Product PortfolioAnalysis

2.15 Product Product Portfolio AnalysisProduct portfolio analysis looks at the range of products and brands (product portfolio) that a firm has under its control. This type of analysis can help a firm identify where every single one of its products is positioned in the market.

Perhaps the most common type of product portfolio analysis that firms use to analyse their product mix is the BCG Matrix.TATA group runs a business Empire. How many different type of products does they have under its control?

Product Life Cycles and the BCG MatrixProduct Life Cycle shows the stages that products go through from development to withdrawal from the marketProduct Portfolio the range of products a company has in development or available for consumers at any one time

Managing product portfolio is important for cash flow

BCG Matrix

The BCG MatrixThe BCG Matrix:A means of analysing the product portfolio and informing decision making about possible marketing strategiesDeveloped by the Boston Consulting Group a business strategy and marketing consultancy in 1968Links growth rate, market share and cash flowWhat do these terms mean?

BCG Matrix key terms..

Drawing the BCG Matrix

The BCG Matrix - STARSStars products in markets experiencing high growth rates with a high or increasing share of the market

- Potential for high revenue growth

The BCG Matrix Cash CowsCash Cows:High market shareLow growth markets maturity stage of PLCLow cost supportHigh cash revenue positive cash flows

The BCG Matrix - DogsDogs:Products in a low growth market Have low or declining market share (decline stage of PLC)Associated with negative cash flowMay require large sums of money to supportIs your product starting to embarrass your company?

BCG Matrix - ? Problem childQuestion mark ???Or Problem Child:Products having a low market share in a high growth marketNeed money spent to develop themMay produce negative cash flowPotential for the future?Problem children worth spending good money on?

The BCG MatrixMarket GrowthMarket ShareHighLowHigh

Problem ChildrenStarsDogsCash Cows

What stage of the BCG Matrix are these at?Put these onto a grid

BCG Matrix GridMarket GrowthMarket ShareHighLowHigh

Problem ChildrenStarsDogsCash Cows

The BCG MatrixImplications:Dogs:Are they worth persevering with?How much are they costing?Could they be revived in some way?How much would it cost to continue to support such products?How much would it cost to remove from the market?

The BCG MatrixImplications:Problem Children:What are the chances of these products securing a hold in the market?How much will it cost to promote them to a stronger position?Is it worth it?

The BCG MatrixImplications:Stars:Huge potential how?May have been expensive to develop why?Is it worth spending money to promote?What issues are there with product life cycle?

The BCG MatrixImplications:Cash Cows:Why are they cheap to promote?Generate large amounts of cash are these used for further R&D?Do you think there are any costs of developing and promoting these products?Is there a need to monitor their performance the long term?What stage of the PLC are these at?

The Product Life Cycle and the BCG MatrixSalesTimeABCDThe product portfolio four products in the portfolio(1)(1) A is at maturity stage cash cow. Generates funds for the development of D(2)(2) Cash from B used to support C through growth stage and to launch D. A now possibly a dog?(3)(3) Cash from C used to support growth of D and possibly to finance extension strategy for B?Importance of maintaining a balance of products in the portfolio at different stages of the PLC BCG Matrix helps with the analysis

Portfolio AnalysisGE Tool for Analyzing Opportunities & Ability to Compete

GE Portfolio AnalysisClassification of SBUs/products into nine cell matrix based onMarket AttractivenessMultiple Indicators

Business StrengthMultiple Indicators

Steps In Developing GE MatrixSelect Factors & Indicators.Assign each indicator a weight (total = 1) based on its importance.Rate the industry on industry indicators and company on business indicators on scale of 1(weak) 5 (strong).Multiply weight times rating and total for summary measures.

GE Portfolio AnalysisSample Industry/Market IndicatorsMarket FactorsSizeGrowth RateCyclicalitySeasonalityCompetitionType of competitorsDegree of ConcentrationFinancial & EconomicContribution MarginsBarriers to Entry or Exit

GE Portfolio AnalysisIndustry/Market IndicatorsTechnologicalPatents & copyrightsWill it become obsoleteSociopoliticalSocial attitudes & trendsLaws & government regulations

GE Portfolio AnalysisBusiness Strength IndicatorsMarket Companys Market ShareCompanys Sales or Share Growth RateCompetitionStrength of product, promotion, price, distribution, financial resources, management relative to competitionFinancial & EconomicCompanys MarginsEconomies of scale

GE Portfolio AnalysisBusiness Strength IndicatorsTechnologicalCompanys ability to cope with changeTechnological skillsPatent ProtectionSociopoliticalCompanys responsiveness & flexibility

GE Portfolio Example

UsesThe power of the Life-cycle matrix is the story it tells about the distribution of the firms businesses across the stages of the industry evolution

LimitationsLimited strategic prescriptionOnce defined prescription is limitedSome businesses skip cyclesGo from Growth to Decline in a short time.Duration of cyclesEg. Mars (1930)

International Portfolio Analysis2 Factors:Countrys attractivenessMarket size, rate of growth, regulation

Competitive strengthMarket share, product fit, contribution margin, market support

Portfolio Matrix for Plotting Products by Country

Portfolio Analysis

Advantages:Top management evaluates each of firms businesses individuallyUse of externally-oriented data to supplement management judgmentRaises issue of cash flow availabilityFacilitates communication

Portfolio Analysis

Disadvantages:Difficult to define product/market segmentsStandard strategies can miss opportunitiesIllusion of scientific rigorValue-laden terms

Experience Curve

Experience CurveIn the 1960's, management consultants at The Boston Consulting Group observed a consistent relationship between the cost of production and the cumulative production quantity (total quantity produced from the first unit to the last).

Data revealed that the real value-added production cost declined by 20 to 30 percent for each doubling of cumulative production quantity.

Uses of Experience curveThere are three general areas for the application and use of experience curves; strategic, internal, and external to the organization.Strategic uses include determining volume-cost changes, estimating new product start-up costs, and pricing of new products.Internal applications include developing labor standards, scheduling, budgeting, and make-or-buy decisions.External uses are supplier scheduling, cash flow budgeting, and estimating purchase costs

HOFERS MATRICES AND DIRECTIONAL POLICIES

BUSINESS PORTFOLIO ANALYSISThe analysis methods of the business portfolio analysis are used in order to identify and examine the various strategic alternatives that must be approached at corporate level.

POTENTIAL BENEFITSIt encourages the promotion of competitive analysis at the level of strategic business units.Selective earmarking of financial resources by means of identification of strategic issues and by means of adoption of a standardized and objective negotiation process.It helps to reduce risks, increases concentration and involvement

(COMPETITIVE POSITION)STRONGAVERAGEWEAKDEVELOPGROWTHSUPER GROWTHMATURITYDECLINEHOFERS MATRICES(STAGE OF EVOLUTION)

Contd..Strategic business unit A seems to be a potential Star. It holds a large market share, it is in the stage of life cycle development and has a strong competitive position on the market. As such, unit A represents a potential candidate in the competition for corporate resource competition.Investments in unit B must take into account the fact that although it has a strong market position, its market share is quite small. strategy that may contribute to the increase of market share must be developed, thus accounting for the future necessary investment.

ContdUnit C has a small market share, and it holds a competitively weak position and it entered a small market whose development is underway. For the unit C a strategy residing in the elimination from the market must be applied, so that the investment for the first two units may be favored.Unit D is characterized by a strong competitive position on the market and it holds a large market share. In this case, it is recommended that investments be made with a view to maintaining the current position on the market. On the lung run, it will become a Cash Cow.

ContdUnit E together with unit F are included into the Cash Cow category and they should be capitalized on because of great cash flows that they generate.Unit G is included into the Dogs category and the management thereof is recommended, with a view to generating short-term cash flows in as much as it is possible. Nevertheless, on the long term, the strategy of limitation or liquidation on the market must be selected.

Advantages of Hofers MatricesIt provides an image regarding the manner of distribution of the businesses undertaken by a company during specific stages of a life cycle.The company may predict how the present portfolio will develop in the future.It manages to divert the managements attention from the corporate level and focus on potential strategies specific to the strategic business unit.

DisadvantagesIdentification of Key Success Factors.Weight assignment to different Key Success Factors can be difficult.Managers tend to underestimate their weaknesses and overestimate their strengths.

Directional Policy Matrix

Characterize Your EnterpriseThe expert system will position your enterprise on the chart based upon your description of: Supplier Bargaining Power Threat of Substitutes Threat of New Entrants Competitive Rivalry Buyer Bargaining Power Product Quality Product Value Relative Market Share Reputation Customer Loyalty Staying Power Experience

You can trace through the supporting analysis and its conclusions, adjusting your input until you are satisfied your description accurately characterizes your enterprise.

Shell Directional Policy MatrixAnother refinement upon the Boston MatrixAlong the horizontal axis are prospects for sector profitability, and along the vertical axis is a company's competitive capabilityThe location of a Strategic Business Unit (SBU) in any cell of the matrix implies different strategic decisionsHowever decisions often span options and in practice the zones are an irregular shape and do not tend to be accommodated by box shapes. Instead they blend into each other.

Each of the zones is described as follows:

Leader - Major resources are focused upon the SBUTry Harder - Could be vulnerable over a longer period of time, but fine for nowDouble or Quit - Gamble on potential major SBU's for the futureGrowth - Grow the market by focusing just enough resources hereCustodial - Just like a cash cow, milk it and do not commit any more resourcesCash Generator - Even more like a cash cow, milk here for expansion elsewherePhased Withdrawal - Move cash to SBU's with greater potentialDivest - Liquidate or move these assets on a fast as you can

Best UseThe DPM showsMarkets categorised based on a scale of attractiveness to the organisationThe organisations relative strengths in each of these marketsThe relative importance of each marketBrief HistoryThis Directional Policy Matrix uses the GE multi-factor approach using the same fundamental ideas as the Boston Consulting Group Matrix. It provides for Market attractiveness on the y-axis and Relative Strength on the x-axis. The matrix is traditionally a four-box matrix but can also be a nine-box matrix.

Model Use and Applicability

Model WeaknessesQuadrant namesMcDonald initially labeled the different quadrants as those in the Boston Consulting Group matrix and received a lot of criticism from this. These labels created confusion. More recently he merely refers to these positions but does not label the quadrants as they were in the past.Products-for-marketsThis concept is confusing to many people and limits the analysis.

Strategic EmphasisThe McDonald DPM like other models of portfolio analysis attempts to define a firms strategic position and strategy alternatives. The accepted level at which a firm can be analysed using the DPM is that of strategic business unit.Professor Malcolm McDonald of the Cranfield School of Management developed the matrix to define Business Strengths in terms of Critical Success Factors (CSFs). A critical success factor represents something that a company must do right in the eyes of the customer. For the first time the business strengths are looked at from the customers point of view and are therefore more objective. In the past defining the factors was a very subjective exercise from the companys point of view. The Business Strengths in this matrix are relative strengths (relative to the best in the market)The DPM can be used at any level in the organisation and for any kind of SBU.

SummaryWas developed to overcome the limitations seen in the BCG matrix and to simplify the Shell directional policy and GE matrices, which both illustrated a nine box matrix.This matrix provides for Market attractiveness on the y-axis and Relative Business Strength on the x-axis and is made up of four quadrants (but nine quadrants can also be used).Business Strengths are defined in terms of Critical Success Factors (CSFs).Factors on both matrices are weighted and scored. Relative strength on the x-axis is included in the mathematical calculation of the co-ordinates.The circles are placed in any one of five positions on the matrix each with a specific generic strategy or guideline for management. These are Invest for growthMaintain market position, manage for earningsSelectiveManage for cashOpportunistic developmentThis matrix is a good one to use if the organisation wishes to assess the competitors relative to themselves as it allows for a good analysis of the strengths and weaknesses of the competitors from the customers point of view.

ConclusionThere is always a better strategy than the one you have; you just haven't thought of it yet Sir Brian Pitman, former CEO of Lloyds TSB, Harvard Business Review, April 2003

Life-Cycle Portfolio MatrixA simple tool developed in the 1980's by the professional services firm Arthur D. Little intended to help a company manage its collection of product businesses as a portfolio. The key concept is consideration of where each product is within its business life cycle.

Matrix represents a company's various businesses in a 2-dimensional matrix. In this case, the columns of the matrix represents the growth stage of the business product (embryonic, growth, mature, or aging) and the rows represents the product's competitive position in the marketplace (dominant, strong, favorable, tenable, or weak or nonviable).This results in a 4 by 5 matrix with 20 cells. The company's various product businesses are placed within the matrix, and the positions are associated with logical business strategies.he distribution and trajectory of the businesses across the matrix helps indicate whether the firm's product mix is well balanced now and in the future. For example, the company will need to maintain a continuing set of mature businesses in order to generate cash to support new embryonic and growth operations.

MECE Approach

MECE ApproachTheMECE principle, pronounced 'me see',mutually exclusiveandcollectively exhaustive, is a grouping principle for separating a set of items into subsets, the choice of subsets should bemutually exclusiveandcollectively exhaustive.The MECE principle is useful in thebusiness mappingprocess where the optimum arrangement of information is exhaustive and does not double count at any level of the hierarchy.

Mutually ExclusiveThis means that any idea can be placed intoone-and only one- bucket. If you can come up with an idea that could potentially go into more than one bucket, your approach isnotMECE. For example, let's suppose you are trying to organize pizza toppings. You decide to try the following buckets or drawers in the refrigerator: "meat", "vegetarian", and "vegan". Those buckets will seem mutually exclusive for many ingredients, but you will soon come up with a topping that could fit into more than one bucket. Pepperoni: Meat - yes. Vegetarian - no. Vegan - no... OK!Cheese: Meat - no. Vegetarian - yes. Vegan - no... OK!Mushrooms: Meat - no. Vegetarian - yes. Vegan - yes... NOT OK! So this would not be MECE organizing system because someone looking for mushrooms wouldn't know whether to look in the "vegetarian" or "vegan" drawer.

Completely exhaustive

This means that your buckets cover theentire universe of possible items. If you can come up with an example that does not fit into any of your buckets, your approach isnotMECE. Let's continue with the pizza topping example. Suppose after failing the test for mutual exclusivity, we've relabeled our refrigerator drawers as "meat", "vegetables", "dairy". This system works better for our previous test items, but it could be missing a category... Pepperoni: Meat - yes. Vegetables - no. Dairy - no... OK!Cheese: Meat - no. Vegetables - no. Dairy - yes... OK!Mushrooms: Meat - no. Vegetables - yes. Dairy - no... OK!Tomato sauce: Meat - no. Vegetables - sort of. Dairy - no... Maybe?Pesto: Meat - no. Vegetables - sort of. Dairy - no... Maybe? It is possible to make your current system MECE by specifying that "vegetables" includes all things veggie-based, like pesto and tomato sauces. Similarly, a dairy-based sauce like Alfredo can go in the "dairy" drawer. But are you comfortable splitting sauces across drawers? We can also see from this test that there might be potential to add a "sauce" drawer. Or do you think your users would expect to find all sauces together? As you can see, even for the simplest lists, creating a MECE framework can be challenging!

Why is MECE important?

MECE is critical to effective problem solving. It reflects thinking that is: Clear- Because mutual exclusivity means overlap is eliminated, it is easy to understand where things belong, making them easy to find and, if necessary, editThorough- A completely exhaustive approach means every possible idea can be raised and consideredLogical- Ultimately, a MECE approach yields anelegantyet comprehensivesolution that can be easily understood and followed. It also highlights for your McKinsey boss or interviewer that you can organize informationeffectivelyandefficiently

*********************Bases on the product life cycle model. Assesses products and businesses across 2 dimensionsStage of industry maturity- from embryonic to declineCompetitive position strong to weak.

*Not only does it allow managers to plot the distribution of their products across the stages of evolution- the idea is that a business should not have all products in the maTURITY OR DECLINE STAGE, THERE SHUOLD BE OTHERS COMING THROUGH.

But it also allow managers to asses resource needs along the product life cycle curve:Introduction_ invest heavily, to build sales and product awareness, refine product, R&D- need for resources in terms of management as well. Growth stage- further investment required to build product , heavy marketing needed. At maturity stage- emphasis shifts to efficiency, management attempts to maintain profit marginsDecline- emphasis is on cash flow, considerations for selling or divesting.

*Once plotted on the matrix the prescription is limited. In terms of cash investment and allocation of resources- some businesses can be revived eg Levi 501.

Cabbage patch dolls and other fads- *Can also be used to assess businesses in different locations. *