Random Matrix - AlokeshBanerjee

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PORTFOLIO MANAGEMENT TOOLS
Alokesh Banerjee
The aim of a portfolio analysis
1) Analyze its current business portfolio and decide
which SBU's should receive more or less investment,
and
2) Develop growth strategies for adding new products
and businesses to the portfolio
3) Decide which businesses or products should no longer
be retained.
The BCG Matrix (Boston Consulting Group Matrix) is
the best-known portfolio planning framework. The GE /
McKinsey Matrix is a later and more advanced form of
the BCG Matrix.
GE VS BCG
The GE / McKinsey Matrix is more sophisticated than the BCG Matrix
in three aspects:
1. Market (Industry) attractiveness replaces market growth as the
dimension of industry attractiveness. Market Attractiveness
includes a broader range of factors other than just the market
growth rate that can determine the attractiveness of an industry /
market.
2. Competitive strength replaces market share as the dimension by
which the competitive position of each SBU is assessed.
Competitive strength likewise includes a broader range of factors
other than just the market share that can determine the
competitive strength of a Strategic Business Unit.
3. Finally the GE / McKinsey Matrix works with a 3*3 grid, while the
BCG Matrix has only 2*2. This also allows for more sophistication.
GE(General Electric)/McKinsey MultiFactor 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
– Attempt to explain why different SBU had different
profitability
* InternalFactors
Market Share
Sales Force
Marketing
Customer
service R&D
Manufacturing
Distribution
Financial
resource Image
Breadth of
product line
Quality/Reliabilit
y Managerial
Competence
*
**
** External Factors
Market size
Market growth rate
CyclicalityCompetitiv
e structure
Barriers to entry
Industry profitability
Technolog y
Inflation
Regulation
Manpower
availability
Social
issuesEnvironmental
issues
Political issuesLegal
issues
High Attractiveness
Strong Competitive Position
The strategy advice for this cell is to invest for
growth. Consider the following strategies:
provide maximum investment
diversify
consolidate your position to focus your resources
accept moderate near-term profits to build share
High Attractiveness
Average Competitive Position
The strategy advice for this cell is to invest for
growth. Consider the following strategies:
build selectively on strength
define the implications of challenging for market
leadership
fill weaknesses to avoid vulnerability
High Attractiveness
Weak Competitive Position
The strategy advice for this cell is to
opportunistically invest for earnings. However, if
you can't strengthen your enterprise you should
exit the market. Consider the following
strategies:
ride with the market growth
seek niches or specialization
seek an opportunity to increase strength through
acquisition
Medium Attractiveness
Strong Competitive Position
The strategy advice for this cell is to selectively
invest for growth. Consider the following
strategies:
invest heavily in selected segments,
establish a ceiling for the market share you wish
to achieve
seek attractive new segments to apply strengths
Medium Attractiveness
Average Competitive Position
The strategy advice for this cell is to selectively
invest for earnings. Consider the following
strategies:
segment the market to find a more attractive
position
make contingency plans to protect your
vulnerable position
Medium Attractiveness
Weak Competitive Position
The strategy advice for this cell is to preserve for
harvest. Consider the following strategies:
act to preserve or boost cash flow as you exit the
business
seek an opportunistic sale
seek a way to increase your strengths
Low Attractiveness
Strong Competitive Position
The strategy advice for this cell is to selectively
invest for earnings. Consider the following
strategies:
defend strengths
shift resources to attractive segments
examine ways to revitalize the industry
time your exit by monitoring for harvest or
divestment timing
Low Attractiveness
Average Competitive Position
The strategy advice for this cell is to restructure,
harvest or divest. Consider the following
strategies:
make only essential commitments
prepare to divest
shift resources to a more attractive segment
Low Attractiveness
Weak Competitive Position
The advice for this cell is to harvest or divest. You
should exit the market or prune the product line.
High
Medium
-Indentify growth segments
-Invest strongly
-Maintain position
elsewhere
-Maintain overall position
-Seek cash flow
-Invest at maintanence level
-Evaluate potentila for
leadership via segmentation
-Identify weaknesses
-Build strengths
-Identify growth segments
-Specialise
-Invest secratively
-Prune lines
-Minimise investment
-Position to divest
-Specialise
-Seek niches
- Consider acquisition
-Specialise
- seek niches
-Consider exit
-Trust leader’s statemenship
- Sic on competitors cash
generation
- time exit and divest
-Grow
-Seek dominance
-Maximise investment
Low
Business Strengths
Strategic implications from the Industry
Attractiveness – Business Strength Matrix
High
Medium
Industry Attractiveness
Low
GE Multifactor Portfolio Matrix
Industry Attractiveness
High
High
Medium
Protect
Position
Build
selectively
Medium
Invest to
Build
Selectively
manage for
earnings
Low
Build
selectively
Limited
expansion or
harvest
Invest/Grow
Selectivity
/earnings
Low
Protect &
refocus
Manage for
earnings
Divest
Harvest
/Divest
The nine cells in the matrix can be grouped into three major segments:
• Segment 1: This is the best segment. The business is strong and the
market is attractive. The company should allocate resources in this
business and focus on growing the business and increase market share.
• Segment 2: The business is either strong but the market is not attractive
or the market is strong and the business is not strong enough to pursue
potential opportunities. Decision makers should make judgment on how
to further deal with these SBUs. Some of them may consume to much
resources and are not promising while others may need additional
resources and better strategy for growth.
• Segment 3: This is the worst segment. Businesses in this segment are
weak and their market is not attractive. Decision makers should consider
either repositioning these SBUs into a different market segment, develop
better cost-effective offering, or get rid of these SBUs and invest the
resources into more promising and attractive SBUs.
Strategy Implications of
Attractiveness/Strength Matrix
Businesses in upper left corner
– Accorded top investment priority
– Strategic prescription is grow and build
• Businesses in three diagonal cells
– Given medium investment priority
– Invest to maintain position
• Businesses in lower right corner
– Candidates for harvesting or divestiture
– May be candidates for an overhaul and reposition
strategy
•
The Attractiveness/Strength Matrix
•
Allows for intermediate rankings between high and low
and between strong and weak
•
Incorporates a wide variety of strategically relevant
variables
•
Stresses allocating corporate resources to businesses with
greatest potential for
–
Competitive advantage and
–
Superior performance
Decide Resource Allocation Priorities
and Strategic Direction
Objective:
– “Get the biggest bang for the buck”
in allocating corporate resources
• Procedure:
– Rank each business from highest to lowest priority for
corporate resource support and new investment (steer
resources to high opportunity areas and limit support to
low opportunity areas)
– Develop a general strategic direction for each business
•
23
4
6
5
The GE matrix has 5 steps:
• One - Identify your products, brands, experiences,
solutions, or SBU's.
• Two - Answer the question, What makes this market so
attractive?
• Three - Decide on the factors that position the business
on the GE matrix.
• Four - Determine the best ways to measure
attractiveness and business position.
• Five - Finally rank each SBU as either low, medium or
high for business strength, and low, medium and high
in relation to market attractiveness.
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
There is no research to prove that there is a relationship between market
attractiveness and business position.
The interrelationships between SBU's, products, brands, experiences or
solutions is not taken into account.
This approach does require extensive data gathering.
Scoring is personal and subjective.
There is no hard and fast rule on how to weight elements.
The GE matrix offers a broad strategy and does not indicate how best to
implement it.
The Life Cycle Portfolio Matrix OR
Arthur D. Little Matrix
MATURITY
Dominant
COMPETITIVE
POSITION
Strong
Favourable
Tenable
Weak
Nonviable
Embryonic
Wide
range of
strategic
options
Caution,
selective
develop
ment
Growth
Mature
Danger,
withdraw to
market
niche,divert or
liquidate
Aging
Strategic positioning in terms of market share
suggested by Life – cycle Portfolio Matrix
Dominant
Strong
Favorable
Tenable
Weak
All out push for share
Hold position
Hold position
Hold share
Hold position
Grow with industry
Hold position
Attempt to Improve
position
All out push for share
Attempt to improve
position
Push for share
Hold position
Grow with industry
Hold position
Or
Harvest
Selective or all out
Push for share
Selectively attempt to
Improve position
Attempt to improve
position
Selective push for
share
Custodial or
maintenance
Find niche and attempt
to protect
Harvest
Or
Phased withdrawal
Selectively push for
position
Find niche and protect
it
Find niche and hang on
Or
Phase withdrawal
Phased withdrawal
Or
Abandon
Up
Or
Out
Turnaround
Or
Abandon
Turnaround
Or
Phased withdrawal
Abandon
Embryonic
Growth
Mature
Aging
Strategic positioning in term sof investment requirements
suggested by the Life Cycle Portfolio Matrix
Dominant
Strong
Invest Slightly Faster Than
Market Dictates
Reinvest as Necessary
Reinvest as Necessary
Minimum Reinvestment or
Maintenance
Invest to Sustain
Growth Rate (andPreempt
New (?)Competitors)
Invest as Fast as Market
Dictates
Invest to Increases Growth
Rate (andImprove Position)
Reinvest as Necessary
Invest Selectively
Selective Investment to
Improve Position
Minimum and/orSelective
Reinvestment
Invest (VerySelectively)
Selective Investment
Minimum Reinvestment or
Disinvest
Disinvest or Divest
Invest or Divest
Invest or Divest
Invest Selectively or Disinvest
Divest
Favorable
Tenable
Minimum Maintenance
Investment or Disinvest
Weak
The terms invest and divest are used in the broadest sense and are not restricted to property,
plant & equipment.
Strategic positioning in terms of Profitability and Cash
flow suggested by Life – cycle Portfolio Matrix
Dominant
Strong
Favorable
Tenable
Probably Profitable, But
Not Necessary Net Cash
Borrowe
Profitable Probably Net
Cash Producer (But
NotNecessary)
Profitable Net Cash
Producer
Profitable Net Cash
Producer
May Be Unprofitable Net
Cash Borrower
Probably Profitable
Probably Net Cash
Borrower
Profitable Net Cash
Producer
Profitable Net Cash
Producer
Probably Unprofitable
Net Cash Borrower
Marginally Profitable
Net Cash Borrower
Moderately Profitable
Net Cash Producer
Moderately Profitable
Cash Flow Balance
Unprofitable Net Cash
Borrower
Unprofitable Net Cash
Borrower or Cash Flow
Balance
Minimally Profitable Cash
Flow Balance
Minimally Profitable Cash
Flow Balance
Unprofitable Net Cash
Borrower
Unprofitable Net Cash
Borrower or Cash Flow
Balance
Unprofitable Possibly Net
Cash Borrower or Net
Cash Producer
Unprofitable (Writeoff)
Weak
Embryonic
Growth
Mature
Aging
Criteria for classification of
competitive position
• Dominant – dominant competitors are very rare. Dominance often results
from a quasi – monopoly or from a strongly protected technological
leadership.
• Strong – not all industries have a dominant or strong competitors. Strong
competitors can usually follow strategies of their choice, irrespective of
their competitor’s move
• Favourable – when industries are fragmented, with no competitors clearly
standing out, the leader tend to be in a favourable position
• Tenable – a tenable position can usually be maintained profitable through
specialisation in a narrow or protected market niche. This can be a
geographical specialisation or a project specialisation
• Weak – weak competitors can be intrinsically too small to survive
independently and profitably in the long term, given the competitive
economies of their industries, or they can be larger and potentially strong
competitors, but suffering from costly past mistakes or from a critical
mistake
•
•
•
•
•
•
EXAMPLE: Portfolio planning models such as those developed by General Electric
or the Boston Consulting Group are widely used and commonly known.
Nevertheless, proving that popularity in itself is not necessarily a guarantee of
suitability, Ciba-Geigy decided to develop a customized model to fit its intention
“to improve the process of resource allocation and performance assessment.” The
main idea was to differentiate the various strategic business units – to give them
different objectives, different types of managers, and to allow them to adopt the
organization structure that was appropriate to them. The model that Ciba-Geigy
developed categorizes strategic business units into five types:
1. Development – new products at the beginning of the product life cycle.
2. Growth – products that have the potential to become profitable.
3. Pillar – profitable products targeted to wide-breadth markets.
4. Niche – similar to pillar products, but differing in the size of the market.
5. Core – traditional products that compete in mature markets and should
therefore be managed as such. (Source: "Portfolio Planning at Ciba-Giegy and the
Newport Investment Proposal", 1995, Harvard Business School Case Services
Order Number 9-795-040 Rev. 6/95.)
Shell’s directional policy matrix
Figure 20.5
Shell’s Directional Policy Matrix
• Developed by Shell international Chemical
Company to identify the areas in which they
should operate
• The vertical axis measures the company’s
present competitive position
• The horizontal axis gives the prospect for
profitable operation in that sector
• The criteria used are market growth rate,
market quality, feed stock and environmental
aspects
• Shell considered that creating a single strategy
plan did not work in the changing
environment.
• It tried to develop many scenarios based on a
number of assumptions about the future
environment, these could be optimistic,
pessimistic and straightline
• Depending upon events different scenario was
used
Positions in Shell’s Matrix
Each of the zones is described as follows:
• Leader - major resources are focused upon the SBU.
• Try harder - could be vulnerable over a longer period of time, but
fine for now.
• Double or quit - gamble on potential major SBU's for the future.
• Growth - grow the market by focusing just enough resources here.
• Custodial - just like a cash cow, milk it and do not commit any more
resources.
• Cash Generator - Even more like a cash cow, milk here for
expansion elsewhere.
• Phased withdrawal - move cash to SBU's with greater potential.
• Divest - liquidate or move these assets on a fast as you can.
Business Sector Prospects.
(Horizontal x-Axis)
Profitability prospects (or attractiveness) for businesses in the petroleum sector are judged on
four criteria
1. Market Growth Rate – market growth is necessary for the growth of sector profits but sectors
with the highest growth rate are not necessarily those with the largest profit growth. Shell
advocated a rating system for this factor where the midpoint was the average growth rate for
the industry. A star rating system was used rating the growth rate from a one star to a five
star.
2. Market Quality – this is a difficult concept to quantify and to get to a rating for the sector. A
number of questions must be answered – (Shell questions)
•
Has the sector a record of high, stable profitability?
•
Can margins be maintained when manufacturing capacity exceeds demand?
•
Is the product resistant to commodity pricing behaviour?
•
Is the technology of production freely available or is it restricted to those who developed it?
•
Do relatively few producers supply the market?
•
Is the market free from domination by a small group of powerful customers?
•
Has the product high added value when converted by the customer?
•
In the case of a new product, is the market destined to remain small enough not to attract
too many producers?
•
Is the product one where the customer has to change his formulation or even his machinery
if he changes supplier?
•
Is the product free from the risk of substitution by an alternative synthetic or natural
product?
• A business sector rating yes on all or most of these questions would score a four or five star
rating.
3. Industry Feedstock Situation
• Expansion of productive capacity is often hindered by the uncertainty of feedstock supply.
• If the feed stocks in the sector have a strong pull towards an alternative use or are difficult to
assemble in large quantities then this is a plus for sector prospects and the rating is better
than average.
• If the feedstock is a by-product of another process and the main product consumption is
growing at a faster rate than that of the by-product, pressure might result due to low prices
or direct investment by the by-product producer to increase its consumption. This would be
given a lower than average rating.
4. Environmental (Regulatory) Aspects
• Business sector prospects can be affected by restrictions on manufacture, transportation and
marketing of a product. If this has not been built into the forecast of market growth, it must
be assessed separately. Strong positive or negative environmental pr regulatory influences
must be taken into account.
Competitive Capabilities (Vertical
y- Axis)
A petroleum company can be judged as strong, average or weak on three major criteria. Shell
recommended reviewing these criteria in relation to significant competitors in the relevant
business sector. (this axis is similar to the Business Strength axis on the GE-McKinsey matrix)
Market Position
• The percentage share of the total market as well as the degree to which this share is secure is
of primary importance. Shell looked at this factor in terms of a relative market leadership
position rather than market share and rated this factor on a 5 star rating scale as follows:
•
Leader – 5 stars – this type of company has market leadership and technical leadership
usually accompanies this.
•
Major Producer – 4 stars – this occurs where no single company is leader but there are two
to four competitors are closely placed.
•
Viable Producer -3 stars – this type of company has a strong viable stake but falls below the
top league
•
Minor- 2 stars - businesses in this category are less than able to support research and
development in the long term
•
Negligible- 1 star – companies with a negligible position in the market fall into this category
Major Advantage
The general technique of this model can
be applied to any business with separate
identifiable sectors even though it was
developed for the petro-chemical
industry This model works well in the
petroleum industry but adaptations
should be made when using it outside
the industry.
Model weaknesses
The Shell DPM has been used in different industries
and some practical problems have been raised.
1. There is a need to change the questions for
companies not in the petroleum industry and the
questions regarding the factors should be
customised for the company doing the analysis.
2. Shell advocated equal weightings for the criteria on
each of the axes. This worked for Shell but other
companies may feel that certain factors are more
important than others and therefore the weights
should be adjusted accordingly
3. The environment was the fourth factor on the
business sector prospects axis yet Shell often left
this factor out altogether. Environment can be a
very important factor as it deals with the wider
question of risk
4. When using the Shell DPM methodology, it was
found that the star rating system added very little
value and a point’s allocation rating was superior.
Shell’s Vs BCG / GE
• BCG has problem with market share as it may
not inclue viable and minor producers, as will
as leaders and majors. Shell’s is based on the
concept of market leadership instead of
market share. In this one can select criteria for
different industry sector’s and situations
• Mckinsey’s portfolio planning at GE was
paralleled in Europe by Shell which pioneered
the concept of scenario planning
Product/market Evolution
Portfolio Matrix
• The product/market evolution matrix was
formulated to allow the analyst to focus
corporate- and business-level strategy
decisions on the stage of product/market
evolution and its relationship with market
position
• Products are plotted in terms of their
product/market evolution and the competitive
position
• Circles vary in size according to their respective
industry size that represent business units
• Each circle contains a pie wedge that corresponds
in size to its Market Share
PROCEDURE TO DEVELOP THE
BUSINESS PORTFOLIO MATRIX
 Classify
various activities of the company into
different business segments or strategic
business units (SBUs).
For each business segment determine the
growth rate of the market. This is later plotted on
a linear scale
Compile the assets employed for each business
segment and determine the relative size of the
business within the company
 Estimate the relative market shares for the different
business segments. This is generally plotted on a
logarithmic scale
 Plot the position of each business on a matrix of
business growth rate and relative Market Share. A bubble
represents the size of the business; a circle with a
diameter corresponding to say the assets employed in
that business.
 For precise plotting, it has been recommended that the
radius of a bubble corresponding to a business/product
may be defined thus:
r = square root of (P * R2) Where,
R = radius of the large circle (total company sales)
P = sales of a product as percentage (expressed in
decimal) of the total sales
IDENTIFICATION OF STRATEGIES FOR DIFFERENT PRODUCTS
A product in the Development or Growth stage has a potential to be a Star.
If the market share is:
(1 ) large in these growth-oriented stages, more resources must be
invested to develop competitive position.
(2)If market share is low, a strategy to improve the same must be
developed.
(3)If the industry is relatively small and market share is low despite high
growth stage, Management must consider divesting and redeploying
resources in other more competitive business
A business in the Shakeout or Maturity stage has a potential to be Cash
Cow. Investments could be made to maintain high market share
.
• A business in Decline stage with a low market share
would be a Dog business. Though in the short run it may
generate cash, in the long run, however, it should be
considered for divestment or liquidation
The End
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