PORTFOLIO ANALYSIS

ModelsToolsPrescriptions Strategies

C. M. Clarke-Hill

BUILDING SHAREHOLDER VALUE

How attractive is group of businesses firm is in?

How good is overall performance outlook over next five years?

If previous answers are not satisfactory, what should firm do to:- Get out of some businesses

- Strengthen position of remaining ones

- Acquire new businesses to boost prospects for better performance

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 conceptThe Experience Curve ConceptThe PIMS Study

PORTFOLIO ANALYSISPortfolio 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

STARSTAR QUESTION MARKQUESTION MARK

CASH COWCASH COW DOGDOG

MARKET

GROWTH

RELATIVE MARKET SHARE

LOW

HIGH

HIGH LOW

?

BCG GROWTH SHARE MATRIX

TWO VARIABLES USED

Market Growth Rate (Vertical)

Relative Market Share (Horizontal)

MARKET GROWTH RATE

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

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

RELATIVE MARKET SHARECalculated by dividing firm’s market

share by market share of firms largest rival

Typical dividing line between “high” and “low” relative market share businesses placed at about .75 or .8

Businesses on left are share leadersBusinesses on right are in below-

average relative market share positionsEach business is a “circle” with size

scaled to portion of total corporate revenues generated

ASSUMPTIONS UNDER WHICH THE MATRIX IS BASED

Cash Generated is proportional toRelative 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 STRATEGY PRESCRIPTIONS

Within the portfolio context there are FOUR basic strategies that can be pursued:

BUILD - a strategy of building market shareHOLD - a strategy of holding share relative to competitors and to market growth rateHARVEST - a cash out strategy with little or no new investmentQUIT - a strategy of exit or withdrawal

STARSTAR QUESTION MARKQUESTION MARK

CASH COWCASH COW DOGDOG

MARKET

GROWTH

RELATIVE MARKET SHARELOW

HIGH

HIGH LOW

BCG GROWTH SHARE MATRIX

Strategies: Build Strategies: Build/Harvest Quit

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

C. M. Clarke-Hill

PLC AND AN EXTENDED FORM OF GROWTH-SHARE MATRIX

Introduction Stage

Growth Stage

Maturity

Decline

Infants - negative cash flow

Stars Question Marks Cash Cows DogsWar HorsesDodos

Life Cycle Stage Extended Growth Share Types

STARSTAR QUESTION MARKQUESTION MARK

CASH COWCASH COW DOGDOG

MARKET

GROWTH

RELATIVE MARKET SHARE

LOW

HIGH

HIGH LOW

BCG CASH FLOW POSITION CHART

Modest positive or negative cash flow

Large negative cashflow

Large positive cashflow

Modest positive or negative cash flow

Optimum Cash Flow

STARSTAR QUESTION MARKQUESTION MARK

CASH COWCASH COW DOGDOG

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 ‘unbalanced’ 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

STARSTAR QUESTION MARKQUESTION MARK

CASH COWCASH COW DOGDOG

MMAARRKKEETT

GGRROOWWTTHH

RELATIVE MARKET SHARE

LOW

HIGH

HIGH LOW

BCG BALANCED GROWTH SHARE MATRIX

1

2 3

5

6

78

9

10

4

WEAKNESSES OF GROWTH- SHARE

MATRIXFour-cell matrix hides fact that many

businesses are in “average” growth rate markets and have “average” relative market share positions

Misleading simplification to categorise businesses into just four types

Matrix doesn’t identify which businesses offer best investment opportunities

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

WEAKNESSES OF GROWTH- SHARE

MATRIXAssessment of relative long-term

attractiveness of business units requires more than just market growth and relative market share

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

DIRECTIONAL POLICY MATRIX

This model is an alternativeto the BCG

Matrix, and is based on different criteria.

Market attractivenessBusiness 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.

GENERAL ELECTRIC’S MARKET ATTRACTIVENESS - BUSINESS

STRENGTH MATRIXStrong Average Weak

High

Medium

Low

MARKET ATTRACTIVENESS

Market SizeGrowth RateProfit MarginCompetition

IntensitySeasonalityCyclicality

Social ImpactRegulationEnvironmentOpportunities

& ThreatsBarriers to

Exit/EntryTechnology &

Capital

BUSINESS STRENGTHMarket 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.

RATING INDUSTRY ATTRACTIVENESS

Select factors to compare long term attractiveness of each market

Assign weights to each attractiveness factor

Rate each market on each attractiveness factor, using scale of 1 to 10

Calculate weighted ratings; sum to get to get an overall market attractiveness rating for each market

RATING BUSINESS POSITION/COMPETITIVE

STRENGTHSelect factors to compare

competitive strength of each business unit

Assign weight to each competitive strength factor

Rate each business on each factor using scale of 1 to 10

Calculate weighted ratings; sum to get an overall business unit strength rating for each business.

STRATEGY IMPLICATIONS OF ATTRACTIVENESS/STRENGTH

MATRIX

Businesses in three cells at upper left have top investment priority. General strategic prescription is “grow and build”

Business in three diagonal cells given medium investment priority

Businesses in lower right of matrix are strong candidates for harvesting or divestment. May be candidates for “overhaul and reposition strategy”.

GENERAL ELECTRIC’S MARKET ATTRACTIVENESS - BUSINESS

STRENGTH MATRIXStrong Average Weak

High

Medium

Low

Grow and Build

Medium

Harvest/Divest

Overhaul and Reposition

ADVANTAGES OF ATTRACTIVENESS/STRENGTH

MATRIX

Allows for intermediate rankings between high & low and strong & weak

Incorporates wider variety of strategically relevant variables

Stresses channelling of corporate resources to businesses with greatest potential for competitive advantage and superior performance.

WEAKNESSES OF ATTRACTIVENESS/STRENGTH

MATRIXNo real guidance on specifics of

business strategyMost to be concluded is general

strategic postureLeaves issues of strategic

coordination across businesses wide open, as well as issue of specific competitive approaches and action to take at business unit level

Tends to obscure businesses about to emerge as winners.

PORTFOLIO MODELS IN USE

Care when using such modelsModels help - but -

remember the assumptionsDifferent models can offer

differing solutionsUse your judgementThink of the ‘other’ factors

DIFFERENT MODELS - DIFFERENT RESULTS

Results of a study by Wind, Mahajan and Swire

(1983) concluded that when using standardised

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, ContThe 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?