Portfolio Analysis < BCG Matrix, GE/Mckinsey Matrix >

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Portfolio Analysislt BCG Matrix, GE/Mckinsey
Matrix gt
Prof. Eui-ho Suh (ehsuh_at_postech.ac.kr) POstech
Strategic Management of Information System Lab
(POSMIS) Industrial Eng, POSTECH

• by Sang jun Kim
• April 9, 2004

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

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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

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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

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3. GE/Mckinsey Matrix (1/3)

• the GE/Mckinsey matrix attempt to
• improve upon the BCG Matrix

• 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

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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

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3. GE/Mckinsey Matrix (3/3)

• Limitations of GE/Mckinsey Matrix

• Core competencies are not represented
• Interactions between Strategic Business Units
  are not considered

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4. Advantages and limitation of Portfolio analysis

• Portfolio offers certain advantages

• It encourages top management to evaluate each of
  the corporations businesses
• individually and to set objectives and
  allocate resources for each
• It stimulates the use of externally oriented
  data to supplement managements judgment
• It raises the issue of cash flow availability
  for use in expansion and growth
• Its graphic depiction facilitates communication

• Portfolio have some very real limitations Matrix

• 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