Portfolio Models

To determine the strategy in respect of the existing portfolio (collection of different business), an evaluation of the portfolio is needed. Several models have been developed for the evaluation of business portfolio.
a) Boston Consulting Group (BCG) Matrix b) GE Multifactor portfolio matrix c) Hofers Product/Market evaluation matrix

1) BCG Matrix (Growth-share matrix)

According to this technique, businesses or products are classified as low or high performers depending upon :

a) market growth rate

- an indicator of attractiveness of the industry

b) market share
- indicator of the strength of the firm relative to its competitors

High Growth High Market share

- products in this cell are stars. - usually profitable. - requires substantial investment to maintain their market share in the fast growing market. - investment needed to increase supply & to fight competition. - appropriate strategy for stars is to HOLD

High growth and low market share

- known as question marks - requires heavy investment to increase its market share - appropriate strategy is to BUILD and DIVEST

Low growth High market share

- when the market growth rate becomes low the stars would become cash cows - doesnt require significant investment - generate lot of cash - appropriate strategy is to HARVEST in case of weak cash cows and INVEST in case of strong cash cows.

Low growth Low market share

- businesses with low market share in low growth industries are known as DOGS - it causes loss or low profits - appropriate strategy is HARVEST

2)GE Multifactor Portfolio Matrix

Developed by General Electric of America Its a 3*3 matrix Based on two variables

a) industry attractiveness b) business strength

Here industry attractiveness is measured by a no;of factors like size of market , market growth rate, industry profitability etc. Business strength is rated by considering factors like market share, profitability, brand image etc.

 Each factor is assigned a weight and then rated on a 10 point scale. a) 1 - 4 low b) 5 - 7 medium c) 8 -10 high

Industry attractiveness
Factors
Availability of inputs Market size

Weight
0.20 0.15

Rating (1 10)
7 8

Value
1.40 1.20

Profitability
Technology requirements Capacity utilisation Total

0.30
0.25 0.10

6
6 7

1.80
1.50 0.70

6.6

GE Multifactor Portfolio Matrix

Industry Attractiveness High Medium Invest to Build Low

High

Protect Position

Build selectively

Medium

Build selectively

Selectively manage for earnings

Limited expansion or harvest

Invest/Grow Selectivity /earnings

Low

Protect & refocus

Manage for earnings Divest

Harvest /Divest

Porters Model
Porter provided a structural analysis of industries according to which the state of competition in an industry depends on 5 basic competitive forces.
1) Rivalry among existing firms 2) Threat of new entrants 3) Threat of substitutes 4) Bargaining power of suppliers 5) Bargaining power of buyers

1) Rivalry among existing firms

Factors which influence intensity of rivalry are:
a) no:of firms & their relative market share b) state of growth of industry c) fixed or storage costs d) exit barriers e) strategic stake

2) Threat of new entrants

Some common entry barriers are: Government policy Cost disadvantages Product differentiation Monopoly elements Capital requirements

3) Threat of substitutes
Substitutes place a limit on the price that firms can profitably charge in an industry.

4) Bargaining power of buyers

Volume of purchase Importance of the product to the buyer Extent of standardisation or differentiation of the product Switching costs Potential for backward integration by the buyer Profitability of the buyer Extent of buyers information

5) Bargaining power of suppliers

Importance of the buyer to the supplier Importance of the product to the buyer Extent of concentration & domination in the industry Extent of substitutability of the product Switching costs Extent of standardisation or differentiation of the product Potential for forward integration by the suppliers

Generic Strategies
1) Differentiation 2) Overall Cost leadership 3) Focus a) Cost focus b) Differentiation focus