business portfolio analysis

Prof. (Dr.) Nitin Zaware 1

Business Portfolio Analysis

Prof.(Dr.) Nitin Zaware

2

Business Portfolio Analysis :Business Portfolio Analysis is an

organizational strategy formulation technique that is based on the philosophy that Organizations should develop strategy much as they handle investment portfolios.

Portfolio analysis is a systematic way to analyze the products and services that make up an association's business portfolio.

In the way, in which the sound financial investments should be supported and unsound ones discarded, sound organizational activities should be emphasized and unsound ones deemphasized.

Prof. (Dr.) Nitin Zaware

3

Purpose of Portfolio Analysis :A viable strategy need for product-

market scopes in determining how strategic objectives will be attained. In a diversified company, one well-accepted concept of product-market scope is the portfolio approach to an organization's overall strategy.

The optimal business portfolio is one that fits perfectly to the company's strengths and helps to exploit the most attractive industries or markets.

An SBU can either be an entire mid-size company or a division of a large corporation.

It normally formulates its own business level strategy and often has separate objectives from the parent company.



The aim of a portfolio analysis is: 1) To Analyse: Analyse its current business portfolio and decide which SBUs should receive more or less investment.

2) To Develop Growth Strategies:Develop growth strategies for adding new products and business to the portfolio.

3) To Take Decisions Regarding Product Retention:Decide which business or products should no longer be retained.


Portfolio Analysis Techniques:1) BCG Matrix:

The basis for many of these matrix analyses grew out of work carried out in the 1960s by the Boston Consulting Group (BCG).

BCG observed in many of their studies that producers tend to become increasingly efficient as they gain experience in making their product and costs usually declined with cumulative production.

The growth-share matrix (aka the product portfolio, BCG-matrix, Boston matrix, Boston Consulting Group analysis, and portfolio diagram) is a chart that had been created by Bruce D. Henderson for the Boston Consulting Group in 1970 to help corporations with analyzing their business units or product lines.


BCG Matrix

High

Stars

Cash Cows Dogs

LowHighLow

Fledglings orquestion

m arks

Relative M arket Share

7

BCG Matrix:a)Dogs : Low Market Share and Low Market

Growth :Dogs are business units or products that

have low market share in a low-growth market. They often don't make much profit, but they don't need much investment either. Much of the time, you'll need to offer a price discount to sell Dog products.

b) Cash Cows: High Market Share and Low Market Growth :

These businesses or products are well established. They're likely to be popular with customers, which makes it easier for you to exploit new opportunities. However, you should avoid spending too much effort on these, because the market is only growing slowly, and opportunities are likely to be limited.



c) Stars: High Market Share and High Market Growth :

Businesses and products in this quadrant are seeing rapid growth. There should be some good opportunities here, and you should work hard to realize them.

d) Question Marks (Problem Children): Low Market Share and High Market Growth :

These are the opportunities that no one knows how to handle. They aren't generating much revenue right now, because you don't have a large market share.


Portfolio Analysis Techniques:2 )GE Nine Cell Matrix:

GE Matrix also called McKinsey Matrix is a strategic management tool for conducting portfolio analysis.

The portfolio which is analyzed with the matrix may include products, services or entire SBUs (strategic business units) owned by the company.

This tool is very similar to the BCG Matrix and you can actually view the GE or McKinsey Matrix is a kind of extension of the BCG Matrix (the multifactor portfolio analysis tool).


GE Nine Cell Matrix

Low

High A

E

D

C

B

M edium

Strong M edium Weak

Competitive strength


2 )GE Nine Cell Matrix: a )The Vertical Axis: Industry Attractiveness

It represents industry attractiveness which weighs composite rating based on eight different factors. These factors are:1)Market size and growth rate.2)Industry profit margin.3)Competitive intensity.4)Seasonability.5)Cyclicality.6)Economics of scale7)Technology and8)Social, environmental, legal and human

impacts.


2 )GE Nine Cell Matrix:b) The Horizontal Axis: Business Strength:

It represents business strength competitive position which is again a weighed composite rating based on seven factors. They are:1)Relative market share2)Profit margins3)Ability to compete on price and quality4)Knowledge of customer5)Competitive strengths and weaknesses6)Technological capability and 7)Calibre of management.


GE Matrix Positions and Strategy:The GE / McKinsey Matrix are actually

divided into nine cells. These 9 cells represent the nine alternatives for positioning of any SBU or product / service offering. Based on clear understanding of all of these factors decision makers are able to develop effective strategies.The nine cells in the matrix grouped into 3 major segments: Segment 1

This is mostly the best segment. The business in this position is strong and the market is attractive.

In this case the company should allocate resources in this business and focus on growing the business and increase its current 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 or products.

Some of them may consume too much resource and are not really promising any strong potential while others may need additional resources and better strategy for growth.


Segment 3:

This is the worst positioning segment. Businesses or products and services in this segment are very 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.


Advantages of GE Matrix:1)It offers an intermediate classification of medium and average ratings.2)It incorporates a larger variety of strategic variable like the market share and industry size.3)It is a powerful analytical tool to channel corporate resources to businesses that combine medium to high industry attractiveness with an average to strong business competitive position.

Disadvantages:The major drawback of the GE matrix

is that it only provides broad strategic prescriptions rather than the specifics of business strategy.


Advantages of Portfolio AnalysisEncoura

ges Management for Evaluati

onStimulates Use of

Externally Oriented

Data

Key Areas

Cash Flow

Balance Portfolio

Diverse Perspectiv

e

Flexible Comparis

ons


Advantages of Portfolio Analysis:1) Encourages Management for Evaluation:

It encourages management to evaluate each of the organization's businesses individually and to set objectives and allocate resources for each.

2) Stimulates Use of Externally Oriented Data: It stimulates the use of externally oriented

data to supplement management's intuitive judgment.

3) Key Areas:These models highlight certain aspects of

business that are considered essential to success or failure.

4) Cash Flows :They focus on cash flow requirements of the

SBU's and help identify the different cash flow implications and requirements of different business activities. This helps management to carry out its resource allocation function.


5) Balance Portfolio :They help identify strengths and weaknesses

in the portfolio, the gaps that to be filled; when a new SBU needs to be added or when one needs to be removed; and the duplicative businesses in the portfolio.

6) Diverse Perspective :The diverse activities of a multi-business

company are analyzed in a systematic manner and enterprise diversity highlighted.

7) Flexible Comparisons :Some matrices, like the McKinsey Matrix,

are highly flexible in being able to select different factors for different industries. This kind of analysis can provide coverage of a wide number of strategically relevant variables.


Disadvantages of Portfolio Analysis

Disadvantage

s

To Simple

Market Share

Market Share and Cash

Flow Mismatch

Market Share and Cost Savings

Mismatch

Subjective Numbers Static

Pictures Multiple SBUs

Conflict of Interests Inappropriate

divesting


Disadvantages of Portfolio Analysis:1) Too Simple:

Matrix models are simplistic. The important factors are reduced to only two dimensions (e.g. market share and business attractiveness) other factors are necessarily excluded or lose their distinctiveness in the collapsed dimensions.

2) Market Share:Market share, though used widely, may not

be the best measure of a company's success. For example, product differentiation for a particular market segment may have low market share but produce high success within a market segment.

3) Market Share and Cash Flow Mismatch :High market share in a low-growth industry

does not necessarily result in large positive cash flow characteristics of a "cash cow" business.


4)Market Share and Cost Savings Mismatch :The connection between relative market

share and economics of scale may also not be a direct relationship.

5) Subjective Numbers :The numerical format of some matrices

may lead the user to place greater confidence in them than is warranted. The numbers from most ratings are subjectively derived, subject to personal biases, political pressure, and budgetary needs.

6) Static Pictures :The analyses most often provide a static

picture of SBUs. They are not projective, they do not account adequately for changes due industry evolution, technological change, and other environmental forces, etc.


7) Multiple SBUs :There is a limit to the number of SBUs that

can be examined; otherwise the resulting analysis becomes increasingly superficial. Such problems can occur when the volume exceeds 40-50 SBUs.

8) Conflict of Interests :When a SBU contains several different but

related business conflicts of interest can occur between the cash flow priorities of a SBU and the priorities of the company as a whole.

9) Inappropriate divesting :Improper application of portfolio techniques

may result in inappropriate divesting of useful between the cash flow priorities of a SBU and the priorities of the company as a whole.


Business Portfolio Analysis is an organizational strategy formulation technique that is based on the philosophy that Organizations should develop strategy………. much as they handle investment portfolios………