BCG&GE Matrix_SM

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Business Portfolio Analysis: 

Business Portfolio Analysis ^^^^^^^^^^^^^^^


Outline Introduction BCG (Boston Consulting Group) Matrix GE(General Electric)/McKinsey Multi-Factor Matrix


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 2 are covered here: BCG & GE models

BCG (Boston Consulting Group) Matrix: 

BCG (Boston Consulting Group) Matrix Provides a framework for senior management in allocating resources across business units in a diversified firm by Balancing cash flows among business units, and Balancing stages in the product life-cycle (PLC)

BCG Product Portfolio Matrix Dimensions: 

BCG Product Portfolio Matrix Dimensions Relative Market Share Product Sales Growth Rate

BCG Matrix (cont’d): 

BCG Matrix (cont’d) The horizontal axis is the 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 means it is not the leader

BCG Matrix (cont’d): 

BCG Matrix (cont’d) The vertical axis is the growth rate 5 category 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

Matrix Quadrants: 

Matrix Quadrants High Low High Low Product Sales Growth Rate Relative Market Share

Key Assumptions of BCG Matrix: 

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 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: 

Strategic Perspectives of Products in Different Quadrants Four different strategic perspectives Investment Earnings Cash-flow, and Strategy Implications

Question Marks (Problem Children): 

Question Marks (Problem Children) Investment—h eavy initial capacity expenditures and high R&D costs Earnings— negative to low Cash-flow—n egative (net cash user) Strategy Implications If possible to dominate segment, go after share. If not, redefine the business or withdraw


Stars Investment— continue to invest for capacity expansion Earnings— Low to high earnings Cash-flow— Negative (net cash user) Strategy Implications Continue to increase market share—even at the expense of short-term earnings


Cows Investment— Capacity maintenance Earnings— High Cash-flow— Positive (net cash contributor) Strategy Implications Maintain market share and cost leadership until further investment becomes marginal


Dogs Investment Gradually reduce capacity Earnings— High to low Cash-flow Positive (net cash contributor) if deliberately reducing capacity Strategy Implications Plan an orderly withdrawal to maximize cash flow

BCG Matrix (Three Paths to Success): 

BCG Matrix ( Three Paths to Success) Continuously generate cash cows and use the cash throw-up by the cash cows to invest in the question marks that are not self-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): 

Three Paths to Success (cont’d) High Low High Low Market Growth Rate Relative Market Share

BCG Matrix (Three Paths to Failure): 

BCG Matrix ( Three Paths to Failure) Over invest in cash cows and under invest in question marks 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

Three Paths to Failure (cont’d): 

Three Paths to Failure (cont’d) High Low High Low Market Growth Rate Relative Market Share

GE(General Electric)/McKinsey Multi-Factor Matrix: 

GE(General Electric)/McKinsey Multi-Factor Matrix Originally developed by GE’s planners drawing on McKinsey’s approaches Market attractiveness is based on as many relevant factors as are appropriate in a given context Business-position assessment also made on a many factors SBU needs to be rated on each factor

GE Multifactor Portfolio Matrix: 

GE Multifactor Portfolio Matrix Industry Attractiveness Business Strengths High High Medium Medium Low Low Invest/Grow Selectivity /earnings Harvest /Divest Protect Position Invest to Build Build selectively Build selectively Selectively manage for earnings Limited expansion or harvest Protect & refocus Divest Manage for earnings

Some Limitations of the GE Model: 

Some Limitations of the GE Model Subjective measurements across SBUs Process also highly subjective From the selection and weighting of factors to the subsequent development of both a firm’s position and the market attractiveness Businesses may have been evaluated with respect to different criteria Sensitive to how a product market is defined