Portfolio AnalysisPortfolio AnalysisObjectiveObjective: to introduce one of a key element of : to introduce one of a key element of self-analysis method which assess the strength self-analysis method which assess the strength

of a business in the marketof a business in the market

Portfolio AnalysisPortfolio Analysis

Portfolio analysis, which is one of a key element Portfolio analysis, which is one of a key element in the self-analysis of the company, extends in the self-analysis of the company, extends strengths assessment in three direction. strengths assessment in three direction.

First, it combines the assessment of business position First, it combines the assessment of business position with a market attractiveness evaluation which emerges with a market attractiveness evaluation which emerges from external analysis (in general) and market analysis from external analysis (in general) and market analysis (in particular).(in particular).

Second, it includes the analysis of multiple SBUs in one Second, it includes the analysis of multiple SBUs in one analysis which addresses the SBU investment decision. It analysis which addresses the SBU investment decision. It focuses on the issues of which SBUs should receive the focuses on the issues of which SBUs should receive the available cash.available cash.

Third, it offers baseline recommendations concerning the Third, it offers baseline recommendations concerning the investment strategies for each SBU.investment strategies for each SBU.

Simply, the Purpose?Simply, the Purpose?

Simply, the purpose of conducting Portfolio Simply, the purpose of conducting Portfolio Analysis is;Analysis is;

To understand what businesses the company To understand what businesses the company operate in - the collection of businesses and operate in - the collection of businesses and products that make up the company. products that make up the company.

And how these businesses relate to each other And how these businesses relate to each other in (a) their ability to supply financial resources in (a) their ability to supply financial resources to the organization, or (b) their need for to the organization, or (b) their need for financial resources from the organization - financial resources from the organization - simply to decide which businesses should simply to decide which businesses should receive more, less, no investment.receive more, less, no investment.

What is an SBU?What is an SBU?

The first step in the portfolio analysis is to The first step in the portfolio analysis is to identify the identify the key businesseskey businesses making up making up the company. The company’s key the company. The company’s key businesses (a company division, a product businesses (a company division, a product line, or a single product or brand) are line, or a single product or brand) are called called strategic business units (SBU)strategic business units (SBU)..

It may be less difficult to define SBUs in It may be less difficult to define SBUs in multibusiness organizations (such as multibusiness organizations (such as General Electric, Christian Dior, etc) General Electric, Christian Dior, etc) which are diversified into many different which are diversified into many different businesses.businesses.

How to Identify SBUs?How to Identify SBUs?

The following are some characteristics The following are some characteristics and attributes of an SBU:and attributes of an SBU:

It is the basic competitive unit of a company.It is the basic competitive unit of a company. It has a specific and identifiable group of It has a specific and identifiable group of

customers.customers. It has specific and identifiable competitors.It has specific and identifiable competitors. It can be measured as an independent entity It can be measured as an independent entity

in terms of profit and loss.in terms of profit and loss. Therefore, it may require a separate Therefore, it may require a separate

marketing strategy.marketing strategy.

In order to identify the company’s SBUs, one In order to identify the company’s SBUs, one of the simplest way is to develop a matrix. of the simplest way is to develop a matrix.

On the horizontal axis, there will be the On the horizontal axis, there will be the customer groups the company currently serve. customer groups the company currently serve.

On the vertical axis, there will be product or On the vertical axis, there will be product or product groupings the company currently product groupings the company currently serve. serve.

To define the company SBUs, each customer To define the company SBUs, each customer group will be needed to match up with the group will be needed to match up with the product or product groupings. product or product groupings.

When the matrix is finished, there will be some When the matrix is finished, there will be some blocks containing “x”. X represent where the blocks containing “x”. X represent where the company’ have a strategic business unit. company’ have a strategic business unit.

It is the company versus the competition for a It is the company versus the competition for a specific group of customers, with a specific set specific group of customers, with a specific set of products as a competitive tool.of products as a competitive tool.

Customer Customer Customer CustomerCustomerCustomer

Group 1Group 1 Group 2 Group 2 Group 3Group 3

Product(s) 1Product(s) 1

Product(s) 2Product(s) 2

Product(s) 3Product(s) 3

XX XX

XX XX

XX XX

Different Portfolio Different Portfolio ModelsModels

There are different portfolio models. There are different portfolio models. However, in this course, two of them However, in this course, two of them will be discussed. will be discussed.

The BCG growth-share matrix, The BCG growth-share matrix, introduced by the Boston Consulting introduced by the Boston Consulting Group. Group.

The business strength-industry The business strength-industry attractiveness matrix associated with attractiveness matrix associated with General Electric and McKinsey & Co. General Electric and McKinsey & Co.

BCG Growth-Share BCG Growth-Share MatrixMatrix

In Boston Consulting Group’s BCG Growth-In Boston Consulting Group’s BCG Growth-Share Matrix Analysis, SBUs are evaluated Share Matrix Analysis, SBUs are evaluated from two ways; (a) The attractiveness of from two ways; (a) The attractiveness of the SBU’s market the SBU’s market (market growth)(market growth) and (b) and (b) the strength of the SBU’s position in that the strength of the SBU’s position in that market market (market share).(market share).

In BCG approach, the company classifies all In BCG approach, the company classifies all its SBUs into 4 types as “star”, “cash cow”, its SBUs into 4 types as “star”, “cash cow”, “question mark” and “dog” according to “question mark” and “dog” according to their their marketmarket growth growth and relativeand relative market market shareshare. .

The BCG growth-share matrix model, as being The BCG growth-share matrix model, as being both simple and easily quantifiable, suggests both simple and easily quantifiable, suggests that an analysis of the market can best be that an analysis of the market can best be summarized by knowing its growth rate, and summarized by knowing its growth rate, and that the best summary indication of a firm’s that the best summary indication of a firm’s strength in a market is its relative market strength in a market is its relative market share.share.

The growth dimension is usually set at a 10-The growth dimension is usually set at a 10-percent annual growth rate. Thus, markets percent annual growth rate. Thus, markets growing in excess of 10 percent are considered growing in excess of 10 percent are considered to be high-growth markets.to be high-growth markets.

The market-share dimension is defined by the The market-share dimension is defined by the ratio of market share to the market of the ratio of market share to the market of the largest competitor. largest competitor.

Growth and Market-Share Growth and Market-Share DimensionDimension

MarketMarket Growth Growth highhigh RateRate

lowlow

high lowhigh low Relative Market ShareRelative Market Share

BCG Growth-Share MatrixBCG Growth-Share Matrix

StarsStars; are high-growth, high-share businesses ; are high-growth, high-share businesses or products. They often need heavy investment or products. They often need heavy investment to finance their rapid growth. Therefore, they to finance their rapid growth. Therefore, they may not be producing a positive cash flow. The may not be producing a positive cash flow. The business strategy will generally be for growth business strategy will generally be for growth fueled by externally acquired capital. fueled by externally acquired capital. Eventually, their growth will slow, and they will Eventually, their growth will slow, and they will turn into cash cows.turn into cash cows.

Cash cowsCash cows; are low-growth, high-share ; are low-growth, high-share businesses or products. These established and businesses or products. These established and successful SBUs need less investment to keep successful SBUs need less investment to keep their market share. They produce a lot of cash their market share. They produce a lot of cash to be used for other business units of the to be used for other business units of the company. They are either milked for company. They are either milked for investment in stars or question marks or investment in stars or question marks or harvested if there is little optimism for a stable harvested if there is little optimism for a stable future. future.

Question marksQuestion marks; sometimes called ; sometimes called problem children, are low-share business problem children, are low-share business units in high-growth markets. They need a units in high-growth markets. They need a lot of cash to keep and increase their lot of cash to keep and increase their share; they can not generate enough cash share; they can not generate enough cash themselves. Management must decide themselves. Management must decide which question mark it should build into which question mark it should build into stars and which should phase out.stars and which should phase out.

DogsDogs; are low-growth, low-share ; are low-growth, low-share businesses and products. They often have businesses and products. They often have poor profitability. Therefore, the business poor profitability. Therefore, the business strategy for a dog is most often to divest, strategy for a dog is most often to divest, but occasionally to hold for possible but occasionally to hold for possible strategic repositioning as a question mark strategic repositioning as a question mark or cash cow.or cash cow.

Strategy ImplicationsStrategy Implications

Once the company classifies its SBUs, it Once the company classifies its SBUs, it must determine what to do with them. must determine what to do with them.

Imagine yourself in a poker game. The Imagine yourself in a poker game. The other players at the table are your other players at the table are your competitors. The cards in your hand competitors. The cards in your hand represent your business. Each card represent your business. Each card represents a single strategic business unit. represents a single strategic business unit. To win the game, you need to decide how To win the game, you need to decide how strong your hand is and what you must do strong your hand is and what you must do with each card in order to give you the with each card in order to give you the highest probability of holding a winning highest probability of holding a winning hand.hand.

There are four strategies. The company can;There are four strategies. The company can;

invest more in the business unit in order to invest more in the business unit in order to buildbuild (increase) its share. (increase) its share.

invest just enough to invest just enough to holdhold (keep) the SBU’s (keep) the SBU’s share at the current level.share at the current level.

it can it can harvestharvest the SBU, milking its short- the SBU, milking its short-term cash flow regardless of the long-term term cash flow regardless of the long-term effect .effect .

divestdivest (kill) the SBU by selling it or phasing (kill) the SBU by selling it or phasing it out and using the resources elsewhere. it out and using the resources elsewhere.

Limitations of the BCG Limitations of the BCG MatrixMatrix

It is very simple; focuses only on two It is very simple; focuses only on two dimensions - growth and market share. dimensions - growth and market share. Although they are important, much more is Although they are important, much more is needed. E.g. a restaurant could have a low needed. E.g. a restaurant could have a low market share with minimal industry growth market share with minimal industry growth but be producing an excellent profit.but be producing an excellent profit.

It assumes that growth markets are attractive It assumes that growth markets are attractive markets, therefore strategies are developed markets, therefore strategies are developed accordingly.accordingly.

The analysis is highly sensitive to the definition The analysis is highly sensitive to the definition of the product market. E.g. laptop computers of the product market. E.g. laptop computers or all personal computers? or all personal computers?

It focuses on cash flow. However, ROI, sales It focuses on cash flow. However, ROI, sales growth, risk etc are also important.growth, risk etc are also important.

The Business Strength-The Business Strength-Industry Attractiveness Industry Attractiveness

MatrixMatrix To eliminate some of the limitations of the To eliminate some of the limitations of the

BCG growth/share matrix, a more complete BCG growth/share matrix, a more complete matrix analysis was developed by the General matrix analysis was developed by the General Electric planners and mostly used McKinsey Electric planners and mostly used McKinsey & Co - a management consulting firm.& Co - a management consulting firm.

The primary improvement of BS/IA matrix is The primary improvement of BS/IA matrix is that it allows for the analysis of multiple that it allows for the analysis of multiple variables (rather than only market share and variables (rather than only market share and growth) depending on the context. growth) depending on the context.

And, rather than focusing on cash flow , it And, rather than focusing on cash flow , it concerns potential future return on concerns potential future return on investment.investment.

Business Strength and Business Strength and Industry Attractiveness Industry Attractiveness

Dimensions Dimensions Horizontal axis – Horizontal axis –

market attractiveness;market attractiveness; Size Size GrowthGrowth Customer satisfaction Customer satisfaction

levelslevels Competition; quantity, Competition; quantity,

types, effectiveness, types, effectiveness, commitmentcommitment

Price levelsPrice levels ProfitabilityProfitability TechnologyTechnology Government regulationsGovernment regulations Sensitivity to economic Sensitivity to economic

trendstrends

Vertical axis – Vertical axis – business strength;business strength;

SizeSize GrowthGrowth Share of segmentShare of segment Customer loyaltyCustomer loyalty MarginsMargins DistributionDistribution Technology skillsTechnology skills PatentsPatents MarketingMarketing FlexibilityFlexibility OrganizationOrganization

Weight, Rating, Value?Weight, Rating, Value?

In BS/IA matrix, each of the key variables In BS/IA matrix, each of the key variables used must be given a weight, rating and value. used must be given a weight, rating and value.

The weight will be based on its importance to The weight will be based on its importance to the company, relative to other selected the company, relative to other selected variables. The total point must equal 10. the variables. The total point must equal 10. the weights can be determined by management weights can be determined by management or, when possible, by customer surveys.or, when possible, by customer surveys.

A rating (or grade) will be given for each A rating (or grade) will be given for each business strength variable. E.g. a strength business strength variable. E.g. a strength would receive a high score, a weakness would would receive a high score, a weakness would receive a low score.receive a low score.

The rating for each variable is then multiplied The rating for each variable is then multiplied by its weight to obtain the variable’s value.by its weight to obtain the variable’s value.

The values are individual summed for total The values are individual summed for total value for business strength for that particular value for business strength for that particular business.business.

For industry attractiveness, influencing For industry attractiveness, influencing variables will be given a weight based on their variables will be given a weight based on their importance to the business, and a rating importance to the business, and a rating based on favorable or unfavorable conditions based on favorable or unfavorable conditions in the environment (opportunity or threat?).in the environment (opportunity or threat?).

The total value for industry attractiveness is The total value for industry attractiveness is calculated in the same manner as for business calculated in the same manner as for business strength. strength.

The two scores for each business unit are then The two scores for each business unit are then used to position the business on the matrix. used to position the business on the matrix.

Business StrengthBusiness Strength WeightWeight Rating Rating ValueValue

(importance (performance; (importance (performance; (Weight(Weight

to the firm: 1=poor, 10= × to the firm: 1=poor, 10= × Rating)Rating)

must add up excellent)must add up excellent)

to 10)to 10)

ProfitProfit 33 8 8 2424

Pro/ser qual.Pro/ser qual. 33 8 8 2424

Man. SkillsMan. Skills 22 7 7 1414

LocationLocation 11 6 6 66

AtmosphereAtmosphere 11 5 5 55

Total value for business strengthTotal value for business strength 7373

IndustryIndustry WeightWeight Rating Rating ValueValue

AttractivenessAttractiveness (present trend; (present trend; 1=not attractive1=not attractive 10=very attractive) 10=very attractive)

GrowthGrowth 2,52,5 5 5 12,512,5Profit marginsProfit margins 3,53,5 7 7

24,524,5Comp. intensityComp. intensity 33 5 5 1515Remote env.Remote env. 11 7 7 77

Total value for industry attractivenessTotal value for industry attractiveness5959

Industry AttractivenessIndustry Attractiveness

HighHigh Medium Medium LowLow100100

HighHigh

BusinessBusinessStrengthStrength 6767

MediumMedium

3333LowLow

100 67 33 100 67 33 0 0

Premium Premium invest / invest / growgrow

Selective Selective invest / invest / growgrow

ProtectiveProtective

selectivity selectivity / earnings/ earnings

Challenge Challenge invest / invest / growgrow

Prime Prime selectivity selectivity / earnings/ earnings

RestructurRestructure harvest / e harvest / divestdivest

OpportunisOpportunistic tic selectivity selectivity / earnings/ earnings

OpportunitOpportunity harvest / y harvest / divestdivest

Harvest / Harvest / divestdivest

Strategy ImplicationsStrategy Implications

The position on the matrix (determined The position on the matrix (determined according to the weight, rating and according to the weight, rating and value) will indicate the appropriate value) will indicate the appropriate strategy (as in the BCG matrix).strategy (as in the BCG matrix).

Green cellsGreen cells define the businesses that define the businesses that will receive the resources to grow; the will receive the resources to grow; the so called “green light” businesses. The so called “green light” businesses. The market is high or medium in market is high or medium in attractiveness and the organization has attractiveness and the organization has high or enough skills and resources to high or enough skills and resources to take advantage of the market.take advantage of the market.

Red cellsRed cells define the businesses that define the businesses that lack opportunity in terms of market lack opportunity in terms of market and or company capabilities; the so and or company capabilities; the so called “red light” businesses. They called “red light” businesses. They are managed to harvest their are managed to harvest their resources or are just divested.resources or are just divested.

Yellow cellsYellow cells define businesses that define businesses that are to receive selective investment, are to receive selective investment, and where caution (the yellow light) and where caution (the yellow light) is the operating style.is the operating style.

Limitations of BS/IA Limitations of BS/IA MatrixMatrix

Although richer and more broadly Although richer and more broadly applicable than the BCG growth-share applicable than the BCG growth-share matrix, it can be more subjective in the matrix, it can be more subjective in the selection and weighting of the factors.selection and weighting of the factors.

Different business units may involve Different business units may involve different factors which makes the different factors which makes the analysis ambiguous.analysis ambiguous.

As it is the case with the BCG growth-As it is the case with the BCG growth-share matrix, the results are very share matrix, the results are very sensitive to the definition of the product sensitive to the definition of the product market. E.g. luxury cars, all cars?market. E.g. luxury cars, all cars?