Chap 10 portfolio analysis

30 CHAPTER 10: Portfolio Analysis

Chapter 10
Portfolio Analysis

A. Intoduction
1. Need for Product Portfolio (TM 10-1)
2. Portfolio Models (TM 10-2)
B. Product Life Cycle
1. Basic Product Life Cycle (TM 10-3)
2. Product Life Cycle Strategies (TM 10-4)
3. Information for Locating Products in Their Life Cycles (TM 10-5)
C. Growth/Share Portfolio Matrix
1. Product Portfolio Matrix Dimentsions (TM 10-6)
2. Matrix Quadrants (TM 10-7)
3. Strategic Perspectives of Products in Different Quadrants (TM 10-8)
4. Portfolio Matrix: Strategic Consequences (TM 10-9)
5. Relationship Between Portfolio Matrix and Product Life Cycle (TM 10-10)
6. Illustration of a Balanced Portfolio (TM 10-11)
7. Illustration of an Unbalanced Portfolio (TM 10-12)
8. Difficulties with Product Portfolio (TM 10-13)
D. Multifactor Portfolio Matrix
1. GE Multifactor Portfolio Matrix (TM 10-14)
2. Assessing Industry Attractiveness (TM 10-15)
3. Assessing Business Strengths (TM 10-16)
4. Prescriptive Strategies for Business in Different Cells (TM 10-17)
5. Directional Policy Matrix (TM 10-18)
E. A New Product Portfolio Approach
1. Porter’s Three Generic Strategies (TM 10-19)

31 CHAPTER 10: Portfolio Analysis

10-1

NEED FOR PRODUCT PORTFOLIO
The top management of a multibusiness firm
cannot generate strategic alternatives for different
product/markets. They must rely on their business
managers and on their corporate development
personnel. However, they must establish a
conceptual
framework
within
which
the
alternatives can be developed. Product portfolio is
such a framework.


CHAPTER 10: Portfolio Analysis 32

10-2

PORTFOLIO MODELS
• Product life cycle
• Growth/share portfolio matrix
• Multifactor portfolio matrix
• New product portfolio approaches

33 CHAPTER 10: Portfolio Analysis

10-3

BASIC PRODUCT LIFE CYCLE


CHAPTER 10: Portfolio Analysis 34

10-4

PRODUCT LIFE CYCLE STRATEGIES
Introduction

Growth

Maturity

Decline

Offer a basic
product

Offer product
extensions,
service,
warranty

Diversify
brands and

models

Phase out
weak items

Use cost-plus

Price to
penetrate
market

Price to
match or beat
competitors

Cut price

Distribution

Build
selective
distribution

Build
intensive
distribution

Build more
intensive
distribution

Go selective:
phase out
unprofitable
outlets

Advertising

Build product
awareness
among early
adopters and
dealers

Build
awareness
and interest
in the mass
market

Stress brand
differences
and benefits

Reduce to
level needed
to retain
hard-core
loyals

Sales
Promotion

Use heavy
sales
promotion to
entice trial

Reduce
to take
advantage
of heavy
consumer
demand

Increase to
encourage
brand
switching

Reduce to
minimal level

Product

Price


35 CHAPTER 10: Portfolio Analysis

10-5

INFORMATION FOR LOCATING
PRODUCTS IN THEIR LIFE CYCLES
—Past Performance and Current Perspectives
A. COMPANY
•Sales-growth pattern
•Design problems and technical bugs
•Sales and profit history of allied products
•Number of years the product has been on
market
•Casualty history of similar products
•Availability of dealers, etc.
B. COMPETITION
•Profit history
•Ease of entry
•Extent of initial investment
•Number of competitors
•Number of competitors that left the industry
•Life cycle of the industry
•Critical factors for success in the business


CHAPTER 10: Portfolio Analysis 36

10-6

PRODUCT PORTFOLIO
MATRIX DIMENSIONS

37 CHAPTER 10: Portfolio Analysis

10-7

MATRIX QUADRANTS


CHAPTER 10: Portfolio Analysis 38

10-8

STRATEGIC PERSPECTIVES OF PRODUCTS IN
DIFFERENT QUADRANTS
QUADRANT

Stars

INVESTEMENT
CHARACTERISTICS

EARNING
CHARACTERISTICS

CASH-FLOW
CHARACTERISTICS

• Continual

Low to High

Negative cash flow
(net cash user)

Continue to
increase market
share – if
necessary, at the
expense of shortterm earnings.

High

Positive cash flow
(net cash
contributor)

Negative to Low

Negative cash flow
(net cash user)

High to Low

Positive cash flow
(net cash
contributor)

Maintain share
and cost
leadership until

further investment
becomes
marginal.
Assess chances
of dominating
segment. If good,
go after share. If
bad, redefine
business or
withdraw.
Plan an orderly
withdrawal to
maximize cash
flow.

•

expenditures for
capacity
expansion
Pipeline filling
with cash
Capacity
maintenance
expenditures

Cash Cows

•

Question Marks

• Heavy initial
•

Dogs

capacity
expenditures
High R&D costs

• Gradually

deplete capacity

STRATEGY
IMPLICATION

10-9


39 CHAPTER 10: Portfolio Analysis

PORTFOLIO MATRIX:
STRATEGIC CONSEQUENCES

10-10


CHAPTER 10: Portfolio Analysis 40

RELATIONSHIP BETWEEN PORTFOLIO
MATRIX AND PRODUCT LIFE CYCLE


41 CHAPTER 10: Portfolio Analysis

10-11

ILLUSTRATION OF A
BALANCED PORTFOLIO


CHAPTER 10: Portfolio Analysis 42

10-12

ILLUSTRATION OF AN
UNBALANCED PORTFOLIO


43 CHAPTER 10: Portfolio Analysis

10-13

DIFFICULTIES WITH PRODUCT PORTFOLIO
• Overinvesting in low-growth segments (lack of
objectivity and “hard” analysis).
• Underinvesting in high-growth segments (lack
of guts).

• Misjudging the segment growth rate (poor
market research).
• Not achieving market share (due to market
strategy, improper sales capabilities, or
improper promotion).
• Losing cost-effectiveness (lack of operating
talent and control system).
• Not uncovering emerging high-growth
segments (lack of corporate development
effort).
• Unbalanced business mix (lack of planning and
financial resources).


CHAPTER 10: Portfolio Analysis 44

10-14

GE MULTIFACTOR
PORTFOLIO MATRIX


45 CHAPTER 10: Portfolio Analysis

10-15

ASSESSING INDUSTRY ATTRACTIVENESS
CRITERIA
Market size
Growth rate

Profit margin
Market diversity
Demand cyclicality
Expert opportunities
Competitive structure
Industry profitability
Inflation vulnerability
Value added
Capital intensity
Raw material availability
Technological role
Energy impact
Social
Environmental impact
Legal
Human

WEIGHTS*

×

.15
.12
.05
.05
.05
.05
.05
.20
.05

.10
GO
GO
.05
.08
GO
GO
GO
GO
1.00

*

RATINGS**
4
3
3
2
2
5
3
3
2
5
4
4
4
4
4
4

4
4
1 to 5

=

VALUES
.60
.36
.15
.10
.10
.25
.15
.60
.10
.50
—
—
.20
.32
—
—
—
—
3.43

Some criteria may be of a GO/NO GO type. For example, manyFortune 500 firms would
probably not invest in industries viewed negatively by society even if it were legal and profitable
to do so.

** “1” denotes very unattractive; “5” denotes very attractive.


CHAPTER 10: Portfolio Analysis 46

10-16

ASSESSING BUSINESS STRENGTHS
CRITERIA
Market share
SBU growth rate
Breadth of product line
Sales/distribution
effectiveness
Proprietary & key
account effectiveness
Price competitiveness
Advertising &
promotion
effectiveness
Facilities location &
newness
Capacity and
productivity
Experience curve effects
Value added
Investment utilization
Raw materials cost
Relative product quality

R & D advantages/
position
Cash throwoff
Organizational synergies
General image

WEIGHTS*

x

RATINGS**

=

VALUES

.10
X
.05

5
3
4

.50
—
.20

.20

4

. 80

X
X

3
4

—
—

.05

4

.20

.05

5

.25

X
.15
X
.05
.05

.15

3
4
4
5
4
4

—
.60
—
.25
.20
.60

.05
.10
X
X

4
5
4
5

.20
.50
—
—

1.00

1 to 5

*

For any particular industry, there will be some factors that, while important in general, will have little or
no effect on the relative competitive position of firms within that industry.

**

“1” denotes a very weak competitive position; “5” denotes a very strong competitive position.

4.30


47 CHAPTER 10: Portfolio Analysis

10-17

PRESCRIPTIVE STRATEGIES FOR BUSINESS IN
DIFFERENT CELLS
MARKETATTRACTIVENESS

High

PROTECT
POSITION

• Challenge for

• Specialize around

•

•

• Seek ways to

Maximum rate
Concentrate effort on
maintaining strength

leadership
Build selectively on
strengths
Reinforce vulnerable
areas

limited strengths

SELECTIVITY/MANAGE
FOR EARNINGS

overcome weaknesses
• Withdraw if indications
of sustainable growth
are lacking
LIMITED EXPANSION

OR HARVEST

• Invest Heavily in most

• Protect existing

• Look for ways to

•

•

•

attractive segments
Build up ability to
counter competition
Emphasize profitability
by raising productivity

•

PROTECT AND
REFOCUS
Low

BUILD
SELECTIVELY

• Invest to grow at

BUILD
SELECTIVELY

Medium

INVEST
TO BUILD

program
Concentrate
investments in
segments where
profitability is good and
risk is relatively low
MANAGE FOR
EARNINGS

expand without high
risk; otherwise
minimize investment
and rationalize
operations
DIVEST

• Manage for current

• Protect position in most • Sell at time that will

•

•
•

•

earnings
Concentrate on
attractive segments
Defend strengths
Strong

profitable segments
Upgrade product line
Minimize investment
Medium

•

maximize cash value
Cut fixed costs and
avoid investment
meanwhile
Weak


CHAPTER 10: Portfolio Analysis 48

10-18

DIRECTIONAL POLICY MATRIX


49 CHAPTER 10: Portfolio Analysis

10-19

PORTER’S THREE GENERIC STRATEGIES