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Portfolio Analysis< BCG Matrix, GE/Mckinsey Matrix >
Prof. Eui-ho Suh ([email protected])
POstech Strategic Management of Information System Lab (POSMIS)
Industrial Eng, POSTECH
by Sang jun KimApril 9, 2004
Contents
BCG Matrix
GE/Mckinsey Matrix
Advantages and Limitation of Portfolio analysis
Portfolio Analysis
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
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
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
3. GE/Mckinsey Matrix (1/3)
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
the GE/Mckinsey matrix attempt to improve upon the BCG Matrix
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
3. GE/Mckinsey Matrix (3/3)
Limitations of GE/Mckinsey Matrix
Core competencies are not represented
Interactions between Strategic Business Units are not considered
4. Advantages and limitation of Portfolio analysis
Portfolio offers certain advantages
Portfolio have some very real limitations Matrix
It encourages top management to evaluate each of the corporation’s businesses individually and to set objectives and allocate resources for each It stimulates the use of externally oriented data to supplement management’s judgment It raises the issue of cash flow availability for use in expansion and growth Its graphic depiction facilitates communication
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
