Assignment 1 Questions 1) Discuss how a firm uses the BCG portfolio analysis. Assess the effectiveness of such an analysis for the firm. Explain other alternatives used for portfolio analysis. Explain other alternatives used for portfolio analysis. 2) The environment that an organization operates in determines its structure.
Thoroughly discuss using examples. The BCG Portfolio Analysis The BCG analysis is a tool for measuring the status of a company's small business units (SBU's) according to market growth rate and relative market share by use of relative competitive position. Market growth rate is the projected rate of sales growth for the market served by a particular SBU. It serves as a indicator of of the relative attractiveness of the markets served by each business unit in the firm's portfolio of business. It is usually measured as the percentage increase in a market's sales or unit volume over the two most recent years. Relative competitive position is usually expressed as the market share of a business divided by the market share of the of the market's largest player.
The relative competitive position therefore provides a basis for comparing the relative strengths of the businesses in the firm's portfolio in terms of their positions in their respective markets. Market Share High Low Star Question Mark? Cash Cow $ Dog X High Growth Rate Low A business would therefore categorise its SBU's and place them in the sub-classifications provided by the BCG matrix as above according to their relative competitive position and growth rate. The four categories in the BCG portfolio analysis are -Question Marks -Stars -Cash cows -Dogs Question Marks These are SBU's whose high growth rate gives them considerable strategic appeal but whose low market share makes their profit potential uncertain. Their rapid growth requires high cash needs with cash outflow for such business exceeding cash inflows. The aim of the firm at corporate level is to identify the question marks that would increase their market share and move into the star group if additional funding is applied to them. If this outcome is unlikely, the BCG matrix suggests divesting the question mark and redirecting resources more profitably in the remainder of the portfolio.
Stars These are SBU's in rapidly growing markets with large market shares. They represent the best long-run opportunities in both growth and profitability in the firm's portfolio. They require a high investment to consolidate and advance their dominant position in a growing market. These capital investments can exceed internally generated funds and therefore, the businesses are often priority consumers of corporate resources.
Cash Cows These have a high market share in low growth markets. They often generate cash in excess of their requirements due to their strong market position and their minimal reinvestment requirements. They are selectively milked as a source of corporate resources for investment in other SBU's. They provide cash needed to pay corporate overhead and dividends to shareholders and provide debt capacity. Dogs As their name suggests, these businesses are the least attractive in the company's portfolio facing mature markets with intense competition and low profit margins.
They are managed for short-term cash flow through surprise, positive occurrences in the market or ruthless cost-cutting for example. They are normally divested or liquidated once this short-term harvesting has been maximised. Applicability of the BCG Portfolio Analysis Advantages o The BCG matrix provides a brief and remotely accurate picture on the status and relative attractiveness of the company's SBU's. A brief overview of the company's overall portfolio structure can therefore be ascertained. o It is fairly simple to apply as only two parameters are applied on all SBU's. Disadvantages o It does not address how value is created across business units, the only relationship being cash overlooking other forms of business value such as human resources.
o The boundaries between categories is too abstract and may fail to fully represent SBU's which are in a transitional state from one category to another. o The approach gives the impression that firms needed to be self-sufficient in capital ignoring capital raised in capital markets. Alternative Tools for Portfolio Analysis 1) Industry Attractiveness-Business Strength Matrix This matrix was developed by McKinsey & Company at General Electric. It uses multiple factors to measure industry attractiveness and business strengths.
It has nine cells replacing the high / low axes with high / medium /low axes to make more precise distinctions among porfolio positions. The following factors are considered for industry attractiveness Market share Barriers to entry Manpower availability Environmental issues Political issues Market growth rate Inflation Technology Competitive structure Legal issues Cyclical ity Industry profitability Social issues Regulation These factors are weighed according to business strength which gives a subjective assessment of how a strong competitive advantage is created by a broad range of the firm's internal strengths and weaknesses. The following are usually applied and graded to come up with the firms internal strengths and weaknesses. Market share growth Distribution Breadth of product line Customer service Sales force R&D Quality / reliability Image Marketing Financial resources Managerial competence Manufacturing The Industry Attractiveness-Business Strength Matrix Diagram High Medium Low Invest Selective Growth Grow or Let go Selective Growth Grow or Let go Harvest Grow or Let go Harvest Divest High Business Strength Medium Low Industry Attractiveness The Industry Attractiveness-Business Strength matrix is a improvement on the BCG matrix in three main ways: o The terminology associated with this model is less offensive and more understandable. The terms star and dog tend to be very uninformative and informal. o The multiple measures associated with each dimension of the business strength matrix tap many factors relevant to business strength and viability rather than just market share and market growth.
o There is broader assessment during the planning process, bringing to light factors important in both strategy formulation and strategy implementation. The Life Cycle-Competitive Strength Matrix This approach aims to depict a company's business as having an evolutionary characteristic rather than the static nature of the other two portfolio approaches. It allows users to consider multiple strategic issues associated with each business life cycle stage. It includes basic strategic investment parameters recommended for different positions in the matrix. Its recommendations are however identical to those of the other portfolio approaches.