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The aim of portfolio analysis is to: - Analyze all businesses in the companys portfolio and decide how much to invest in each - Develop growth strategies and identify new product opportunities. - Identify businesses from which to exit.
Portfolio Planning Models: BCG Matrix GE Nine Cell Matrix McKinsey Matrix (MACS Framework)
BCG MATRIX
The BCG matrix model is a portfolio planning model developed by Bruce Henderson of the Boston Consulting Group in the early 1970's.
The BCG model categorizes businesses into four categories based on combinations of two dimensions - market growth and relative market share, thus it is also referred to as growth-share matrix.
BCG MATRIX
HIGH INDUSTRY
Stars
Question Marks
GROWTH RATE
10%
Cash Cows LOW Dogs
HIGH
1x
LOW 0.1x
STARS
SBUs classified as stars have the following main characteristics: High relative market share High projected industry growth rate Generate high profits Require significant investments in order to maintain lead and take advantage of industry growth
CASH COWS
High relative market share Low industry growth potential Generate substantial profits due to their market share. This surplus cash may be diverted to other businesses.
QUESTION MARKS
They are products with high growth potential Current market share is considerably low, therefore, substantial investments would be required to take advantage of the market growth potential
Ideally the firm would like to convert these into stars, but since there is no guarantee of this happening they are referred to as question marks.
DOGS
They belong to industries that have a slow-growth potential The SBU has a low relative market share It is difficult, and expensive, to increase market share because of the above two reasons.
SUGGESTED STRATEGIES
Stars: Build. Cash Cows : Hold/Harvest. Question Marks : Build/Harvest. Dogs : Divest.
GE NINE-CELL MATRIX This matrix evaluates various businesses of the firm along two composite dimensions: Business Strength on the horizontal (X) axis Industry Attractiveness on the vertical (Y) axis
Factors considered for determining industry attractiveness: Market size and growth rate Industry Profit Margin Competitive Intensity Seasonality Cyclicality Economies of Scale Technology Social, Environmental, legal and human impacts
Factors considered for determining business strength: Relative market share Profit margins relative to competitors Ability to compete on price and quality Knowledge of customer and market Competitive strengths and weaknesses Technological capability Calibre of management
High
Medium Industry
Attractiveness
Low
Strong
Weak
GE STOPLIGHT MATRIX
High
Medium Industry
Attractiveness
Low
Strong
Weak
Winner
High
Industry Attractiveness
Medium
Low
Poor
MACS Framework
Parent Companys ability to extract value from the business unit, relative to other One of the Pack potential owners
Natural Owner
HIGH
MEDIUM
LOW
Strategic Scope
Narrow Focused Differentiation Focused Cost Leadership
Differentiated
Product/Service
Low Cost
Product/Service