Figure 2.4: Routes to Competitive Advantage

1
Portfolio Analysis
2
Portfolio Analysis

• Foundation for making important choices for
• - investment
• - strategic direction

3
Seven types of businesses

• Todays Breadwinners
• Tomorrows Breadwinners
• Yesterdays Breadwinners
• Development
• Sleepers
• Investment in managerial ego
• Failures

4
Seven types of businesses

• Todays Breadwinners
• The product and services that are earning healthy
  profits
• Tomorrows Breadwinners
• Investment in the companys future
• Yesterdays Breadwinners
• The products and services that have supported the
  company in the past

5
Seven types of businesses

• Development
• The products and services recently developed
• Sleepers
• The products and services that have been around
  for some time
• Investment in managerial ego
• The products and services that have strong
  product champions among influential managers
• Failures
• The products and services that have failed to
  play a significant role in the companys
  portfolio

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Figure 3.1 Product types in the portfolio
Tomorrows breadwinners
Developments Sleepers Ego trips
High
Life Cycle
Death Cycles
Market Attractiveness
Low
Failures Yesterdays breadwinners
Todays breadwinners
High
Low
Business Strength
7
Portfolio Planning

• Any diversified organization needs to find
  methods for assessing the balance of businesses
  its portfolio and to help guide resource
  allocation between them.

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Key Objectives

• Development of business strategies and allocation
  of resources both financial and managerial
• Analysis portfolio balance

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Figure 3.2 Balancing the business portfolio
Long run corporate health requires a balance of
Others that use cash now but promise to generate
cash in the FUTURE
Products that generate cash NOW
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Figure 3.3 Unbalanced, present-focused business
portfolio
A great present But what about the future?
Others that use cash now but promise to generate
cash in the FUTURE
Products that generate cash NOW
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Figure 3.4 Unbalanced, future-focused business
portfolio
Products that generate cash NOW
Future prospects good But who pays todays bills?
Others that use cash now but promise to generate
cash in the FUTURE
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BCG Matrix

• Market growth rate
• Relative market share
• Putting the dimension together
• Virtuous circles
• The pros and cons of the Growth-Share Matrix

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BCG Matrix

• Goals
• - Help corporate analysis decide which of their
  business units to fund, and how much and which
  units to sell.
• Manager were supposed to gain perspective from
  this analysis that allowed them to plan with
  confidence to use money generated by the cash
  cows to fund the stars and, possibly, the
  question marks.
• Help corporations with analyzing their business
  and product lines
• - Help the company allocate resources and
  is used as an
• analytical tool in brand marketing,
  product management,
• strategic , management and
  portfolio-analysis

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Market Growth Rate

• Along the vertical axis
• Recognizes the impact of market growth rate on
  cash flow
• Says more about the brand position than just its
  cash flow.
• It is a good indicator of that markets strength,
  of its future potential (of its maturity in
  terms of the market life-cycle), and also of its
  attractiveness to future competitors.
• It can also be used in growth analysis

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BCG

• Market Growth Rate
• Industry Sales volume (current year)
  Industrys sales volume (previous year) x 100

Industrys sales volume (previous year)
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Figure 3.5 The Growth-Share Matrix
Cash Flow
positive
negative
Relative Market Share
high
low
negative
- - __ 2- __
- __ 0 __
high
Star
Problem Child
Cash Flow
Market Growth Rate
Cash Cow
- __ 0 __
Pet
__ 2 __
low
positive
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BCG

• Relative Market Share
• The horizontal axis of the BCG matrix is relative
  market share (RMS)
• Particular SBUs market share compared to the
  largest competitors in the same market
• The position of an SBU on the RMS scale is
  considered a reflection of future cash generation
  potential

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BCG

• RMS Market Share of
  SBU X
• X is the SBU whose position is being calculated
• If x is not the market leader, the largest
  competitor is the market leader
• If x is the market leader, the largest
  competitor is the second, or next largest
  competitors in the same market

Market Share of the largest competitor
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BCG

• Relative Market Share
• This indicates likely cash generation, because
  the higher the share the more cash will be
  generated.
• The exact measure is the brands share relative
  to its largest competitors.
• Ex if the brand had a share of 20 percent, and
  the largest competitors had the same, the ratio
  would be 11.
• If the largest competitor had a share of 60
  percent, however, the ratio would be 13,
  implying that the organizations brand was in a
  relatively weak position.
• If the largest competitor only had a share of 5
  percent, the ratio would be 41, implying that
  the brand owned was in a relatively strong
  position, which might be reflected in profits and
  cashflow.

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BCG

• The Market / Industry Growth rate indicates the
  annual growth of the industry or market each SBU
  operate in.
• The Relative Market Share is the market share of
  each SBU compared to the market share of the
  largest or next largest competitor in the market
  the SBU operate in.
• The numbered circles represent the plotted
  location of each SBU, and the size of the circle
  represents the proportion share of total company
  earnings for each SBU

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BCG

• The quadrants indicate the combined
  characteristics of each SBU and a general
  strategy direction for each SBU
• Starts are SBUs that are market leaders in high
  growth markets
• Question Marks are SBUs that are not market
  leaders in high growth markets
• Cash Cows are SBUs that are market leaders in low
  growth markets
• Dogs are SBUs that are not market leader in low
  growth markets.

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Portfolio Analysis

• Growth Share Matrix
• (early 1970s)
• BCG Basic strategy recommendation
• Maintain balance between
• - Cash Cows and Stars
• Allocate resources to
• - Question Marks
• - Sell off Dogs

Bog's Growth-Share Matrix
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Strategic Perspective of Products in Different
Quadrants

• Four different strategic perspectives
• Investment
• Earning
• Cash-Flow
• Strategy Implications

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BCG Matrix (Boston Consulting Group Analysis)

• Question Marks
• Are growing rapidly and thus consume large amount
  of cash, but because they have low market shares
  they do not generate much cash.
• The result is a large net cash consumption.
• A question mark (also known as a problem child)
  has the potential to gain market share and become
  a star, and eventually a cash cow when the market
  growth slows.
• Question mark must be analyzed carefully in order
  to determine whether they are worth the
  investment required to grow market share.

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Question Marks (problem children)

• Investment heavy initial capacity expenditures
  and high RD
• Earning 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

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BCG Matrix (Boston Consulting Group Analysis)

• Starts
• Are units with a high market share in a
  fast-growing industry.
• The hops is that stars become the next cash cows.
• Sustaining the business units market leadership
  may require extra cash, but this is worthwhile if
  thats what it takes for the unit to remain a
  leader.
• When growth slows, starts become cash cows if
  they have been able to maintain their category
  leadership, or they move from brief stardom to
  dogdom.

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Stars

• Investment continue to invest for capacity
  expansion
• Earning low to high earnings
• Cash-Flow Negative (net cash user)
• Strategy Implications
• Continue to increase market share even at the
  expense of short-term earning

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BCG Matrix (Boston Consulting Group Analysis)

• Cash Cows
• Are units with high market share in a
  slow-growing industry.
• These units typically generate cash in excess of
  the amount of cash needed to maintain the
  business.
• They are regarded as staid and boring, in a
  mature market, and every corporation would be
  thrilled to own as many as possible .
• They are to be milked continuously with as
  little investment as possible, since such
  investment would be wasted in an industry with
  low growth

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Cash Cows

• Investment Capacity maintenance
• Earning High
• Cash-Flow Positive (net cash contributor)
• Strategy Implications
• Maintain market share and cost leadership until
  further investment becomes marginal

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BCG Matrix (Boston Consulting Group Analysis)

• Dogs or called Pets
• Are units with low market share in a mature,
  slow-growing industry.
• These units typically BREAK EVEN ,generate
  barely enough cash to maintain the businesss
  market share.
• Dogs, it is thought, should be sold off.

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Dogs

• Investment Gradually reduce capacity
• Earning High to low
• Cash-Flow
• Positive (net cash contributor) if deliberately
  reducing capacity
• Strategy Implications
• Plan an orderly withdrawal to maximize cash flow

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Putting the dimension together

• The portfolio implications of combining the cash
  requirements of market growth and cash generation
  potential of market share achieved are shown
  graphically in the two dimensional growth share
  matrix

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Figure 3.6 PIMS analysis - market share effect
Return on Investment
Business Intensity
Market share rank
Source Buzzell and Gale 1987, p98
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Virtuous circles

• As an alternative to the death cycle, the
  growth share matrix proposes a life cycle where
• Funds are invested in the problem children in
  order to make them stars
• Cash cows may decay to become pets

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Figure 3.7 Growth-Share Matrix product sequence
Relative Market Share
High
Low
High
Market Growth Rate
Low
Product Success Sequence Product Disaster
Sequences Cash Support
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BCG Matrix
Relative Market Share Position
High (above 1.0) Low (below 1.0) 1.0
High (faster than the economy as a
whole) Low (slower than the economy as a
whole)
Stars
Question Marks
Industry Growth Rate (in constant sales dollars)
Cash Cows
Dogs
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BCGs Growth/Share Portfolio Matrix
Market Growth Rate
Market Share Dominance
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BCG

• Example
• The following four businesses are part of a
  mythical market segment with 5 percent market
  growth. Average is 3 percent
• Company A has 40 market share
• Company B has 30 market share
• Company C has 20 market share
• Company D has 10 market share

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BCG

• The RMS calculation for each company is as
  follows
• Company A RMS 40/30 1.3
• Company B RMS 30/40 0.75
• Company C RMS 20/40 0.5
• Company D RMS 10/40 0.25
• A business can see where it fits in relation to
  other direct competitors regarding market share.
• The model, used in this way, can also give an
  indication of which competitors pose the greatest
  threat due to similarity in size, and therefore
  are likely to be vying for the same customers.

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BCG
Relative Market Share
6
A
B
C
D
5
Market Growth
3
0
1x
0.1x
10x
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BCG

• There are four strategy options related to the
  BCG model.
• Build
• Invest resources to increase market share
• Extend and expand product offerings ongoing
  investment in RD
• Develop new markets
• Work towards gaining and maintaining loyalty to
  your brand
• Persuade other brands customers to switch

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BCG

• There are four strategy options related to the
  BCG model.
• Hold/ Maintain
• Invest resources to maintain the current level of
  market share
• Maintain current level of promotion unless
  reduced competitive pressures allow some
  reduction
• Renationalize distribution to support profitable
  outlets, but reduce or cancel unprofitable ones.
• Rationalize product lines to eliminate
  unprofitable versions, continue to support
  profitable versions
• Continue loyalty programs

44
BCG

• There are four strategy options related to the
  BCG model.
• Harvest / Milk
• Maximize short term cash generation, even if it
  results in reduced market share
• This option is generally only pursued when cash
  needs to be generated quickly, the SBU has
  substantial levels of finished goods, and the
  businesses expects to eventually withdraw from
  the market or eliminate the product line
• Stop RD and other capital investment
• Reduce marketing and sales budgets except what is
  needed to move stock
• Raise prices to increase profitability of
  remaining sales, or reduce prices to quickly sell
  stock that is becoming obsolete
• Reduce costs wherever possible, even if there is
  a slow decline in quality of product or service

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BCG

• There are four strategy options related to the
  BCG model.
• Divest / Kill
• Move out of the business, market or product line
  / category
• Sell the business. Selling the business can
  generate additional cash resources and eliminate
  some costs
• Walk away where growth is low and there are no
  long term prospect for the market or product
  category, there are not likely to be any
  potential buyers.

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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

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GE Matrix

• Identifying the factors
• - decide on its list of factors that make a
  market attractive or a business position in a
  market strong

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GEs Business Strength/Industry Attractiveness
Screen
Business Strength Market Share Technical
Strength Management Cohesiveness and
Depth Financial Access Industry
Attractiveness Industry Growth Rate Investment
Intensity Technological Intensity Regulatory and
Governmental Factors
High
Industry/ Market Attractiveness
Low
Low
High
Business Strength
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Relative positioning helps focus investment
intentions and define scope
Should we take any defensive actions to head off
competition?
Can we push hard on scale economies or product
quality to improve our position?
Are there segments of this unit that can be
divested or repositioned?
Are we taking advantage of all opportunities
available?
Is it worthwhile to continue putting cash into
this unit?
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Typical (external) factors that affect Market
Attractiveness

• Market size
• Market growth rate
• Market profitability
• Pricing trends
• Competitive intensity /rivalry
• Overall risk of returns in the industry
• Entry barriers
• Opportunity to differentiate products and service
• Demand variability
• Segmentation
• Distribution structure
• Technology development

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Typical (Internal) factors that affect Market
Attractiveness

• Strengths of assets and competencies
• Relative brand strength (marketing)
• Market sharemarket share growth
• Customer loyalty
• Relative cost position (cost structure compared
  with competitors)
• Relative profit margins (compared to competitors)
• Distribution strength and production capacity
• Record of technological or other innovation
• Quality
• Access to financial and other investment
  resources
• Management strength

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How should we Decide Which Segments to Target? -
Steps in Constructing a Market-Attractiveness/Comp
etitive-Position Matrix
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• General Electric Models
• Find out the value of market attractiveness and
  business strength by
• 1. Weighting factors underlying market
  attractiveness and business strength
• 2. Rating (1-5) for unattractive to attractive to
  each market attractiveness factor
• 3. Rating (1-5) for minimum to maximum score for
  each business strength factor
• 4. Multiplying each Weighting proportion by
  Rating of each factor
• 5. Sum the total of market attractiveness and
  business strength

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A Useful Tool for Assessing Market Segments
Segment Rating Chart
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The Market Attractiveness/ Competitive Position
Matrix
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Strategic Implication

• Resources allocation recommendations can be made
  to grow, hold, harvest a strategic business unit
  based on its position on the matrix as follows
• Grow strong business units in attractive
  industries, average business unit in attractive
  industries, and strong business unit in average
  industries. (CELL 2,3,6)

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Strategic Implication

• Hold average businesses in average industries,
  strong businesses in weak industries, and weak
  business in attractive industries. (cell 1,5,9)
• Harvest weak business units in unattractive
  industries, average business units in
  unattractive industries, and weak business units
  in average industries. (cell 4,7,8)

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Figure 3.8 The GE Matrix
Business Position
Strong Medium Weak
Overall attractiveness
High
High Medium Low
Medium
Market Attractiveness
Low
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Implications for marketing strategy

• Invest to hold or maintain current business
  position
• The investment has to be sufficient to keep up
  with market changes
• Invest to improve market position of the business
• Requires sufficient investment to penetrate the
  market
• Invest to rebuild
• High investment strategy aimed at restoring
• Selectivity
• Aims at strengthening position in segment
• Low investment or harvest the business
• Selective investment over the short term and
  eventually cashed in when the price is right

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Strategic Business Units and Portfolio Analysis
The Industry Attractiveness-Business Strength
Matrix

• McKinsey Company
• Strategic Business Units (SBUs)
• GE/McKinsey nine-block matrix

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Implications of Alternative Positions Within the
Market-Attractiveness/Competitive-Position Matrix

Competitive Position
Weak
Strong
Medium

• Desirable Potential Target
• Protect position
• Invest to grow at max. digestible rate
• Concentrate on maintaining strength

• Desirable Potential Target
• Invest to build
• Challenge for leadership
• Build selectively on strengths
• Reinforce vulnerable areas

• Build selectively
• Spec. in limited strengths
• Seek to overcome weak.
• Withdraw if indications of sustainable growth are
  lacking

High

• Limited expansion or harvest
• Look for ways to expand w/out high risk
  otherwise min. invest. and focus operations

• Desirable Potential Target
• Build selectively
• Emphasize profitability by increasing
  productivity
• Build up ability to counter competition

• Manage for earnings
• Protect existing strengths
• Invest to improve position only in areas where
  risk is low

Med.
Market Attractiveness

• Protect and refocus
• Defend strengths
• Seek ways to increase current earnings without
  speeding markets decline

• Manage for earnings
• Protect position
• Minimize investment

• Divest
• Sell when possible to maximize cash value
• Meantime, cut fixed costs avoid further
  investment

Low
6-12
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McKinsey-GE Stoplight Matrix
Business Strength-Competitive Position Strong Ave
rage Weak (5) (3) (1)
Winners
Winners
High (5) Medium (3) Low (1)
Question marks
Average Business
Winners
Industry (Product-Market) Attractiveness
Losers
Profit Producers
Losers
Losers
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Strategic Business Units are portrayed as a
circle plotted in the GE Matrix

• The size of the circles represent the market size
• The size of pies represent the Market share of
  the SBUs
• Arrows represent the direction and the movement
  of the SBUs in the future

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The output is a strategic direction for each SBU
and for the group
...Determining Where You are Going

• Prepare a clear guide for those choices that
  establish the nature and direction of the company
• Guiding Philosophy
• Product/market scope
• Corporate form, role, value added
• Strategic resources and business units
• Growth and financial guidelines
• STRATEGIC SITUATION

Invest to improve competitiveness
Invest Heavily
Reposition
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Figure 3.9 Growth-Share Matrix representation
Relative Market Share
High
Low
25
High

Market Growth Rate
10


Low
-5
1.0x
0.1x
10x
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Financial portfolio theory

• The capital asset pricing model (CAPM)
• - Focus on the rate of return that should be
  obtained from an investment with a certain risk
  level.

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Figure 3.10 The capital asset pricing model
Return
R
Rc
Rm
R0
rm
rc
r0
Risk
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Figure 3.11 The resource portfolio
Crown Jewels Resources that help differentiate in
ways of value to customers
Achilles' Heels Resources that differentiate the
competition in ways important to customers
High
Importance of resource in creating value for
customers
Sleepers Resources that are less important today
but be wary in case they become important
tomorrow
Black Holes Potentially costly resources where we
have an advantage but that dont create value for
customers
Low
Inferior Superior
Resource strength relative to competitors
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Four types of resources can be identified

• Crown jewels
• - the resources where the organization enjoys an
  edge over its competitors
• Black holes
• - the resources where the organization has an
  edge, but they dont contribute to customer value
  creation
• Achilles heels
• - where competitors are strong but the
  organization weak
• Sleepers
• - resources that constitute neither a
  competitive advantage, nor are important in
  customer value creation