This document discusses portfolio analysis tools including the BCG matrix and GE/McKinsey matrix. It provides an overview of each including: 1) The BCG matrix categorizes business units as stars, cash cows, dogs, or question marks based on market growth and market share. It aims to analyze a company's portfolio and determine investment levels. 2) The GE/McKinsey matrix evaluates business units based on industry attractiveness and competitive strength instead of growth and share. It uses a 3x3 grid instead of 2x2. 3) Both tools have advantages in evaluating businesses but also limitations like oversimplifying factors and not capturing interactions between units.

1. Portfolio Analysis
< BCG Matrix, GE/Mckinsey Matrix >
Prof. Eui-ho Suh (ehsuh@postech.ac.kr)
POstech Strategic Management of Information System Lab (POSMIS)
Industrial Eng, POSTECH
by Sang jun Kim
April 9, 2004

2. Contents
BCG Matrix
GE/Mckinsey Matrix
Advantages and Limitation of
Portfolio analysis
Portfolio Analysis

3. 1. Portfolio Analysis
 What is the Business Portfolio ?
 A business portfolio is the collection of Strategic Business Units that make up a
corporation.
 The optimal business portfolio is one that fits perfectly to the company's strengths and
helps to exploit the most attractive industries or markets
 The aim of a portfolio analysis
 Analyze its current business portfolio and decide which SBU's should receive more or less
investment
 Develop growth strategies for adding new products and businesses to the portfolio
 Decide which businesses or products should no longer be retained
 The BCG Matrix is the best-known portfolio planning framework. And the GE / McKinsey
Matrix is a later and more advanced form of the BCG Matrix

4. 2. BCG Matrix (1/3)
 Stars (=high growth, high market share)
- use large amounts of cash and are leaders in
the business so they should also generate large
amounts of cash.
 Cash Cows (=low growth, high market share)
- profits and cash generation should be high, and
because of the low growth, investments needed should
be low. Keep profits high
 Dogs (=low growth, low market share)
- avoid and minimize the number of dogs in a company.
- deliver cash, otherwise liquidate
 Question Marks (= high growth, low market share)
- have the worst cash characteristics of all, because high
demands and low returns due to low market share
- either invest heavily or sell off or invest nothing and
generate whatever cash it can. Increase market share or
deliver cash

5. 2. BCG Matrix (2/3)
 Limitations of BCG Matrix
 The link between market share and profitability is questionable since increasing
market share can be very expensive
 The approach may overemphasize high growth, since it ignores the potential of
declining markets
 The model considers market growth rate to be a given. In practice the firm may be
able to grow the market

6. 3. GE/Mckinsey Matrix (1/3)
 Market (Industry) attractiveness replaces
market growth as the dimension of industry
attractiveness.
 Competitive strength replaces market share as the
dimension by which the competitive position of
each SBU is assessed.
 GE / McKinsey Matrix works with a 3 x 3 grid, while
the BCG Matrix has only 2 x 2. This also allows for
more sophistication
 the GE/Mckinsey matrix attempt to
improve upon the BCG Matrix

7. 3. GE/Mckinsey Matrix (2/3)
Market Attractiveness
- Market size
- Market growth rate
- Pricing trends
- Competitive intensity / rivalry
- Overall risk of returns in the industry
- Demand variability
- Segmentation
Competitive Strength
- Strength of assets and competencies
- Relative brand strength
- Market share
- Market share growth
- Customer loyalty
- Record of technological or other innovation
Strategic Business Units are portrayed as a circle plotted in the GE McKinsey Matrix
 The size of the circles represent the Market Size
 The size of the pies represent the Market Share of the SBU's
 Arrows represent the direction and the movement of the SBU's in the future

8. 3. GE/Mckinsey Matrix (3/3)
 Limitations of GE/Mckinsey Matrix
 Core competencies are not represented
 Interactions between Strategic Business Units are not considered

9. 4. Advantages and limitation of Portfolio analysis
 Portfolio offers certain advantages
 Portfolio have some very real limitations Matrix
 It encourages top management to evaluate each of the corporation’s businesses
individually and to set objectives and allocate resources for each
 It stimulates the use of externally oriented data to supplement management’s judgment
 It raises the issue of cash flow availability for use in expansion and growth
 Its graphic depiction facilitates communication
 It is not easy to define market segments
 It suggests the use of standard strategies that can miss opportunities or be impractical
 It provides an illusion of scientific rigor when in reality positions are based on subjective
judgments
 It is not always clear what makes an industry attractive or what stage a product is at in
its lifecycle