PORTFOLIO ANALYSIS

MODELS

TOOLS

PRESCRIPTIONS &

STRATEGIES

PORTFOLIO MODELS

A multidivisional firm has the problem of how to allocate resources and to back winners in their ‘portfolio’.

Certain Portfolio models are linked with: The Product Life Cycle concept The Experience Curve Concept The PIMS Study

PORTFOLIO ANALYSIS

Portfolio Models can be used to provide strategic insights by:»Acting as a diagnostic aid»Providing a conceptual framework»Being a prescriptive guide»Being a planning tool

PORTFOLIO ANALYSIS

THE BOSTON CONSULTANCY GROUP

MATRIX

THE BOSTON CONSULTANCY GROUP

MATRIX

The BCG Matrix is called the Growth Share Matrix because the model combines market growth and relative market share

THE BCG MATRIX

MARKET GROWTH RATEMARKET GROWTH RATE

““High Growth” businesses are in High Growth” businesses are in markets growing faster than markets growing faster than economyeconomy

““Low growth” businesses are in Low growth” businesses are in markets growing slower than markets growing slower than economyeconomy

Assumptions under which the Matrix is based

Cash Generated is proportional to Relative Market ShareCash is needed to keep pace with

market growth rateAdditional cash is needed to increase

market shareGrowth rate eventually slows to allow

cash to be generated

BCG GROWTH SHARE MATRIX

The model is drawn for products or SBUs in the following way:ȣ Sales - is represented by the area of a

circle»Market share is relative to the firm’s

largest competitor»Growth rate of the market is computed

after being corrected for inflation»Draw the circle at the points of

intersection

STAR QUESTION MARK

CASH COW DOG

MARKET

GROWTH

RELATIVE MARKET SHARE

LOW

HIGH

HIGH LOW

?

BCG GROWTH SHARE MATRIX

BCG STRATEGY PRESCRIPTIONS

Within the portfolio context there are FOUR basic strategies that can be pursued:»BUILD - a strategy of building market share»HOLD - a strategy of holding share relative

to competitors and to market growth rate»HARVEST - a cash out strategy with little or

no new investment»QUIT - a strategy of exit or withdrawal

STAR QUESTION MARK

CASH COW DOG

MARKET

GROWTH

RELATIVE MARKET SHARE

LOW

HIGH

HIGH LOW

BCG GROWTH SHARE MATRIX

Strategies: Build Strategies: Build / Harvest Quit

Strategies: Hold / Harvest Strategies: Harvest / Quit Build (?)

PLC and an Extended Form of Growth-Share Matrix

Introduction Stage

Growth Stage

Maturity

Decline

Infants - negative cash flow

Stars Question Marks Cash Cows Dogs War Horses Dodos

Life Cycle Stage Extended Growth Share Types

STAR QUESTION MARK

CASH COW DOG

MARKET

GROWTH

RELATIVE MARKET SHARE

LOW

HIGH

HIGH LOW

BCG Cash Flow Position Chart

Modest positive ornegative cash flow

Large negative cashflow

Large positive cashflow

Modest positive or negative cash flow

Optimum Cash Flow

STAR QUESTION MARK

CASH COW

DOG

MARKET

GROWTH

RELATIVE MARKET SHARE

LOW

HIGH

HIGH LOW

BCG Product Dynamics Portfolio Chart

Disaster Sequence

SuccessSequence

USING THE MATRIX

Check for internal balanceLook for trendsEvaluate the competitionConsider factors not captured by

the displayDevelop possible target portfoliosCheck for financial balance

PORTFOLIO BALANCE ?

THE BALANCED PORTFOLIO IS REGARDED AS DESIRABLE - CAN WE HAVE OTHER ‘UN-BALANCED PORTFOLIOS? TOO MANY STARS ? TOO MANY CASH COWS ? TOO MANY QUESTION MARKS ? TOO MANY DOGS ?

Too Many Stars - (High Growth Oriented Companies)

Problems of cash flowHigh marketing investments in high

growth markets are a pre-requisite to build or hold market share

NPD costs need to be funded & capitalised

Problems of high growth can be problematical - need for high borrowings

Too Many Question Marks

Negative cash flows can be problematic for development - can be undercapitalised

Question marks can become cash trapsHigh development costs must be cappedQuestion marks are costly in management

timeCan question marks be ‘turned around’?

Too Many Cash Cows - (Profit Orientated Company)

Excessive cash inflowsWhere is the future growth to come

from ?High profitability can be used to fund

dividendsHow do you plan for fading cash

cows ?

Too Many Dogs - A Company in Decline

No growthModest cash flowsWhere is the future to beBut DOGS can be profitable in the

short runSlow or fast decline in the business

fortune

Advantages of the Growth-Share Matrix

Easy of Use - 2x2 matrixSimple yet powerful constructsAids strategic thinking - the theory

underpinning the matrix quite straightforward

Psychological issuesPopular and well known in the literatureWidely taught in business schools

WEAKNESSES OF GROWTH- WEAKNESSES OF GROWTH- SHARE MATRIXSHARE MATRIX

Assessment of relative long-term Assessment of relative long-term attractiveness of business units requires more attractiveness of business units requires more than just market growth and relative market than just market growth and relative market shareshare

Connection between relative market share Connection between relative market share and profitability is not as tight as experience and profitability is not as tight as experience curve effect implies. Many firms with small curve effect implies. Many firms with small relative market shares are profitable.relative market shares are profitable.

WEAKNESSES OF GROWTH- WEAKNESSES OF GROWTH- SHARE MATRIXSHARE MATRIX

Four-cell matrix hides fact that many businesses Four-cell matrix hides fact that many businesses are in “average” growth rate markets and have are in “average” growth rate markets and have “average” relative market share positions“average” relative market share positions

Misleading simplification to categorise Misleading simplification to categorise businesses into just four typesbusinesses into just four types

Matrix doesn’t identify which businesses offer Matrix doesn’t identify which businesses offer best investment opportunitiesbest investment opportunities

Being a leader in a slow growth market doesn’t Being a leader in a slow growth market doesn’t guarantee cash cow status.guarantee cash cow status.

STAR QUESTION MARK

CASH COW DOG

MARKET

GROWTH

RELATIVE MARKET SHARE

LOW

HIGH

HIGH LOW

BCG BALANCED GROWTH SHARE MATRIX

1

2 3

5

6

78

9

10

4

DIRECTIONAL POLICY MATRIX

This model is an alternative to the BCG Matrix, and is based on different criteria.

MARKET ATTRACTIVENESS

BUSINESS STRENGTHS

DPM Cont.

The two factors of Market Attractiveness and Business Strengths are COMPOSITE measures of potential opportunities open to the firm and the opportunities that the firm can take by leveraging its internal business

strengths or competencies.

MARKET ATTRACTIVENESS

Market SizeGrowth RateProfit MarginCompetition

IntensitySeasonalityCyclicalicity

Social ImpactRegulationEnvironmentOpportunities

& ThreatsBarriers to

Exit/EntryTechnology &

Capital

BUSINESS STRENGTH

Market ShareCore CompetenciesProfit Margin vs CompetitorsAbility to Match Price/ServiceRelative CostsKnowledgeTechnological AbilityManagement Caliber

CONSTRUCTING ATTRACTIVENESS/ BUSINESS STRENGTH MATRIX

Quantitative measures of market attractiveness and business strength used to plot each business unit’s position in the matrix

Each business unit appears as a circle. Area of the circle is proportional to size of market. Pie slices within circle reflect business’s market share.

DPM PRESCRIPTIVE STRATEGIES

GROWTHCUSTODIALLEADERSHIPTRY HARDERDIVESTMENTPHASED WITHDRAWALDOUBLE OR QUIT

PORTFOLIO MODELS IN USE

CARE WHEN USING SUCH MODELSMODELS HELP - BUT - REMEMBER

THE ASSUMPTIONSDIFFERENT MODELS CAN OFFER

DIFFERING SOLUTIONSUSE YOUR JUDGMENTTHINK OF THE ‘OTHER’ FACTORS

Different models different results

Results of a study by Wind, Mahajan and Swire (1983) concluded that when using standardized portfolio models the classification of any business into a specific portfolio position depends on four factors:

Wind, Mahajan and Swire cont.

The operational definition of the dimension used

The rule used to divide a dimension in high or low categories

The weighting of the variables used in constituting the composite dimensions

The specific portfolio model used

Wind et al cont.

The issue here is that different models can offer different strategic solutions as SBUs can be classified in different positions

There may be unintended benefits - different portfolio models give different positions can cause a debate in the strategic process

Cash Cow or Dog ?

Problems with Portfolio Models

Cash Flow vs ROI - which should a company adopt ?

Prescriptions can lead to errors in strategy

Growth Rate and Share may be too simplistic a measure to use for market assessment

No assessment of competitors’ strategies How does the centre add value?