Portfolio Planning Models

CAPITAL ALLOCATION FRAMEWORK

Portfolio Planning Models: BCG Matrix GE Nine Cell Matrix McKinsey Matrix

BCG MATRIX
The BCG matrix model is a portfolio planning model developed by Bruce Henderson of the Boston Consulting Group in the early 1970's.

The BCG model categorizes businesses into four categories based on combinations of two dimensions - market growth and relative market share, thus it is also referred to as growth-share matrix.

BCG MATRIX

HIGH INDUSTRY

Stars

Question Marks

GROWTH RATE

10%
Cash Cows LOW Dogs

HIGH

1x

LOW 0.1x

RELATIVE MARKET SHARE

STARS
SBUs classified as stars have the following main characteristics: High relative market share High projected industry growth rate Generate high profits Require significant investments in order to maintain lead and take advantage of industry growth

CASH COWS
High relative market share Low industry growth potential Generate substantial profits due to their market share. This surplus cash may be diverted to other businesses.

QUESTION MARKS
They are products with high growth potential Current market share is considerably low, therefore, substantial investments would be required to take advantage of the market growth potential

Ideally the firm would like to convert these into stars, but since there is no guarantee of this happening they are referred to as question marks.

DOGS
They belong to industries that have a slow-growth potential The SBU has a low relative market share It is difficult, and expensive, to increase market share because of the above two reasons.

SUGGESTED STRATEGIES
Stars: Build. Cash Cows : Hold/Harvest. Question Marks : Build/Harvest. Dogs : Divest.

Limitations of BCG Matrix

The dimensions considered are not comprehensive. Each business unit is considered independent of the other. The model focuses on the market as a whole this may cause misrepresentation of a particular business. It is a static model

GE NINE-CELL MATRIX This matrix evaluates various businesses of the firm along two composite dimensions: Business Strength on the horizontal (X) axis Industry Attractiveness on the vertical (Y) axis

Each of these dimensions is a weighted composite Rating based on different factors.

Factors considered for determining industry attractiveness: Market size and growth rate Industry Profit Margin Competitive Intensity Seasonality Cyclicality Economies of Scale Technology Social, Environmental, legal and human impacts

Factors considered for determining business strength: Relative market share Profit margins relative to competitors Ability to compete on price and quality Knowledge of customer and market Competitive strengths and weaknesses Technological capability Calibre of management

GE NINE CELL MATRIX

High

Medium Industry

Attractiveness

Low

Strong

Average Business Strength

Weak

GE STOPLIGHT MATRIX

High

Medium Industry

Attractiveness

Low

Strong

Average Business Strength

Weak

The McKinsey Matrix

This matrix is very similar to the GE nine cell matrix and evaluates various businesses of the firm along two composite dimensions: Competitive Position on the horizontal (X) axis Industry Attractiveness on the vertical (Y) axis

Each of these dimensions is a weighted composite Rating based on different factors.

Factors considered for determining industry attractiveness: Industry Size Industry Growth Industry Profitability Capital Intensity Technological Stability Competitive Intensity Cyclicality

Factors considered for determining competitive position: Market share Technological Knowhow Product Quality After-sales Service Price Competitiveness Low Operating Costs Productivity

The McKinsey Matrix

Winner
High

Winner Average Business Loser

Question Mark Loser Loser

Industry Attractiveness

Medium

Winner Profit Producer

Good

Low

Medium Competitive Position

Poor