EVALUATING DIVERSIFIED PORTFOLIOSTHE BCG GROWTH-SHARE MATRIX (Boston Consulting Group)DIMENSIONS Industry Growth Rate Compared to GDP Relative Market Share Uses ratios instead of absolute market sharesCLASSIFICATIONS Question Marks (or Problem Children or Wildcats) Stars Cows DogsADVANTAGES & IMPLICATIONS It is quantifiable and easy to use Easy to remember terms and their meaning when referring to business units Each business unit moves across the matrix in predictable ways over time Focuses attention on cash flows and needs
WEAKNESSES IN THE BCG GROWTH-SHARE MATRIXTOO SIMPLISTIC—IT ONLY HAS A FOUR-CELL MATRIX WHERE DO “AVERAGE” BUSINESSES BELONG?PREJUDICIAL CLASSIFICATION SCHEME DOGS & PROBLEM CHILDREN v. STARS & COWS…VERY BIASED TERMS THE TRENDS & MOVEMENTS OF THESE UNITS SEEM MORE IMPORTANTDOES HIGH MARKET SHARE ALWAYS MEAN HIGH PROFITABILITY? FIRMS CAN LOSE MONEY WHILE HOLDING A LARGE MARKET SHARE LOW-SHARE BUSINESSES CAN ALSO BE PROFITABLEONLY CONSIDERS RELATIONSHIP TO THE MARKET LEADER—WHILE OTHERS ARE IGNORED WHAT ABOUT SMALL COMPETITORS WITH FAST-GROWING MARKET SHARES?GROWTH RATE IS ONLY ONE ASPECT OF INDUSTRY ATTRACTIVENESSMARKET SHARE IS ONLY ONE ASPECT OF OVERALL COMPETITIVE POSITION
TWO DIMENSIONS (McKinsey & Co) Industry Attractiveness MARKET SIZE & GROWTH RATE INDUSTRY PROFITABILITY INTENSITY OF COMPETITION BARRIERS TO ENTRY / EXIT TECHNOLOGICAL & PRODUCT CONSIDERATIONS CAPITAL REQUIREMENTS EMERGING OPPORTUNITIES & THREATS SOCIAL, ENVIRONMENTAL, & POLITICAL FACTORS
Business Strength / (Competitive Position) RELATIVE MARKET SHARE RELATIVE PRICE, QUALITY, & SERVICE v. RIVALS PROFIT MARGINS and COST POSITION v. RIVALS KNOWLEDGE OF CUSTOMERS & MARKETS TECHNOLOGICAL CAPABILITY & LEADERSHIP FINANCIAL & PHYSICAL RESOURCES CALIBER OF MANAGEMENT & STAFF COMPETENCIES MATCH KEY SUCCESS FACTORS
STRENGTHS Uses more comprehensive measures and variables in assessing industry attractiveness and business strength / competitive position. It does not lead to as simplistic conclusion as the BCG grid. In this 9 cell approach allows for intermediate rankings between high /low and strong / weak . It stresses channeling of resources to areas with the greatest probability of achieving competitive advantage and superior performance .
WEAKNESS OF GE 9 CELL MATRIXWEAKNESSES :- It provides no real guidance on the specifics of what strategy to follow ….its too general. It cannot spot units that area about to become winners because their industries are entering the takeoff stage. The use of numeric estimates seems objective, but is really very subjective.
Brief History- hofer matrix The principal purpose of analysis for strategic planning is to identify the major opportunities and threats a business unit faces in the future and to identify the skills around which it can develop a strategic intelligence plan to exploit the opportunities and negotiate around the threats. Hofer and Schendel felt that the major weakness with the General Electric business screen was that it didn’t effectively depict the positions of new businesses that are just starting to grow in new industries. They suggested in 1975 that changes in basic competitive positions are easier to accomplish at certain stages in the evolution of an industry than others.
THE HOFER LIFE-CYCLE MARKET EVOLUTION MATRIXTWO DIMENSIONS (Charles Hofer & A. D. Little, Co) Stage of Industry / Market Evolution EARLY DEVELOPMENT RAPID GROWTH / TAKE-OFF SHAKE-OUT MATURITY / SATURATION DECLINE / STAGNATION Business Strength / (Competitive Position) SAME DIMENSIONS AS USED IN THE GE BUSINESS SCREENADVANTAGES Can be used to identify and track developing winners Illustrates how the firm’s businesses are distributed across the stages of industry evolution
THE HOFER LIFE-CYCLE MARKET EVOLUTION MATRIX BUSINESS STRENGTH / COMPETITIVE POSITION STRONG AVERAGE WEAK EARLY ----------------------------- - DEVELOPMENT ----------------------------- -STAGE OF RAPID GROWTH / TAKE-OFFINDUSTRY / MARKET ------------------------------ SHAKE-OUTEVOLUTION ----------------------------- - MATURITY / SATURATION ----------------------------- - DECLINE / STAGNATION ----------------------------- - ONLY ONE DIMENSION IS DIFFERENT FROM THE GE BUSINESS SCREEN Except for the Stage of Market Evolution, this model is identical to the GE Business Screen
IN SUMMARY: USING PORTFOLIO ANALYSIS PROS AND CONSSTRENGTHS• It encourages top management to evaluate each line of business separately , and to set objectives and allocate resources to each .• It stimulates the use of externally oriented data to supplement management judgment.• It raises the issue of cash flow availability for use in expansion and growth .• It graphically communicates the mix of business in which part firm has invested in .
IN SUMMARY: USING PORTFOLIO ANALYSIS CONSWEAKNESSES• Defining product or market segments is very difficult .• It suggests standard strategies that can miss opportunities or be impractical.• It provides an illusion of scientific rigor ,when positions are really based on subjective judgments.• It does not always make clear that what makes an industry attractive and where a product is in the life cycle.• Following portfolio prescription may reduce profits – dogs can make money!
EVALUATING INDUSTRY ATTRACTIVENESS (UNWEIGHTED)INDUSTRY FACTOR CLASSIFIED ASMARKET SIZE & GROWTH RATE AVERAGEINDUSTRY PROFITABILITY ATTRACTIVEINTENSITY OF COMPETITION UNATTRACTIVEBARRIERS TO ENTRY/EXIT UNATTRACTIVESEASONALITY/CYCLICALITY AVERAGETECHNOLOGY & PRODUCT CONSIDERATIONS AVERAGECAPITAL REQUIREMENTS UNATTRACTIVEEMERGING OPPORTUNITIES & THREATS AVERAGESOCIAL, REGULATORY, & POLITICAL FACTORS AVERAGESTRATEGIC FIT WITH OTHER CURRENT LINES OF BUSINESS ATTRACTIVE OVERALL EVALUATION = AVERAGE
EVALUATING BUSINESS STRENGTH / COMPETITIVE POSITION (UNWEIGHTED)USE THE FOLLOWING SCHEME TO CLASSIFY EACH BUSINESS STRENGTH FACTOR… STRONG AVERAGE WEAK---------------------------------------------------------------BUSINESS STRENGTH FACTOR CLASSIFIED ASOUR RELATIVE MARKET SHARE STRONGOUR RELATIVE PRICE v. RIVALS AVERAGEOUR QUALITY & SERVICE v. RIVALS AVERAGEOUR RELATIVE COST POSITION v. RIVALS STRONGOUR PROFIT MARGINS v. RIVALS STRONGKNOWLEDGE OF CUSTOMERS & MARKETS AVERAGETECHNOLOGICAL CAPABILITY / LEADERSHIP WEAKFINANCIAL & PHYSICAL RESOURCES AVERAGECALIBER OF MANAGEMENT & STAFF STRONGCOMPETENCIES MATCH KEY SUCCESS FACTORS AVERAGEOVERALL EVALUATION = AVERAGE to STRONG
WHICH BUSINESS UNITS HAVE THE BEST/WORST PERFORMANCE?ASSESS THE TRENDS RE : Sales Growth Profit Growth Contribution to Company Earnings Return on Capital Invested in the Business (ROA) Cash Flow Generated