages based on the value of the sales, as you

can see in Figure 1.

The product development stage is the incubation stage where no revenues are generated

and the company focuses on the investments prior to the launching of the product on the market.

The introduction stage is characterized by low sales and high marketing investments until

customer become aware of the product, the main goal being to introduce the product on the

market. During the growth stage, more and more customers become aware of the product and the

sales increase with a high rate and the goal is to gain as much market share as possible. The

maturity stage represents the peak of the curve in terms of sales and profits, giving the high

customer awareness and reduced necessity for advertising; the goal here is to maintain the

current market share as much as possible. At some point, inevitably the product will become

obsolete or the customers will change their demands and this is where the decline stage begins

characterized by low revenues until no more profit can be made. [6]

2.2 Market Growth Rate

This represents the rise in the sales or population (market size) on a given period of time

which is usually of one year. The market growth rate can be compared with the sales growth rate

to analyse how a product has been performing compared to its competitors. The market growth

rate is given by the following formula:

Market Growth Rate=Current Market ¿ revious Market ¿¿ Previous Market ¿×100 [%]¿¿

The value can help forecasting how the market will move into its life cycle (which is

similar to the product life cycle) and can give information about how the companies should

direct their strategies, efforts and investments regarding certain products that they offer.

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2.3 Relative Market Share

This variable shows a company’s or a corporate strategic business unit’s (SBU) market

share compared with the one of its main competitor, giving information about the competitive

position of the company or SBU on the market. It is determined by dividing the company’s

market share with the one of the market leader.

Relative Market Share=Compan y ' s Market Share(¿ sales)

Leader Market Share (¿ sal es )

2.4 Industry attractiveness

Industry attractiveness refers to the multitude of external factors that the company can’t

control. When taken into account, the factors are assigned weights appropriate for the industry

that are multiplied with the absolute value of the considered factors resulting in an attractiveness

score. Factors taken into account are: Market Size, Market Growth Rate, Industry profitability,

Market diversity, Pricing, Demand and so on.

2.5 Business Strength

The business strength is computed in a similar way to the Industry attractiveness with the

difference that internal factors which are both controllable and critical to the company or

business unit are taken into account. Examples of factors considered can be: Market share,

Growth rate of the company’s market share, Brand equity, Production capacity and so on.

Industry attractiveness and business strength represent the two axes used to build the GE

(General Electric) matrix (or Internal/External Matrix) which we will discuss in the third

chapter.

2.6 Competitive position

The competitive position of a company or SBU takes into account a series of factors

regarding aspects like supply, production, commercialization and finance in relation with the

competitors, in order to put the company into one of the five categories: dominant (monopoly

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company or strong market dominance), strong (high level of freedom without threats from

competitors), favorable (companies that face opportunities and have potential to grow their

market share), tenable (vulnerable to competitors but are able to survive on the market) and

weak (companies that are not performing well) .

3. Methods and models for business portfolio analysis

There are several models designed to assess the current status of a product or business

based on different factors and most of them are based on displaying the information in a matrix

form to facilitate further strategic comparisons, planning and decisions.

3.1 BCG Matrix (growth-share)

This tool was developed in the mid 1960’s by Bruce D. Henderson of the Boston

Consulting Group (BCG) and is the earliest and simplest model that approaches a company’s or

an SBU’s product portfolio in order to determine how cash is generated and how it should be

spent for further strategic movements. It also gives insight into which products require

investments, which should be divested and which are sources of cash. Depending on the

company size it can be used to analyse business units or brands and individual products.

3.2 GE Matrix (internal/external)

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Figure 3 – The BCG Matrix [2]

This model was developed by the McKinsey & Company consultants in the 1970’s for

General Electric which was managing a big and complex portfolio of unrelated products and was

unsatisfied of their returns on investment. They wanted to have a better view of their products

and strategic business units for better managing their strategic approach. This model was also

developed to overcome the limitations of the BCG model as it classifies a unit based on complex

criteria.

The two dimensions used when plotting the GE Matrix are industry attractiveness on the

vertical axis and business competitive strength on the horizontal one. The industry attractiveness

refers to the critical external factors, while the business strength axis concentrates on the

company’s internal factors. That is why Fred R. David presents this model as the Internal

External (IE) Matrix in his book Strategic Management – Concepts & Cases – 13th Edition.

The three colours of the matrix represent the three strategic approaches that can be

applied according to the unit’s position in the matrix, which are:

Invest/grow – as those units promise the highest returns in the future, companies should

invest in the them; they will certainly require a lot of cash because they are operating in

growing industries or markets and will need to keep or increase their market share; directions

for investments can be production increase, research and development, advertising.

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Figure 4 – The GE McKinsey Matrix [2]

Selectivity/earnings – the units that are positioned on the green cells have a considerably

high level of uncertainty meaning that their growth should be sustained with investments

only with money left over from the units in the blue cells or if there are strong beliefs that

they will become more profitable in the future

Harvest/divest – the units that are operating in unattractive markets or industries and

don’t have enough strength are generally performing poor and unsatisfying; therefore they

should only be invested in if the generated cash exceed the invested one and if they generate

losses they should certainly be divested or liquidated.

In order to plot the GE McKinsey matrix, the two values corresponding to the axes have

to be computed, which are the industry analysis and the business competitive strength and they

are calculated as following:

Industry attractiveness

The first step is to make a list of external factors that define the attractiveness of the

industry of the market considered in relation with the business unit or product range analyzed.

Some of the most common are: market growth rate, market size, market structure, profitability,

price trends, segmentation and others. The next step is to assign weights according to the

importance of each factor, from 0.01 (least important) to 1 (most important) and the sum of all

weights should be equal to 1. After weighing the factors, each one should be assigned a rating

from 1 to 5 (or 1 to 10) where 1 indicates the lowest industry attractiveness and 5 (or 10) the

highest one. For each factor a weighted score should be computed by multiplying the weight

with the rating, and then they should be added to obtain the total industry attractiveness score of

the SBU or product, and this has to be done for each unit analyzed. [6]

Business competitive strength

The total strength score for each business unit or product is computed in the same way as

for the industry attractiveness one, by assigning weights, ratings, multiplying them and them

summing up. The only thing that is different is the range of factors taken into account which are

now internal factors such as market share, relative market share, brand value and others.

An example of computing the industry attractiveness and competitive strength for a range

of four business units of a company can be seen in Figure 5, along with the plot of the GE

McKinsey matrix according to the values calculated in Figure 6.

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When plotting the GE Matrix, two important details should be taken into account: each

circle represents a product or business unit analysed and the size of it must be proportional with

the revenues that it brings to the company; the arrow should indicate the forecasted future

position of the unit.

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Figure 5 – Example of computing values for the two axes of the GE Matrix [2]

Figure 6 – Building the matrix with the data from the tables above [2]

Some of the sources consulted for writing this project also mention that the circle should

be drawn as a pie chart showing the market share of the product or strategic business unit

analysed as you can see on the right.

3.3 ADL Matrix

This tool was developed in the late 1970’s by Arthur D. Little (ADL) consulting

company and as the previous one is a portfolio management technique which has its base in the

Product Life Cycle (PLC) which we defined in Chapter 2.1. The ADL Matrix portrays the

company’s various business units or products on a two dimension matrix divided into 20 cells.

The two axes of the graph represent the two strategic characteristics taken into account

which are the industry maturity (product life cycle) and the competitive position of the business

or product in relation to its industry or market. Basically the matrix projects the business position

on the operating environment. The concept used is that industries as well as humans go through

different stages along their life cycle, with different characteristics, and by correlating them with

the position on the market, we can adopt different strategic orientations in order to maximise the

efficiency of the business unit or product analysed.

The matrix identifies four stages of the industry life cycle, which are: embryonic (the

introduction stage characterised by quick market growth and scarce competition), growth (sales

increase, the market is strengthening), mature (stable industry or market with a lot of

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Figure 7 – The ADL Matrix with different strategic approaches for each cell [4]

competition and well defined customer base), aging (the demand decreases and companies start

to exit that market).

On the competitive dimension, the matrix divides the businesses or products into five

major categories, according to their position on t3he market relative to their competitors. The

five categories are: dominant, strong, favorable, tenable and weak and were described in Chapter

2.6.

In order to design and plot the ADL matrix, at first the company has to be segmented

from a strategic point of view into SBU’s, product ranges or individual products. Then, for each

unit the phase in the industry life cycle should be assessed. Another analyse and assessment

should be carried on for the other dimension of the matrix, the competitive position one, taking

into account factors related to the supply chain, production, marketing and finance.

An example of how a plotted matrix looks like is shown in Figure 8. Notice that circles

representing products or business units have different sizes, according to the size of the industry

or market where they belong. The slices on the circles represent the share of the product or SBU

analysed from that particular market, and based on their position on the matrix, Arthur D. Little

consulting company stated some strategic action plans that can be applied, which are shown in

Figure 7.

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Figure 8 – ADL Matrix plotting example [4]

3.4 DPM (Shell) Matrix

DPM stands for Directional Policy Matrix and this is a tool developed by the Corporate

Planning department of Shell in the late 1970’s (it is also referred to as Shell matrix). This

method displays a business onto a nine cell matrix, projecting it on two dimensions. On the

vertical axis are the business sector or market prospects and on the horizontal one the business is

projected based on its position on that particular market, industry or sector.

The way of quantifying a business position on the DPM Matrix is similar to the one

described in Chapter 3.2 when I presented the GE Matrix. Each factor is assigned a weight based

on its importance and a rating based on its impact on the company. For each factor the two

values are multiplied and then summed up to obtain the total score.

The Leader position is the best one and should be maintained as long as possible. A

product in the Try harder cell is not a market leader but has high potential of growing as the

market is highly attractive, if sustained with investments. The Double or quit cell is for products

that have lost their chances of keeping up with the market, and huge investments are needed to

move up to the left in the matrix; a good approach for businesses in this cell is selling out that

product or division to the competitors. Leader/growth represents products with very strong

position on markets of average attractiveness and should be sustained to keep their share because

they are likely to become cash generators. Growth/custodial cell is in the middle of the matrix

and represents products that have average positions on average markets and should be hold like

that, although the revenues will be also average. Phased withdrawal strategy is for products that

either have an average position on an unattractive market or are very weak on an average market

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Figure 9 – DPM Matrix plotting example (left) and strategic indications (right) [3]

or industry; they probably are generating profits but most likely they will become a waste of

resources so they should be withdrawn. The Divest is for products that represent the worst

scenario for a company: they have weak position on weak markets and are true Dogs on the BCG

Matrix; the only viable strategic option should be to liquidate them. The last category is

represented by the Cash generators which are similar to the Cash cows in the BCG Matrix (see

Chapter 3.1); they are leaders on markets that are not growing anymore so no further investments

in developing their position should be made; they should be kept like this as long as the market

resists in order to benefit from the high returns and profits. [5]

4. Criticism

BCG Matrix

Advantages: As it was one of the first tools available for strategic managers, the BCG

Matrix has been the target of the most critics. Although it has some obvious advantages in

comparison with the other tools, such as its simplicity and ease of understanding which makes

the tool a good base for mapping the company in the market context and gives the managers a

starting point for further strategic analyses and actions, it has some important limitations and

disadvantages.

Disadvantages: This model only takes into account two simple variables to categorize

businesses or products, which is definitely not enough, and it does this only using four cells

which could have been sufficient fifty years ago, but in the context of increasingly complex

markets, this matrix is quite incomplete. Another limitation is that it not provides a framework

for defining the market, leaving this completely in the hands of the ones performing the analysis,

and it also leaves out factors like life cycle stage or the competitive advantage.

GE Matrix

Advantages: This is a more complex and sophisticated tool than the previous one, as it

projects the businesses on a nine cell matrix taking into account more complex factors and how

they help or impact the company, enabling a finer distinction between the units of the portfolio.

Disadvantages: However, this tool has its own limitations. One of them is the fact that it

only concentrates on the present position of the business, ruling out the prospects for future

growth. Secondly, it does not provide a standard list of external and internal factors for

computing the values for the two axes, leaving it in the hands of the analyst which can lead to

subjective and inaccurate results. This means that it requires an external consultant to do the

analysis which can be costly. Another disadvantage is that it ignores the interdependence of the

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SBU’s and the synergies that may exist between the products and the final results depend on the

initial definition of the market.

ADL Matrix

Advantages: One of the main benefits of this tool is that it has a higher degree of

adaptability to every company as it covers all stages of the life cycle and all companies in terms

of their position on the market. It is, like the previous matrix, a more complex and complete tool

than the BCG Matrix, as it uses nine cells and takes way more factors into account when

positioning the products or SBUs on the two axes.

Disadvantages: As for its limitations and disadvantages, it is a similar case as for the GE

Matrix because it doesn’t suggest a standard list of factors and this makes it a target to

subjective, inaccurate or irrelevant results, introducing the necessity for an external consultant

which implies higher costs.

DPM Matrix

Advantages: Although this tool was initially designed for the petroleum industry, it is

widely applicable to any industry or business by adapting the factors taken into account when

building the matrix. It can be considerate a reliable tool as it compares the position of the

business unit or product relative the market’s prospects of development

Disadvantages: The main drawback of this business portfolio analysis model is that it

needs insight to competitors in order to accurately assess the strategic business unit’s or

product’s competitive capabilities. Furthermore, as in the previous cases, the measurement of the

factors influencing the position in the matrix is based on subjective assessment which has the

risk of returning inaccurate and irrelevant results. When Shell introduced this tool, they assigned

equal weights to all the factors taken into account, which could have been useful for their

activities, but can be incorrect when applying this model on other companies and business

sectors.

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5. Conclusions

In today’s context, where everything is developing and evolving with a very high speed,

having the right information at the right time certainly is a powerful weapon, especially in

business. Business portfolio analysis and the matrix models presented in this document are

surely important tools for projecting a company’s position, through its strategic business units, in

the context of the business environment. The matrix models also provide strategic path that can

be followed for the different outcomes of the analysis.

However, as we have seen in the last chapter, all of the four methods presented have their

weaknesses, drawbacks and disadvantages, and one of the most significant is the one that they

cannot provide all the information needed for taking strategic decisions. Managers should

certainly use them, but not exclusively, as they should be combined with other strategic

management tools and information sources, for complete overview of the company in the

business environment and for better and efficient decisions.

6. References

[1] Fred R. David – Strategic Management – Concepts and Cases 13th Edition – Prentice Hall,

2010

[2] Strategic Management Insight http://www.strategicmanagementinsight.com/index.html

[3] The Economist (G. Friend, S. Zehle) – Guide to Business Planning – 2004

[4] European Journal of Business and Management Vol. 4, No. 18, 2012 – Portfolio Analysis

Models: A review

[5] International Journal of Economic Practices and Theories Vol. 2, No. 4, 2012 – DPM Method

– A Performance Analysis Instrument of a Strategic Business Unit

[6] NetMBA - http://www.netmba.com/strategy/

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