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Business Portfolio Analysis

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Business Portfolio Analysis is an organisational strategy formulation technique that is based on the philosophy that Organisations should develop strategy..... much as they handle investment portfolios..

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Business Portfolio Analysis

  1. 1. Business Portfolio Analysis Prof.(Dr.) Nitin Zaware1Prof. (Dr.) Nitin Zaware
  2. 2. Business Portfolio Analysis : Business Portfolio Analysis is an organizational strategy formulation technique that is based on the philosophy that Organizations should develop strategy much as they handle investment portfolios. Portfolio analysis is a systematic way to analyze the products and services that make up an association's business portfolio. In the way, in which the sound financial investments should be supported and unsound ones discarded, sound organizational activities should be emphasized and unsound ones deemphasized. 2Prof. (Dr.) Nitin Zaware
  3. 3. Purpose of Portfolio Analysis : A viable strategy need for product-market scopes in determining how strategic objectives will be attained. In a diversified company, one well-accepted concept of product-market scope is the portfolio approach to an organization's overall strategy. The optimal business portfolio is one that fits perfectly to the company's strengths and helps to exploit the most attractive industries or markets. An SBU can either be an entire mid-size company or a division of a large corporation. It normally formulates its own business level strategy and often has separate objectives from the parent company. 3Prof. (Dr.) Nitin Zaware
  4. 4. The aim of a portfolio analysis is: 1) To Analyse: Analyse its current business portfolio and decide which SBUs should receive more or less investment. 2) To Develop Growth Strategies: Develop growth strategies for adding new products and business to the portfolio. 3) To Take Decisions Regarding Product Retention: Decide which business or products should no longer be retained. 4Prof. (Dr.) Nitin Zaware
  5. 5. Portfolio Analysis Techniques: 1) BCG Matrix: The basis for many of these matrix analyses grew out of work carried out in the 1960s by the Boston Consulting Group (BCG). BCG observed in many of their studies that producers tend to become increasingly efficient as they gain experience in making their product and costs usually declined with cumulative production. The growth-share matrix (aka the product portfolio, BCG-matrix, Boston matrix, Boston Consulting Group analysis, and portfolio diagram) is a chart that had been created by Bruce D. Henderson for the Boston Consulting Group in 1970 to help corporations with analyzing their business units or product lines. 5Prof. (Dr.) Nitin Zaware
  6. 6. BCG Matrix High Stars Cash Cows Dogs LowHigh Low Growth Fledglings or question marks Relative Market Share 6Prof. (Dr.) Nitin Zaware
  7. 7. BCG Matrix: a)Dogs : Low Market Share and Low Market Growth : Dogs are business units or products that have low market share in a low-growth market. They often don't make much profit, but they don't need much investment either. Much of the time, you'll need to offer a price discount to sell Dog products. b) Cash Cows: High Market Share and Low Market Growth : These businesses or products are well established. They're likely to be popular with customers, which makes it easier for you to exploit new opportunities. However, you should avoid spending too much effort on these, because the market is only growing slowly, and opportunities are likely to be limited. 7Prof. (Dr.) Nitin Zaware
  8. 8. c) Stars: High Market Share and High Market Growth : Businesses and products in this quadrant are seeing rapid growth. There should be some good opportunities here, and you should work hard to realize them. d) Question Marks (Problem Children): Low Market Share and High Market Growth : These are the opportunities that no one knows how to handle. They aren't generating much revenue right now, because you don't have a large market share. 8Prof. (Dr.) Nitin Zaware
  9. 9. Portfolio Analysis Techniques: 2 )GE Nine Cell Matrix: GE Matrix also called McKinsey Matrix is a strategic management tool for conducting portfolio analysis. The portfolio which is analyzed with the matrix may include products, services or entire SBUs (strategic business units) owned by the company. This tool is very similar to the BCG Matrix and you can actually view the GE or McKinsey Matrix is a kind of extension of the BCG Matrix (the multifactor portfolio analysis tool). 9Prof. (Dr.) Nitin Zaware
  10. 10. GE Nine Cell Matrix Low High A E D C B Medium Strong Medium Weak Industryattractiveness Competitive strength 10Prof. (Dr.) Nitin Zaware
  11. 11. 2 )GE Nine Cell Matrix: a )The Vertical Axis: Industry Attractiveness It represents industry attractiveness which weighs composite rating based on eight different factors. These factors are: 1) Market size and growth rate. 2)Industry profit margin. 3)Competitive intensity. 4)Seasonability. 5)Cyclicality. 6)Economics of scale 7)Technology and 8)Social, environmental, legal and human impacts. 11Prof. (Dr.) Nitin Zaware
  12. 12. 2 )GE Nine Cell Matrix: b) The Horizontal Axis: Business Strength: It represents business strength competitive position which is again a weighed composite rating based on seven factors. They are: 1) Relative market share 2)Profit margins 3)Ability to compete on price and quality 4)Knowledge of customer 5)Competitive strengths and weaknesses 6)Technological capability and 7)Calibre of management. 12Prof. (Dr.) Nitin Zaware
  13. 13. GE Matrix Positions and Strategy: The GE / McKinsey Matrix are actually divided into nine cells. These 9 cells represent the nine alternatives for positioning of any SBU or product / service offering. Based on clear understanding of all of these factors decision makers are able to develop effective strategies. The nine cells in the matrix grouped into 3 major segments: Segment 1 This is mostly the best segment. The business in this position is strong and the market is attractive. In this case the company should allocate resources in this business and focus on growing the business and increase its current market share. 13Prof. (Dr.) Nitin Zaware
  14. 14. Segment 2: The business is either strong but the market is not attractive or the market is strong and the business is not strong enough to pursue potential opportunities. Decision makers should make judgment on how to further deal with these SBUs or products. Some of them may consume too much resource and are not really promising any strong potential while others may need additional resources and better strategy for growth. 14Prof. (Dr.) Nitin Zaware
  15. 15. Segment 3: This is the worst positioning segment. Businesses or products and services in this segment are very weak and their market is not attractive. Decision makers should consider either repositioning these SBUs into a different market segment, develop better cost-effective offering, or get rid of these SBUs and invest the resources into more promising and attractive SBUs. 15Prof. (Dr.) Nitin Zaware
  16. 16. Advantages of GE Matrix: 1)It offers an intermediate classification of medium and average ratings. 2)It incorporates a larger variety of strategic variable like the market share and industry size. 3)It is a powerful analytical tool to channel corporate resources to businesses that combine medium to high industry attractiveness with an average to strong business competitive position. Disadvantages: The major drawback of the GE matrix is that it only provides broad strategic prescriptions rather than the specifics of business strategy. 16Prof. (Dr.) Nitin Zaware
  17. 17. Advantages of Portfolio Analysis Encourages Managemen t for Evaluation Stimulates Use of Externally Oriented Data Key Areas Cash Flow Balance Portfolio Diverse Perspective Flexible Comparisons 17Prof. (Dr.) Nitin Zaware
  18. 18. Advantages of Portfolio Analysis: 1) Encourages Management for Evaluation: It encourages management to evaluate each of the organization's businesses individually and to set objectives and allocate resources for each. 2) Stimulates Use of Externally Oriented Data: It stimulates the use of externally oriented data to supplement management's intuitive judgment. 3) Key Areas: These models highlight certain aspects of business that are considered essential to success or failure. 4) Cash Flows : They focus on cash flow requirements of the SBU's and help identify the different cash flow implications and requirements of different business activities. This helps management to carry out its resource allocation function. 18Prof. (Dr.) Nitin Zaware
  19. 19. 5) Balance Portfolio : They help identify strengths and weaknesses in the portfolio, the gaps that to be filled; when a new SBU needs to be added or when one needs to be removed; and the duplicative businesses in the portfolio. 6) Diverse Perspective : The diverse activities of a multi-business company are analyzed in a systematic manner and enterprise diversity highlighted. 7) Flexible Comparisons : Some matrices, like the McKinsey Matrix, are highly flexible in being able to select different factors for different industries. This kind of analysis can provide coverage of a wide number of strategically relevant variables. 19Prof. (Dr.) Nitin Zaware
  20. 20. Disadvantages of Portfolio Analysis Disadvantages To Simple Market Share Market Share and Cash Flow Mismatch Market Share and Cost Savings Mismatch Subjective Numbers Static Pictures Multiple SBUs Conflict of Interests Inappropriate divesting 20Prof. (Dr.) Nitin Zaware
  21. 21. Disadvantages of Portfolio Analysis: 1) Too Simple: Matrix models are simplistic. The important factors are reduced to only two dimensions (e.g. market share and business attractiveness) other factors are necessarily excluded or lose their distinctiveness in the collapsed dimensions. 2) Market Share: Market share, though used widely, may not be the best measure of a company's success. For example, product differentiation for a particular market segment may have low market share but produce high success within a market segment. 3) Market Share and Cash Flow Mismatch : High market share in a low-growth industry does not necessarily result in large positive cash flow characteristics of a "cash cow" business. 21Prof. (Dr.) Nitin Zaware
  22. 22. 4)Market Share and Cost Savings Mismatch : The connection between relative market share and economics of scale may also not be a direct relationship. 5) Subjective Numbers : The numerical format of some matrices may lead the user to place greater confidence in them than is warranted. The numbers from most ratings are subjectively derived, subject to personal biases, political pressure, and budgetary needs. 6) Static Pictures : The analyses most often provide a static picture of SBUs. They are not projective, they do not account adequately for changes due industry evolution, technological change, and other environmental forces, etc. 22Prof. (Dr.) Nitin Zaware
  23. 23. 7) Multiple SBUs : There is a limit to the number of SBUs that can be examined; otherwise the resulting analysis becomes increasingly superficial. Such problems can occur when the volume exceeds 40-50 SBUs. 8) Conflict of Interests : When a SBU contains several different but related business conflicts of interest can occur between the cash flow priorities of a SBU and the priorities of the company as a whole. 9) Inappropriate divesting : Improper application of portfolio techniques may result in inappropriate divesting of useful between the cash flow priorities of a SBU and the priorities of the company as a whole. 23Prof. (Dr.) Nitin Zaware
  24. 24. Prof. (Dr.) Nitin Zaware 24

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