Bcg
Content
Business Portfolio Analysis
Introduction BCG (Boston Consulting Group) Matrix GE(General Electric)/McKinsey Multi-Factor Matrix Business profile matrix Directional Policy Matrix MACS Model PIMS (Profit Impact of Market Strategy)
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 High Product Sales Growth Rate Low Anchoring Systems Cable Tray Systems Electric Power Tools
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
Portfolio Analysis
GE Tool for Analyzing Opportunities & Ability to Compete
GE Portfolio Analysis
• Classification of SBUs/products into nine cell matrix based on
• Market Attractiveness
– Multiple Indicators
• Business Strength
– Multiple Indicators
COMPANY POSITION/INDUSTRY ATTRACTIVENESS SCREEN
Criteria Criteria
•Size •Growth •Share •Position •Profitability •Margins •Technological Position •Strength/ Weakness •Image •Pollution •People MARKET ATTRACTIVENESS High High
•Size BUSINESS POSITION •Market Growth Prici •Market Diversity •Competitive Structur Medium Low •Industry Profitability •Technical Role •Social •Environment •Legal •Human
Steps In Developing GE Matrix
1. Select Factors & Indicators. 2. Assign each indicator a weight (total = 1) based on its importance. 3. Rate the industry on industry indicators and company on business indicators on scale of 1(weak) – 5 (strong). 4. Multiply weight times rating and total for summary measures.
GE Portfolio Analysis Sample Industry/Market Indicators
• Market Factors
• • • • Size Growth Rate Cyclicality Seasonality
• Competition
• Type of competitors • Degree of Concentration
• Financial & Economic
• Contribution Margins • Barriers to Entry or Exit
GE Portfolio Analysis Industry/Market Indicators
• Technological
• Patents & copyrights • Will it become obsolete
• Sociopolitical
• Social attitudes & trends • Laws & government regulations
GE Portfolio Analysis Business Strength Indicators
• Market
• Company’s Market Share • Company’s Sales or Share Growth Rate
• Competition
• Strength of product, promotion, price, distribution, financial resources, management relative to competition
• Financial & Economic
• Company’s Margins • Economies of scale
GE Portfolio Analysis Business Strength Indicators
• Technological
• Company’s ability to cope with change • Technological skills • Patent Protection
• Sociopolitical
• Company’s responsiveness & flexibility
GE Portfolio Example
Market Factor Size Growth Profit Margins Business Market Share Product Quality Distribution Net .33 .33 .34 1 5 2 .33 1.65 .68 2.66 Weight .33 .33 .34 Rating (1- 5) 5 3 2 Value 1.65 .99 .68 3.32
GE Portfolio Analysis
Business High High Market Medium Low Medium Low
Competitive
Market
Attractiveness
Position Medium
Challenge Leader
•Invest to Build Selectively •Reinforce Strengths
Strong
Maintain Leadership • Invest to Grow
•Concentrate on Maintaining Strength
Weak
Overcome Weakness, Find Niche or Quit
•Build Selectively
High
Medium
Challenge Leader/Build Selectively
•In most attractive markets •Or counter competition •Emphasize profitability by raising productivity
Manage for Earnings
•Protect existing programs •Concentrate on profitable, less risky segments
Harvest (Gradual Withdrawal) or Limited Expansion
•Look ways to expand without high risk •Or Minimize investment
Low
Generate Cash
•Manage for current earnings •Concentrate on attractive Segments •Defend Strengths
Harvest
•Minimize Investment •Protect positions in most profitable segments
Divest
•Sell at time that will maximize cash value •Cut fixed costs and avoid investment
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
BUSINESS PROFILE MATRIX
EMBRYONIC GROWTH DOMINANT COMPETITIVE POSITION MATURE AGEING
STRONG
FAVORABLE
TENTATIVE
WEAK
STAGE OF INDUSTRY MATURITY
DIRECTIONAL POLICY MATRIX
PROSPECTS FOR SECTOR PROFITABILITY
UNATTRACTIVE AVERAGE ATTRACTIVE
WEAK COMPANY’S COMPETITIVE POSITION
AVERAGE
STRONG
MACS MODEL OF PORTFOLIO ANALYSIS
HIGH MEDIUM LOW
VALUE CREATING CAPABILITY IN THE SBU
NATURAL OWNER
ONE OF THE PACK
VALUE CREATION POTENTIAL IN THE BUSINESS
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
• 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
Limitations of PIMS
• Key market-share variable is sensitive to productmarket definition • Other variables (Policy choices) depend on subjective judgements • Inherent limitations of cross-section analysis • Sample biased toward larger firms that are industry leaders
Introduction BCG (Boston Consulting Group) Matrix GE(General Electric)/McKinsey Multi-Factor Matrix Business profile matrix Directional Policy Matrix MACS Model PIMS (Profit Impact of Market Strategy)
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 High Product Sales Growth Rate Low Anchoring Systems Cable Tray Systems Electric Power Tools
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
Portfolio Analysis
GE Tool for Analyzing Opportunities & Ability to Compete
GE Portfolio Analysis
• Classification of SBUs/products into nine cell matrix based on
• Market Attractiveness
– Multiple Indicators
• Business Strength
– Multiple Indicators
COMPANY POSITION/INDUSTRY ATTRACTIVENESS SCREEN
Criteria Criteria
•Size •Growth •Share •Position •Profitability •Margins •Technological Position •Strength/ Weakness •Image •Pollution •People MARKET ATTRACTIVENESS High High
•Size BUSINESS POSITION •Market Growth Prici •Market Diversity •Competitive Structur Medium Low •Industry Profitability •Technical Role •Social •Environment •Legal •Human
Steps In Developing GE Matrix
1. Select Factors & Indicators. 2. Assign each indicator a weight (total = 1) based on its importance. 3. Rate the industry on industry indicators and company on business indicators on scale of 1(weak) – 5 (strong). 4. Multiply weight times rating and total for summary measures.
GE Portfolio Analysis Sample Industry/Market Indicators
• Market Factors
• • • • Size Growth Rate Cyclicality Seasonality
• Competition
• Type of competitors • Degree of Concentration
• Financial & Economic
• Contribution Margins • Barriers to Entry or Exit
GE Portfolio Analysis Industry/Market Indicators
• Technological
• Patents & copyrights • Will it become obsolete
• Sociopolitical
• Social attitudes & trends • Laws & government regulations
GE Portfolio Analysis Business Strength Indicators
• Market
• Company’s Market Share • Company’s Sales or Share Growth Rate
• Competition
• Strength of product, promotion, price, distribution, financial resources, management relative to competition
• Financial & Economic
• Company’s Margins • Economies of scale
GE Portfolio Analysis Business Strength Indicators
• Technological
• Company’s ability to cope with change • Technological skills • Patent Protection
• Sociopolitical
• Company’s responsiveness & flexibility
GE Portfolio Example
Market Factor Size Growth Profit Margins Business Market Share Product Quality Distribution Net .33 .33 .34 1 5 2 .33 1.65 .68 2.66 Weight .33 .33 .34 Rating (1- 5) 5 3 2 Value 1.65 .99 .68 3.32
GE Portfolio Analysis
Business High High Market Medium Low Medium Low
Competitive
Market
Attractiveness
Position Medium
Challenge Leader
•Invest to Build Selectively •Reinforce Strengths
Strong
Maintain Leadership • Invest to Grow
•Concentrate on Maintaining Strength
Weak
Overcome Weakness, Find Niche or Quit
•Build Selectively
High
Medium
Challenge Leader/Build Selectively
•In most attractive markets •Or counter competition •Emphasize profitability by raising productivity
Manage for Earnings
•Protect existing programs •Concentrate on profitable, less risky segments
Harvest (Gradual Withdrawal) or Limited Expansion
•Look ways to expand without high risk •Or Minimize investment
Low
Generate Cash
•Manage for current earnings •Concentrate on attractive Segments •Defend Strengths
Harvest
•Minimize Investment •Protect positions in most profitable segments
Divest
•Sell at time that will maximize cash value •Cut fixed costs and avoid investment
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
BUSINESS PROFILE MATRIX
EMBRYONIC GROWTH DOMINANT COMPETITIVE POSITION MATURE AGEING
STRONG
FAVORABLE
TENTATIVE
WEAK
STAGE OF INDUSTRY MATURITY
DIRECTIONAL POLICY MATRIX
PROSPECTS FOR SECTOR PROFITABILITY
UNATTRACTIVE AVERAGE ATTRACTIVE
WEAK COMPANY’S COMPETITIVE POSITION
AVERAGE
STRONG
MACS MODEL OF PORTFOLIO ANALYSIS
HIGH MEDIUM LOW
VALUE CREATING CAPABILITY IN THE SBU
NATURAL OWNER
ONE OF THE PACK
VALUE CREATION POTENTIAL IN THE BUSINESS
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
• 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
Limitations of PIMS
• Key market-share variable is sensitive to productmarket definition • Other variables (Policy choices) depend on subjective judgements • Inherent limitations of cross-section analysis • Sample biased toward larger firms that are industry leaders
