30 CHAPTER 10: Portfolio Analysis Chapter 10 Portfolio Analysis A Intoduction Need for Product Portfolio (TM 10-1) Portfolio Models (TM 10-2) B Product Life Cycle Basic Product Life Cycle (TM 10-3) Product Life Cycle Strategies (TM 10-4) Information for Locating Products in Their Life Cycles (TM 10-5) C Growth/Share Portfolio Matrix Product Portfolio Matrix Dimentsions (TM 10-6) Matrix Quadrants (TM 10-7) Strategic Perspectives of Products in Different Quadrants (TM 10-8) Portfolio Matrix: Strategic Consequences (TM 10-9) Relationship Between Portfolio Matrix and Product Life Cycle (TM 10-10) Illustration of a Balanced Portfolio (TM 10-11) Illustration of an Unbalanced Portfolio (TM 10-12) Difficulties with Product Portfolio (TM 10-13) D Multifactor Portfolio Matrix GE Multifactor Portfolio Matrix (TM 10-14) Assessing Industry Attractiveness (TM 10-15) Assessing Business Strengths (TM 10-16) Prescriptive Strategies for Business in Different Cells (TM 10-17) Directional Policy Matrix (TM 10-18) E A New Product Portfolio Approach Porter’s Three Generic Strategies (TM 10-19) 31 CHAPTER 10: Portfolio Analysis 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 conceptual framework within which the alternatives can be developed Product portfolio is such a framework CHAPTER 10: Portfolio Analysis 32 10-2 PORTFOLIO MODELS • Product life cycle • Growth/share portfolio matrix • Multifactor portfolio matrix • New product portfolio approaches 33 CHAPTER 10: Portfolio Analysis 10-3 BASIC PRODUCT LIFE CYCLE CHAPTER 10: Portfolio Analysis 34 10-4 PRODUCT LIFE CYCLE STRATEGIES Introduction Growth Maturity Decline Offer a basic product Offer product extensions, service, warranty Diversify brands and models Phase out weak items Use cost-plus Price to penetrate market Price to match or beat competitors Cut price Distribution Build selective distribution Build intensive distribution Build more intensive distribution Go selective: phase out unprofitable outlets Advertising Build product awareness among early adopters and dealers Build awareness and interest in the mass market Stress brand differences and benefits Reduce to level needed to retain hard-core loyals Sales Promotion Use heavy sales promotion to entice trial Reduce to take advantage of heavy consumer demand Increase to encourage brand switching Reduce to minimal level Product Price 35 CHAPTER 10: Portfolio Analysis 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 CHAPTER 10: Portfolio Analysis 36 10-6 PRODUCT PORTFOLIO MATRIX DIMENSIONS 37 CHAPTER 10: Portfolio Analysis 10-7 MATRIX QUADRANTS CHAPTER 10: Portfolio Analysis 38 10-8 STRATEGIC PERSPECTIVES OF PRODUCTS IN DIFFERENT QUADRANTS QUADRANT Stars INVESTEMENT CHARACTERISTICS EARNING CHARACTERISTICS CASH-FLOW CHARACTERISTICS • Continual Low to High Negative cash flow (net cash user) Continue to increase market share – if necessary, at the expense of shortterm earnings High Positive cash flow (net cash contributor) Negative to Low Negative cash flow (net cash user) High to Low Positive cash flow (net cash contributor) Maintain share and cost leadership until further investment becomes marginal Assess chances of dominating segment If good, go after share If bad, redefine business or withdraw Plan an orderly withdrawal to maximize cash flow • expenditures for capacity expansion Pipeline filling with cash Capacity maintenance expenditures Cash Cows • Question Marks • Heavy initial • Dogs capacity expenditures High R&D costs • Gradually deplete capacity STRATEGY IMPLICATION 10-9 39 CHAPTER 10: Portfolio Analysis PORTFOLIO MATRIX: STRATEGIC CONSEQUENCES 10-10 CHAPTER 10: Portfolio Analysis 40 RELATIONSHIP BETWEEN PORTFOLIO MATRIX AND PRODUCT LIFE CYCLE 41 CHAPTER 10: Portfolio Analysis 10-11 ILLUSTRATION OF A BALANCED PORTFOLIO CHAPTER 10: Portfolio Analysis 42 10-12 ILLUSTRATION OF AN UNBALANCED PORTFOLIO 43 CHAPTER 10: Portfolio Analysis 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) CHAPTER 10: Portfolio Analysis 44 10-14 GE MULTIFACTOR PORTFOLIO MATRIX 45 CHAPTER 10: Portfolio Analysis 10-15 ASSESSING INDUSTRY ATTRACTIVENESS CRITERIA Market size Growth rate Profit margin Market diversity Demand cyclicality Expert opportunities Competitive structure Industry profitability Inflation vulnerability Value added Capital intensity Raw material availability Technological role Energy impact Social Environmental impact Legal Human WEIGHTS* × 15 12 05 05 05 05 05 20 05 10 GO GO 05 08 GO GO GO GO 1.00 * RATINGS** 3 2 3 4 4 4 4 to = VALUES 60 36 15 10 10 25 15 60 10 50 — — 20 32 — — — — 3.43 Some criteria may be of a GO/NO GO type For example, manyFortune 500 firms would probably not invest in industries viewed negatively by society even if it were legal and profitable to so ** “1” denotes very unattractive; “5” denotes very attractive CHAPTER 10: Portfolio Analysis 46 10-16 ASSESSING BUSINESS STRENGTHS CRITERIA Market share SBU growth rate Breadth of product line Sales/distribution effectiveness Proprietary & key account effectiveness Price competitiveness Advertising & promotion effectiveness Facilities location & newness Capacity and productivity Experience curve effects Value added Investment utilization Raw materials cost Relative product quality R & D advantages/ position Cash throwoff Organizational synergies General image WEIGHTS* x RATINGS** = VALUES 10 X 05 50 — 20 20 80 X X — — 05 20 05 25 X 15 X 05 05 15 4 4 — 60 — 25 20 60 05 10 X X 5 20 50 — — 1.00 to * 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 4.30 47 CHAPTER 10: Portfolio Analysis 10-17 PRESCRIPTIVE STRATEGIES FOR BUSINESS IN DIFFERENT CELLS MARKETATTRACTIVENESS High PROTECT POSITION • Challenge for • Specialize around • • • Seek ways to Maximum rate Concentrate effort on maintaining strength leadership Build selectively on strengths Reinforce vulnerable areas limited strengths SELECTIVITY/MANAGE FOR EARNINGS overcome weaknesses • Withdraw if indications of sustainable growth are lacking LIMITED EXPANSION OR HARVEST • Invest Heavily in most • Protect existing • Look for ways to • • • attractive segments Build up ability to counter competition Emphasize profitability by raising productivity • PROTECT AND REFOCUS Low BUILD SELECTIVELY • Invest to grow at BUILD SELECTIVELY Medium INVEST TO BUILD program Concentrate investments in segments where profitability is good and risk is relatively low MANAGE FOR EARNINGS expand without high risk; otherwise minimize investment and rationalize operations DIVEST • Manage for current • Protect position in most • Sell at time that will • • • • earnings Concentrate on attractive segments Defend strengths Strong profitable segments Upgrade product line Minimize investment Medium • maximize cash value Cut fixed costs and avoid investment meanwhile Weak CHAPTER 10: Portfolio Analysis 48 10-18 DIRECTIONAL POLICY MATRIX 49 CHAPTER 10: Portfolio Analysis 10-19 PORTER’S THREE GENERIC STRATEGIES [...]...CHAPTER 10: Portfolio Analysis 40 RELATIONSHIP BETWEEN PORTFOLIO MATRIX AND PRODUCT LIFE CYCLE 41 CHAPTER 10: Portfolio Analysis 10- 11 ILLUSTRATION OF A BALANCED PORTFOLIO CHAPTER 10: Portfolio Analysis 42 10- 12 ILLUSTRATION OF AN UNBALANCED PORTFOLIO 43 CHAPTER 10: Portfolio Analysis 10- 13 DIFFICULTIES WITH PRODUCT PORTFOLIO • Overinvesting in low-growth segments (lack of objectivity and “hard” analysis) ... uncovering emerging high-growth segments (lack of corporate development effort) • Unbalanced business mix (lack of planning and financial resources) CHAPTER 10: Portfolio Analysis 44 10- 14 GE MULTIFACTOR PORTFOLIO MATRIX 45 CHAPTER 10: Portfolio Analysis 10- 15 ASSESSING INDUSTRY ATTRACTIVENESS CRITERIA Market size Growth rate Profit margin Market diversity Demand cyclicality Expert opportunities Competitive... strengths Strong profitable segments Upgrade product line Minimize investment Medium • maximize cash value Cut fixed costs and avoid investment meanwhile Weak CHAPTER 10: Portfolio Analysis 48 10- 18 DIRECTIONAL POLICY MATRIX 49 CHAPTER 10: Portfolio Analysis 10- 19 PORTER’S THREE GENERIC STRATEGIES ... 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 4.30 47 CHAPTER 10: Portfolio Analysis 10- 17 PRESCRIPTIVE STRATEGIES FOR BUSINESS IN DIFFERENT CELLS MARKETATTRACTIVENESS High PROTECT POSITION • Challenge for • Specialize around • • • Seek ways to Maximum rate Concentrate... 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 CHAPTER 10: Portfolio Analysis 46 10- 16 ASSESSING BUSINESS STRENGTHS CRITERIA Market share SBU growth rate Breadth of product line Sales/distribution effectiveness Proprietary & key account effectiveness Price competitiveness... intensity Raw material availability Technological role Energy impact Social Environmental impact Legal Human WEIGHTS* × 15 12 05 05 05 05 05 20 05 10 GO GO 05 08 GO GO GO GO 1.00 * RATINGS** 4 3 3 2 2 5 3 3 2 5 4 4 4 4 4 4 4 4 1 to 5 = VALUES 60 36 15 10 10 25 15 60 10 50 — — 20 32 — — — — 3.43 Some criteria may be of a GO/NO GO type For example, manyFortune 500 firms would probably not invest in industries... materials cost Relative product quality R & D advantages/ position Cash throwoff Organizational synergies General image WEIGHTS* x RATINGS** = VALUES 10 X 05 5 3 4 50 — 20 20 4 80 X X 3 4 — — 05 4 20 05 5 25 X 15 X 05 05 15 3 4 4 5 4 4 — 60 — 25 20 60 05 10 X X 4 5 4 5 20 50 — — 1.00 1 to 5 * For any particular industry, there will be some factors that, while important in general, will have little or ... the business CHAPTER 10: Portfolio Analysis 36 10- 6 PRODUCT PORTFOLIO MATRIX DIMENSIONS 37 CHAPTER 10: Portfolio Analysis 10- 7 MATRIX QUADRANTS CHAPTER 10: Portfolio Analysis 38 10- 8 STRATEGIC... CHAPTER 10: Portfolio Analysis 10- 11 ILLUSTRATION OF A BALANCED PORTFOLIO CHAPTER 10: Portfolio Analysis 42 10- 12 ILLUSTRATION OF AN UNBALANCED PORTFOLIO 43 CHAPTER 10: Portfolio Analysis 10- 13... IMPLICATION 10- 9 39 CHAPTER 10: Portfolio Analysis PORTFOLIO MATRIX: STRATEGIC CONSEQUENCES 10- 10 CHAPTER 10: Portfolio Analysis 40 RELATIONSHIP BETWEEN PORTFOLIO MATRIX AND PRODUCT LIFE CYCLE 41 CHAPTER