Mercer：Business Portfolio Analysis

Matrix Quadrants
Relative Market Share High Low High Product Sales Growth Rate Low
Key Assumptions of BCG Matrix
Stable cost/price relationship
Not valid if the firm is pricing on projected lower average unit costs in the future
Three Paths to Failure (cont’d)
Relative Market Share High Low High Market Growth Rate Low
PIMS (Profit Impact of Marketing Strategy) Program
Database of nearly 3,800 SBUs Representing more than 500 firms Member firms have been in the program from 2 to 12 years The program provides
BCG Matrix (cont’d)
The vertical axis is the growth rate
5 levels may be used: product, product lines, market segment, SBU and business growth rate Horizontal line is usually set as 10% Growth Rate SBUs above the set value (10% line) represents high growth rates Conversely, SBUs below this value depicts slower growth rate
Relative Market Share (Log Scale)
BCG Matrix (cont’d)
The horizontal axis is the Relative Market Share shown in a log scale Vertical line is usually set as 1.0 Relative Market Share An SBU to the left of this line means it is the market leader in the industry or segment in which it operates Conversely, an SBU to the right of this line (1.o RMS) means it is not the leader
Maintain market share and cost leadership until further investment becomes marginal
Dogs
Investment
Gradually reduce capacity
Earnings— Earnings—High to low CashCash-flow
Balancing cash flows among business units, and Balancing stages in the product lifelifecycle (PLC)
BCG Product Portfolio Matrix Dimensions
Product Sales Growth Rate
Relative Market Share High Low High Product Sales Growth Rate Low Powder Actuated Tools Anchoring Systems Cable Tray Systems Electric Power Tools
Concrete Lifting Systems
Market leader influences the average costs Profit margin is a function of market share
This ignores profitable niches
Strategic Perspectives of Products in Different Quadrants
Four different strategic perspectives Investment Earnings CashCash-flow, and Strategy Implications
Question Marks
(Problem Children)
Investment— Investment—heavy initial capacity expenditures and high R&D costs Earnings— Earnings—negative to low Cash-flow— Cash-flow—negative (net cash user) Strategy Implications
Introduction
The creation of SBUs enables the setting of SBU’s mission and objectives and the allocation of resources across SBUs in the organization Senior management need to have a framework to evaluate SBUs and to assign limited resources among them; hence portfolio analysis Many models but only 3 are covered here: BCG, PIMS, & GE models
Trade further opportunities for present cash flow
Under invest in the stars
Allow competitors to gain share in a high growth market
Over milked the cash cows
Examples of Application of some of the Principles of PIMS in ASPAC
Pursue of product quality
Australian Quality Council Hong Kong Awards for Industry (Quality cat.) Japan Quality Award Malaysia’s Prime Minister's Quality Award (Private Sector) Philippines Quality Award Singapore Quality Award Sri Lanka’s National Quality Award Thailand Quality Award
BCG (Boston Consulting Group) Matrix
Provides a framework for senior management in allocating resources across business units in a diversified firm by
Continue to increase market share—even share— at the expense of short-term earnings short-
Cows
Investment— Investment—Capacity maintenance Earnings— Earnings—High Cash-flow— Cash-flow—Positive (net cash contributor) Strategy Implications
If possible to dominate segment, go after share. If not, redefine the business or withdraw
Stars
Investment— Investment—continue to invest for capacity expansion Earnings— Earnings—Low to high earnings Cash-flow— Cash-flow—Negative (net cash user) Strategy Implications
Positive (net cash contributor) if deliberately reducing capacity
Strategy Implications
Plan an orderly withdrawal to maximize cash flow
Example of a BCG Matrix for a Fastener Supplier in Soutlio Analysis
Outline
Introduction BCG (Boston Consulting Group) Matrix PIMS (Profit Impact of Market Strategy) GE(General Electric)/McKinsey MultiMulti-Factor Matrix
Note that the Anchoring System SBU is forecasted to move to new position
BCG Matrix (Three Paths to Success)
Continuously generate cash cows and use the cash throw-up by the cash cows to throwinvest in the question marks that are not selfself-sustaining Stars need a lot of reinvestments and as the market matures, stars will degenerate into cash cows and the process will be repeated. As for dogs, segment the markets and nurse the dogs to health or manage for cash
Three Paths to Success (cont’d)
Relative Market Share High Low High Market Growth Rate Low
BCG Matrix (Three Paths to Failure)
Over invest in cash cows and under invest in question marks
Par ROI (Return of Investment) Prediction of how ROI would change if policy change is made
Important Strategic Principles Derived From PIMS
In the long run, product quality is the single most important factor affecting performance Market share and profitability closely correlated HighHigh-investment intensity reduces profitability Cash implications of growth rate and relative market share are affected by many factors Vertical integration is profitable for some business only Most factors that boost ROI also contribute to value