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The Models
BCG (Boston Consulting Group) Matrix GE (General Electric)/McKinsey MultiFactor Matrix
Portfolio analysis
The creation of SBUs enables the setting of SBUs
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
BCG Matrix
(Boston Consulting Group)
Provides a framework for senior management
Matrix Quadrants
Relative Market Share High Low High Market Growth Rate Low
Question Marks
(Problem Children)
Investmentheavy initial capacity expenditures
Stars
Investmentcontinue to invest for capacity expansion
EarningsLow to high earnings Cash-flowNegative (net cash user) Strategy Implications
Cows
InvestmentCapacity maintenance EarningsHigh Cash-flowPositive (net cash contributor) Strategy Implications
Maintain market share and cost leadership until further investment becomes marginal
Dogs
Investment
Gradually reduce capacity
Strategy Implications
Plan an orderly withdrawal to maximize cash flow
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
Low
BCG Matrix
(Three Paths to Failure)
Over invest in cash cows and under invest in question
McKinseys approaches
Market attractiveness is based on as many relevant
factors
SBU needs to be rated on each factor
Industry Attractiveness
Overall Market size Annual Market growth rate Historical profit margin Competitive intensity Technological requirements Energy requirements Inflation vulnerability Social/ political / legal
Business Strengths
Market share Share growth Product quality Brand reputation Distribution network Promotional effectiveness Productive capacity Productive efficiency Unit costs R & D performance Managerial personnel
Protect Position
Invest to Build
Build selectively
Selectively Limited Build Medium selectively manage for expansion earnings or harvest
Low
Divest
GE MODEL
Protect Position Invest to grow Concentrate effort on maintaining strength
Build Selectively
Business Strength
Invest to build Challenge for leadership Build selectively Reinforce vulnerable areas
Selectivity/Manage for earnings
Protect existing program Concentrate investments in segments where profitability is good and risks are relatively low
M A
Build Selectively
Specialize around limited strengths Seeks ways to overcome weakness Withdraw if indications of sustain growth is lacking Limited Expansion or Harvest
Look for ways to expand without high risk ,Otherwise minimize investment and rationalize operations Divest Sell at time that will maximize value Cut fixed costs and avoid investment meanwhile
R K E T A T T R A C T I V E N E S S
High
Medium
Invest heavily in most attractive segments Build up ability to counter competition Emphasize profitability by raising productivity
Low
Strong
Medium
Weak
Plotting on GE Matrix The circle represents the complete market and the arc represents the market share of the company
5
a
r k e t a t
3.67 2.97
Scooters
t r
a
c t
I v e n e s s
different criteria
Sensitive to how a product market is defined
500 firms Member firms have been in the program from 2 to 12 years The program provides
Par ROI (Return of Investment) Prediction of how ROI would change if policy change is made
affecting performance Market share and profitability closely correlated High-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
Limitations of PIMS
Key market-share variable is sensitive to product-market
definition Other variables depend on subjective judgements Inherent limitations of cross-section analysis Sample biased toward larger firms that are industry leaders