Discuss the models of business portfolio.

Managing the firm can involve viewing it as an investment portfolio.  This allows managers to deal with business entities in deciding if to Build, maintain, Phase Down, or Terminate.  These decisions affect resource allocation.

To help with resource allocation, managers use one or more models.  Two of the best-known business portfolio models are (1) Boston Consulting Group (BCG) model, and (2) the General Electric (GE) Model.

Boston Consulting Group Approach

This model utilizes the growth-share matrix with Relative Market Share on the X axis (horizontal axis) and Market Growth Rate on the Y-axis (vertical axis).  The growth-share matrix is divided into four (4) cells, with each indicating a different kind of business decision need.

1)      Dogs – located in the Bottom Right Hand Quadrant.  These are businesses that have weak/low market share in low-growth markets. They generally generate low profits or losses and may be candidates for elimination unless there are reasons to hold on to them.

2)      Question Marks – located in the Upper Right Hand Quadrant.  Question marks have low market shares in high growth markets – cash is needed to make question marks into stars.  This requires management decision concerning whether to continue to spend money to turn the low market shares in to high market shares in an opportunity rich high growth market.  Most business start off as question marks.  Question marks require a lot of resources I if the firm want s to be successful.  Competition is great as competitors fight for market share and the firm has to decide if it wants to keep pouring money into this business.

3)      Stars – Upper left hand quadrant.  A star is the market leader (large market share) in a high growth market.  A Star does not necessarily make money for the firm since resources used to continue to take advantage of growth opportunities and hold off competitors.

4)      Cash Cows -  lower left hand quadrant.  When the market’s annual growth rate falls a star becomes a cash cow.  The firm has a large market share in a low growth market.  Given the low growth, most competitors drop out of the market, an the firm is left to dominate the industry.    The firm does not have to finance capacity expansion since market growth rate has slowed.   Because the firm is the market leader, it enjoys economies of scale and higher profit margins.  The firm utilizes cash from its cash cows to pay bills and support other efforts.

The firm should determine if its business portfolio is healthy. Unbalanced portfolios spell weakness

Benefit of the BCG Model

Based upon an analysis of its SBU, the firm can decide if its portfolio is healthy (balanced).  An unbalanced portfolio (one with too many dogs and not enough of the others) would drain resources or leave the firm open to changes in the environment.  Results from the analysis could be used to decide on strategies to adopt.  Managing the firm as an investment portfolio deals with the determination of business entities with respect to four strategies that the firm can adopt:

1)      Build: Here the goal is to increase market share.  This is a strategy best suited for “question marks” as they must grow to become stars.

2)      Hold:  The goal is to keep market share and is best suited for “cash cows” so that they could continue to yield large positive cash flow.

3)      Harvest:  Here the goal is to increase short-term cash flow.  Harvesting involves a decision to exit from the business (market).  Harvesting involves “milking the business” to get out as much resources as it can.   Harvesting best suited for weak cash cows, question marks and dogs.

4)      Divest:  Sell or liquidate to be able to direct the resources elsewhere.  This strategy best suited for “dogs” and “question marks” that are a drag on profitability and has no real chance of future profitability.  Before divesting the firm should evaluate whether divesture is a better option than harvesting.

All firms operate several non-obvious businesses. Therefore, it is important to identify what business you are in, in terms of customer needs (since customer needs ensure even as products or ways of meeting the needs change).  Firms define their business in order to manage them strategically.  Levitt (in “marketing Myopia” observes that the mission of the firm must neither be too narrow nor too broad.  The competitive domain of the firm defines the business domain. These are stated in terms of (1) Customer Groups – who is served, (2) Customer needs, and (3) Technology.

The GE Multifactor Portfolio Matrix:

This view holds that the growth-share matrix is not the only way to view the firm – additional factors (beside market share and growth rate) should also be considered (hence the Multifactor Matrix).   Circles are used to represent the size of the market rather than the size of the business.  Each business is rated in terms of (1) market attractiveness, and (2) business strength.  This a firm is assessed in terms of the degree to which it is in an attractive market, and has the required business strength to compete in the market.  If one these two factors are missing, then the firm will not have success in the marketplace.  To measure these two dimensions, identify the factors underlying each dimension, measure them, and combine them into an index.   Compared to the BCG model the GE model examines more factors in evaluating an actual or a potential business.