Chap 10 portfolio analysis

Relationship Between Portfolio Matrix and Product Life Cycle TM 10-10 6.. CHAPTER 10: Portfolio Analysis 54310-1 NEED FOR PRODUCT PORTFOLIO The top management of a multibusiness firm can

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)

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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

alternatives can be developed Product portfolio is

such a framework.

PORTFOLIO MODELS

 Product life cycle

 Growth/share portfolio matrix

 Multifactor portfolio matrix

 New product portfolio approaches

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1 0 - 3

B A S I C P R O D U C T L I F E C Y C L E

PRODUCT LIFE CYCLE STRATEGIES

Offer a basic Offer product Diversify Phase out

Product product extensions, brands and weak items

service, models warranty

Use cost-plus Price to Price to Cut price

market competitors Build Build Build more Go selective:

Distribution selective intensive intensive phase out

distribution distribution distribution unprofitable

outlets Build product Build Stress brand Reduce to awareness awareness differences level needed

Advertising among early and interest and benefits to retain

adopters and in the mass hard-core

Use heavy Reduce Increase to Reduce to

Promotion promotion to advantage brand

entice trial of heavy switching

consumer demand

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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

PRODUCT PORTFOLIO MATRIX DIMENSIONS

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10-7

MATRIX QUADRANTS

STRATEGIC PERSPECTIVES OF PRODUCTS IN

DIFFERENT QUADRANTS

CHARACTERISTICS CHARACTERISTICS EARNING CHARACTERISTICS CASH-FLOW IMPLICATION STRATEGY

Stars  Continual

expenditures for capacity

expansion

 Pipeline filling with cash

Low to High Negative cash flow

(net cash user) Continue to increase market

share – if necessary, at the expense of short-term earnings Cash Cows  Capacity

maintenance expenditures

High Positive cash flow

(net cash contributor)

Maintain share and cost leadership until further investment becomes

marginal

Question Marks  Heavy initial

capacity expenditures

 High R&D costs

Negative to Low Negative cash flow

(net cash user) Assess chances of dominating

segment If good,

go after share If bad, redefine business or withdraw

Dogs  Gradually

deplete capacity

High to Low Positive cash flow

(net cash contributor)

Plan an orderly withdrawal to maximize cash flow

10-9

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PORTFOLIO MATRIX:

STRATEGIC CONSEQUENCES

10-10

MATRIX AND PRODUCT LIFE CYCLE

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1 0 -1 1

IL L U S T R A T IO N O F A

B A L A N C E D P O R T F O L IO

ILLUSTRATION OF AN UNBALANCED PORTFOLIO

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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).

GE MULTIFACTOR PORTFOLIO MATRIX

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10-15

ASSESSING INDUSTRY ATTRACTIVENESS

CRITERIA WEIGHTS* × RATINGS** = VALUES

Market diversity 05 2 10

Demand cyclicality 05 2 10

Expert opportunities 05 5 25

Competitive structure 05 3 15

Industry profitability 20 3 60

Inflation vulnerability 05 2 10

Raw material availability GO 4 —

Technological role 05 4 20

Environmental impact GO 4 —

1.00 1 to 5 3.43

* Some criteria may be of a GO/NO GO type For example, many Fortune 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

ASSESSING BUSINESS STRENGTHS

Sales/distribution

Proprietary & key

Advertising &

promotion

Facilities location &

Capacity and

R & D advantages/

* 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.

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10-17

PRESCRIPTIVE STRATEGIES FOR BUSINESS IN

DIFFERENT CELLS

MARKET-ATTRACTIVENESS

High

PROTECT POSITION

 Invest to grow at Maximum rate

 Concentrate effort on maintaining strength

INVEST

TO BUILD

 Challenge for leadership

 Build selectively on strengths

 Reinforce vulnerable areas

BUILD SELECTIVELY

 Specialize around limited strengths

 Seek ways to overcome weaknesses

 Withdraw if indications

of sustainable growth are lacking

Medium

BUILD SELECTIVELY

 Invest Heavily in most attractive segments

 Build up ability to counter competition

 Emphasize profitability

by raising productivity

SELECTIVITY/MANAGE FOR EARNINGS

 Protect existing program

 Concentrate investments in segments where profitability is good and risk is relatively low

LIMITED EXPANSION

OR HARVEST

 Look for ways to expand without high risk; otherwise minimize investment and rationalize operations

Low

PROTECT AND REFOCUS

 Manage for current earnings

 Concentrate on attractive segments

 Defend strengths

MANAGE FOR EARNINGS

 Protect position in most profitable segments

 Upgrade product line

 Minimize investment

DIVEST

 Sell at time that will maximize cash value

 Cut fixed costs and avoid investment meanwhile

10-18

DIRECTIONAL POLICY MATRIX

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PORTER’S THREE GENERIC STRATEGIES