BCG-GE

					Business Portfolio
    Analysis
              The Models

 BCG (Boston Consulting Group) Matrix
 GE (General Electric)/McKinsey Multi-
   Factor Matrix
                Portfolio analysis

 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
               BCG Matrix
       (Boston Consulting Group)

 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)
                Matrix Quadrants
                Relative Market Share
                High            Low


         High

Market
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
                      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 milk the cash cows
   Three Paths to Failure (cont’d)
                Relative Market Share
                High            Low


         High

Market
Growth
Rate


         Low
 GE(General Electric)/McKinsey Multi-Factor
                   Matrix


 Originally developed by GE’s planners drawing on
  McKinsey’s approaches

 Market attractiveness is based on as many relevant
  factors as are appropriate in a given context

 Business-position assessment also made on a many
  factors
   – SBU needs to be rated on each factor
       Industry Attractiveness

 Overall Market size
 Annual Market growth rate
 Historical profit margin
 Competitive intensity
 Technological requirements
 Energy requirements
 Inflation vulnerability
 Social/ political / legal
          Business Strengths

   Market share
   Share growth
   Product quality
   Brand reputation
   Distribution network
   Promotional effectiveness
   Productive capacity
   Productive efficiency
   Unit costs
   R & D performance
   Managerial personnel
                              GE Multifactor Portfolio Matrix
                                           Business Strengths
                                    High      Medium        Low

                                    Protect    Invest to   Build
Industry Attractiveness




                            High    Position     Build     selectively


                                             Selectively Limited
                                 Build
                          Medium selectively manage for expansion        Invest/Grow
                                             earnings    or harvest
                                                                         Selectivity
                                                                         /earnings
                                   Protect & Manage for
                           Low     refocus   earnings                    Harvest
                                                             Divest      /Divest
                                   Business Strength                                      M
GE MODEL
                                                                                          A
         Protect Position           Invest to build             Build Selectively         R
                                                                Specialize around
                                                                                          K
         Invest to grow             Challenge for               limited strengths
                                                                Seeks ways to             E
         Concentrate effort         leadership
                                                                overcome weakness         T
High     on maintaining             Build selectively
                                                                Withdraw if               A
         strength                   Reinforce                   indications of sustain
                                    vulnerable areas            growth is lacking         T
                                                                                          T
         Build Selectively          Selectivity/Manage          Limited Expansion
                                    for earnings                or Harvest                R
Medium   Invest heavily in most
                                                                                          A
         attractive segments        Protect existing program    Look for ways to expand
         Build up ability to        Concentrate investments     without high risk         C
         counter competition        in segments where           ,Otherwise minimize       T
         Emphasize profitability    profitability is good and   investment and
         by raising productivity    risks are relatively low    rationalize operations    I
Low      Protect and Refocus        Manage for                  Divest                    V

                                    earnings                                              E
         Manage for current                                     Sell at time that will
                                                                maximize value            N
         earnings                   Protect position in most
         Concentrate on             profitable segments         Cut fixed costs and       E
         attractive segments        Upgrade product line        avoid investment
                                                                meanwhile                 S
         Defend strengths           Minimize investment
                                                                                          S

              Strong                 Medium                                Weak
               Plotting on GE Matrix
                                                         M
 The circle represents the complete market and the
                                                         a
  arc represents the market share of the company         r
                                                         k
 5                                                       e
                                                         t
                                                         a
                                                         t
                                                         t
3.67
                                                         r
2.97                        Scooters                     a
                                                         c
                                                         t

2.33                                                     I
                                                         v
                                                         e
                                                         n
 1
                                                         e
       5           3.67 3.45           2.33          1
                                                         s
           Business strength                             s
      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
                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
                Limitations of PIMS
 Key market-share variable is sensitive to product-market
  definition
 Other variables depend on subjective judgements
 Inherent limitations of cross-section analysis
 Sample biased toward larger firms that are industry
  leaders

				
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posted:7/28/2012
language:English
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