PORTFOLIO MANAGEMENT TOOLS

Alokesh Banerjee

The aim of a portfolio analysis 1) Analyze its current business portfolio and decide

which SBU's should receive more or less investment, and

2) Develop growth strategies for adding new products and businesses to the portfolio

3) Decide which businesses or products should no longer be retained.

The BCG Matrix (Boston Consulting Group Matrix) is the best-known portfolio planning framework. The GE / McKinsey Matrix is a later and more advanced form of the BCG Matrix.

GE VS BCGThe GE / McKinsey Matrix is more sophisticated than the BCG Matrix

in three aspects: 1. Market (Industry) attractiveness replaces market growth as the

dimension of industry attractiveness. Market Attractiveness includes a broader range of factors other than just the market growth rate that can determine the attractiveness of an industry / market.

2. Competitive strength replaces market share as the dimension by which the competitive position of each SBU is assessed. Competitive strength likewise includes a broader range of factors other than just the market share that can determine the competitive strength of a Strategic Business Unit.

3. Finally the GE / McKinsey Matrix works with a 3*3 grid, while the BCG Matrix has only 2*2. This also allows for more sophistication.

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– Attempt to explain why different SBU had different

profitability

* InternalFactors Market Share Sales Force Marketing Customer service R&D Manufacturing Distribution Financial resource Image Breadth of product line Quality/Reliability Managerial Competence

** External Factors Market size Market growth rate CyclicalityCompetitive structureBarriers to entry Industry profitabilityTechnolog y Inflation Regulation Manpower availability Social issuesEnvironmental issuesPolitical issuesLegal issues

**

*

High AttractivenessStrong Competitive PositionThe strategy advice for this cell is to invest for growth. Consider the following strategies: provide maximum investment diversify consolidate your position to focus your resources accept moderate near-term profits to build share

High AttractivenessAverage Competitive PositionThe strategy advice for this cell is to invest for growth. Consider the following strategies: build selectively on strength define the implications of challenging for market leadership fill weaknesses to avoid vulnerability

High AttractivenessWeak Competitive PositionThe strategy advice for this cell is to opportunistically invest for earnings. However, if you can't strengthen your enterprise you should exit the market. Consider the following strategies: ride with the market growth seek niches or specialization seek an opportunity to increase strength through acquisition

Medium AttractivenessStrong Competitive PositionThe strategy advice for this cell is to selectively invest for growth. Consider the following strategies: invest heavily in selected segments, establish a ceiling for the market share you wish to achieve seek attractive new segments to apply strengths

Medium AttractivenessAverage Competitive PositionThe strategy advice for this cell is to selectively invest for earnings. Consider the following strategies: segment the market to find a more attractive position make contingency plans to protect your vulnerable position

Medium AttractivenessWeak Competitive PositionThe strategy advice for this cell is to preserve for harvest. Consider the following strategies: act to preserve or boost cash flow as you exit the business seek an opportunistic sale seek a way to increase your strengths

Low AttractivenessStrong Competitive PositionThe strategy advice for this cell is to selectively invest for earnings. Consider the following strategies: defend strengths shift resources to attractive segments examine ways to revitalize the industry time your exit by monitoring for harvest or divestment timing

Low AttractivenessAverage Competitive PositionThe strategy advice for this cell is to restructure, harvest or divest. Consider the following strategies: make only essential commitments prepare to divest shift resources to a more attractive segment

Low AttractivenessWeak Competitive PositionThe advice for this cell is to harvest or divest. You should exit the market or prune the product line.

Strategic implications from the Industry Attractiveness – Business Strength Matrix

-Grow-Seek dominance-Maximise investment

-Indentify growth segments-Invest strongly-Maintain position elsewhere

-Maintain overall position-Seek cash flow-Invest at maintanence level

-Evaluate potentila for leadership via segmentation-Identify weaknesses-Build strengths

-Identify growth segments-Specialise-Invest secratively

-Prune lines-Minimise investment-Position to divest

-Specialise-Seek niches- Consider acquisition

-Specialise- seek niches-Consider exit

-Trust leader’s statemenship- Sic on competitors cash generation- time exit and divest

Industry Attractiveness

Busi

ness

Str

engt

hs

High Medium Low

Low

M

ediu

mH

igh

GE Multifactor Portfolio MatrixIndustry Attractiveness

Busi

ness

Str

eng t

hs

High

High

Medium

Medium

Low

Low

Invest/Grow

Selectivity/earnings

Harvest /Divest

Protect Position

Invest to Build

Build selectively

Build selectively

Selectively manage for earnings

Limited expansion or harvest

Protect & refocus

Divest

Manage for earnings

The nine cells in the matrix can be grouped into three major segments:• Segment 1: This is the best segment. The business is strong and the

market is attractive. The company should allocate resources in this business and focus on growing the business and increase market share.

• 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. Some of them may consume to much resources and are not promising while others may need additional resources and better strategy for growth.

• Segment 3: This is the worst segment. Businesses in this segment are 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.

Strategy Implications of Attractiveness/Strength Matrix

• Businesses in upper left corner– Accorded top investment priority– Strategic prescription is grow and build

• Businesses in three diagonal cells– Given medium investment priority– Invest to maintain position

• Businesses in lower right corner– Candidates for harvesting or divestiture– May be candidates for an overhaul and reposition

strategy

The Attractiveness/Strength Matrix

• Allows for intermediate rankings between high and low and between strong and weak

• Incorporates a wide variety of strategically relevant variables

• Stresses allocating corporate resources to businesses with greatest potential for

– Competitive advantage and

– Superior performance

Decide Resource Allocation Priorities and Strategic Direction

• Objective:– “Get the biggest bang for the buck”

in allocating corporate resources • Procedure:

– Rank each business from highest to lowest priority for corporate resource support and new investment (steer resources to high opportunity areas and limit support to low opportunity areas)

– Develop a general strategic direction for each business

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The GE matrix has 5 steps:

• One - Identify your products, brands, experiences, solutions, or SBU's.

• Two - Answer the question, What makes this market so attractive?

• Three - Decide on the factors that position the business on the GE matrix.

• Four - Determine the best ways to measure attractiveness and business position.

• Five - Finally rank each SBU as either low, medium or high for business strength, and low, medium and high in relation to market attractiveness.

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• There is no research to prove that there is a relationship between market attractiveness and

business position. • The interrelationships between SBU's, products, brands, experiences or solutions is not

taken into account. • This approach does require extensive data gathering. • Scoring is personal and subjective. • There is no hard and fast rule on how to weight elements. • The GE matrix offers a broad strategy and does not indicate how best to implement it.

The Life Cycle Portfolio Matrix OR Arthur D. Little Matrix

MATURITY

COM

PETI

TIVE

PO

SITI

ON

Dominant

Strong

Favourable

Tenable

Weak

Nonviable

Embryonic Growth Mature Aging

Wide range of strategic options

Caution, selective development

Danger, withdraw to market niche,divert or liquidate

Strategic positioning in terms of market share suggested by Life – cycle Portfolio Matrix

All out push for shareHold position

Hold positionHold share

Hold positionGrow with industry

Hold position

Attempt to Improve positionAll out push for share

Attempt to improve positionPush for share

Hold positionGrow with industry

Hold position OrHarvest

Selective or all out Push for share Selectively attempt to Improve position

Attempt to improve positionSelective push for share

Custodial or maintenanceFind niche and attempt to protect

Harvest OrPhased withdrawal

Selectively push for position

Find niche and protect it

Find niche and hang on OrPhase withdrawal

Phased withdrawalOrAbandon

Up OrOut

Turnaround OrAbandon

TurnaroundOrPhased withdrawal

Abandon

Favorable

Dominant

Strong

Tenable

Weak

Embryonic Growth Mature Aging

Strategic positioning in term sof investment requirements suggested by the Life Cycle Portfolio Matrix

Invest Slightly Faster Than Market Dictates Invest to Sustain

Growth Rate (andPreempt New (?)Competitors)

Reinvest as Necessary Reinvest as Necessary

Invest as Fast as Market Dictates

Invest to Increases Growth Rate (andImprove Position)

Reinvest as Necessary Minimum Reinvestment or Maintenance

Invest Selectively Selective Investment to Improve Position

Minimum and/orSelective Reinvestment

Minimum Maintenance Investment or Disinvest

Invest (VerySelectively) Selective Investment Minimum Reinvestment or Disinvest

Disinvest or Divest

Invest or Divest Invest or Divest Invest Selectively or Disinvest Divest

The terms invest and divest are used in the broadest sense and are not restricted to property, plant & equipment.

Dominant

Strong

Favorable

Tenable

Weak

Strategic positioning in terms of Profitability and Cash flow suggested by Life – cycle Portfolio Matrix

Probably Profitable, But Not Necessary Net Cash Borrowe

Profitable Probably Net Cash Producer (But NotNecessary)

Profitable Net Cash Producer

Profitable Net Cash Producer

May Be Unprofitable Net Cash Borrower

Probably Profitable Probably Net Cash Borrower

Profitable Net Cash Producer

Profitable Net Cash Producer

Probably Unprofitable Net Cash Borrower

Marginally ProfitableNet Cash Borrower

Moderately Profitable Net Cash Producer

Moderately Profitable Cash Flow Balance

Unprofitable Net Cash Borrower

Unprofitable Net Cash Borrower or Cash Flow Balance

Minimally Profitable Cash Flow Balance

Minimally Profitable Cash Flow Balance

Unprofitable Net Cash Borrower

Unprofitable Net Cash Borrower or Cash Flow Balance

Unprofitable Possibly Net Cash Borrower or Net Cash Producer

Unprofitable (Writeoff)

Dominant

Strong

Favorable

Tenable

Weak

Embryonic Growth Mature Aging

Criteria for classification of competitive position

• Dominant – dominant competitors are very rare. Dominance often results from a quasi – monopoly or from a strongly protected technological leadership.

• Strong – not all industries have a dominant or strong competitors. Strong competitors can usually follow strategies of their choice, irrespective of their competitor’s move

• Favourable – when industries are fragmented, with no competitors clearly standing out, the leader tend to be in a favourable position

• Tenable – a tenable position can usually be maintained profitable through specialisation in a narrow or protected market niche. This can be a geographical specialisation or a project specialisation

• Weak – weak competitors can be intrinsically too small to survive independently and profitably in the long term, given the competitive economies of their industries, or they can be larger and potentially strong competitors, but suffering from costly past mistakes or from a critical mistake

• EXAMPLE: Portfolio planning models such as those developed by General Electric or the Boston Consulting Group are widely used and commonly known. Nevertheless, proving that popularity in itself is not necessarily a guarantee of suitability, Ciba-Geigy decided to develop a customized model to fit its intention “to improve the process of resource allocation and performance assessment.” The main idea was to differentiate the various strategic business units – to give them different objectives, different types of managers, and to allow them to adopt the organization structure that was appropriate to them. The model that Ciba-Geigy developed categorizes strategic business units into five types:

• 1. Development – new products at the beginning of the product life cycle. • 2. Growth – products that have the potential to become profitable. • 3. Pillar – profitable products targeted to wide-breadth markets. • 4. Niche – similar to pillar products, but differing in the size of the market. • 5. Core – traditional products that compete in mature markets and should

therefore be managed as such. (Source: "Portfolio Planning at Ciba-Giegy and the Newport Investment Proposal", 1995, Harvard Business School Case Services Order Number 9-795-040 Rev. 6/95.)

Shell’s directional policy matrix

Figure 20.5

Shell’s Directional Policy Matrix• Developed by Shell international Chemical

Company to identify the areas in which they should operate

• The vertical axis measures the company’s present competitive position

• The horizontal axis gives the prospect for profitable operation in that sector

• The criteria used are market growth rate, market quality, feed stock and environmental aspects

• Shell considered that creating a single strategy plan did not work in the changing environment.

• It tried to develop many scenarios based on a number of assumptions about the future environment, these could be optimistic, pessimistic and straightline

• Depending upon events different scenario was used

Positions in Shell’s Matrix

Each of the zones is described as follows: • Leader - major resources are focused upon the SBU.• Try harder - could be vulnerable over a longer period of time, but

fine for now.• Double or quit - gamble on potential major SBU's for the future.• Growth - grow the market by focusing just enough resources here.• Custodial - just like a cash cow, milk it and do not commit any more

resources.• Cash Generator - Even more like a cash cow, milk here for

expansion elsewhere.• Phased withdrawal - move cash to SBU's with greater potential.• Divest - liquidate or move these assets on a fast as you can.

Business Sector Prospects. (Horizontal x-Axis)

Profitability prospects (or attractiveness) for businesses in the petroleum sector are judged on four criteria

1. Market Growth Rate – market growth is necessary for the growth of sector profits but sectors with the highest growth rate are not necessarily those with the largest profit growth. Shell advocated a rating system for this factor where the midpoint was the average growth rate for the industry. A star rating system was used rating the growth rate from a one star to a five star.

2. Market Quality – this is a difficult concept to quantify and to get to a rating for the sector. A number of questions must be answered – (Shell questions)

• Has the sector a record of high, stable profitability?• Can margins be maintained when manufacturing capacity exceeds demand?• Is the product resistant to commodity pricing behaviour?• Is the technology of production freely available or is it restricted to those who developed it?• Do relatively few producers supply the market?• Is the market free from domination by a small group of powerful customers?• Has the product high added value when converted by the customer?• In the case of a new product, is the market destined to remain small enough not to attract too many

producers?

• Is the product one where the customer has to change his formulation or even his machinery if he changes supplier?

• Is the product free from the risk of substitution by an alternative synthetic or natural product?• A business sector rating yes on all or most of these questions would score a four or five star rating.3. Industry Feedstock Situation• Expansion of productive capacity is often hindered by the uncertainty of feedstock supply. • If the feed stocks in the sector have a strong pull towards an alternative use or are difficult to

assemble in large quantities then this is a plus for sector prospects and the rating is better than average.

• If the feedstock is a by-product of another process and the main product consumption is growing at a faster rate than that of the by-product, pressure might result due to low prices or direct investment by the by-product producer to increase its consumption. This would be given a lower than average rating.

4. Environmental (Regulatory) Aspects• Business sector prospects can be affected by restrictions on manufacture, transportation and

marketing of a product. If this has not been built into the forecast of market growth, it must be assessed separately. Strong positive or negative environmental pr regulatory influences must be taken into account.

Competitive Capabilities (Vertical y- Axis)

A petroleum company can be judged as strong, average or weak on three major criteria. Shell recommended reviewing these criteria in relation to significant competitors in the relevant business sector. (this axis is similar to the Business Strength axis on the GE-McKinsey matrix)

Market Position• The percentage share of the total market as well as the degree to which this share is secure is

of primary importance. Shell looked at this factor in terms of a relative market leadership position rather than market share and rated this factor on a 5 star rating scale as follows:

• Leader – 5 stars – this type of company has market leadership and technical leadership usually accompanies this.

• Major Producer – 4 stars – this occurs where no single company is leader but there are two to four competitors are closely placed.

• Viable Producer -3 stars – this type of company has a strong viable stake but falls below the top league

• Minor- 2 stars - businesses in this category are less than able to support research and development in the long term

• Negligible- 1 star – companies with a negligible position in the market fall into this category

Major Advantage

The general technique of this model can be applied to any business with separate identifiable sectors even though it was developed for the petro-chemical industry This model works well in the petroleum industry but adaptations should be made when using it outside the industry.

Model weaknessesThe Shell DPM has been used in different industries and

some practical problems have been raised.

1. There is a need to change the questions for companies not in the petroleum industry and the questions regarding the factors should be customised for the company doing the analysis.

2.  Shell advocated equal weightings for the criteria on each of the axes. This worked for Shell but other companies may feel that certain factors are more important than others and therefore the weights should be adjusted accordingly

3. The environment was the fourth factor on the business sector prospects axis yet Shell often left this factor out altogether. Environment can be a very important factor as it deals with the wider question of risk

4.  When using the Shell DPM methodology, it was found that the star rating system added very little value and a point’s allocation rating was superior.

Shell’s Vs BCG / GE

• BCG has problem with market share as it may not inclue viable and minor producers, as will as leaders and majors. Shell’s is based on the concept of market leadership instead of market share. In this one can select criteria for different industry sector’s and situations

• Mckinsey’s portfolio planning at GE was paralleled in Europe by Shell which pioneered the concept of scenario planning

Product/market Evolution Portfolio Matrix

• The product/market evolution matrix was formulated to allow the analyst to focus corporate- and business-level strategy decisions on the stage of product/market evolution and its relationship with market position

• Products are plotted in terms of their product/market evolution and the competitive position

• Circles vary in size according to their respective industry size that represent business units

• Each circle contains a pie wedge that corresponds in size to its Market Share

PROCEDURE TO DEVELOP THE BUSINESS PORTFOLIO MATRIX Classify various activities of the company into different business segments or strategic business units (SBUs).

For each business segment determine the growth rate of the market. This is later plotted on a linear scale

Compile the assets employed for each business segment and determine the relative size of the business within the company

Estimate the relative market shares for the different business segments. This is generally plotted on a logarithmic scale

Plot the position of each business on a matrix of business growth rate and relative Market Share. A bubble represents the size of the business; a circle with a diameter corresponding to say the assets employed in that business.

For precise plotting, it has been recommended that the radius of a bubble corresponding to a business/product may be defined thus:

r = square root of (P * R2) Where, R = radius of the large circle (total company sales) P = sales of a product as percentage (expressed in

decimal) of the total sales

IDENTIFICATION OF STRATEGIES FOR DIFFERENT PRODUCTS

A product in the Development or Growth stage has a potential to be a Star. If the market share is:

(1 ) large in these growth-oriented stages, more resources must be invested to develop competitive position.

(2)If market share is low, a strategy to improve the same must be developed.

(3)If the industry is relatively small and market share is low despite high growth stage, Management must consider divesting and redeploying resources in other more competitive business A business in the Shakeout or Maturity stage has a potential to be Cash Cow. Investments could be made to maintain high market share

. • A business in Decline stage with a low market share

would be a Dog business. Though in the short run it may generate cash, in the long run, however, it should be considered for divestment or liquidation

The End

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