Page 13 - Portfolio Analysis

BCG MATRIX

ANALYZING THE PRODUCT PORTFOLIO

A study of the PLC demonstrates the wisdom of having a variety of
products/divisions with different present and prospective growth rates.
However, this is not a sufficient condition for the development of a well-
balanced portfolio of products that will ensure longrun growth. Two other
factors are market share position and the need to balance cash flows
within the company. Some products should generate cash (and provide
acceptable reported profits) and others should use cash to support growth.
If this balance is not achieved the company may either build up
unproductive cash reserves or go bankrupt.

This becomes clearer when we consider market share position and market
growth rate together. Products or services or divisions are classified
according to their positions on two dimensions: relative market share and
market growth rate. Relative market share records the product’s share
relative to the largest competitor; market growth rate indicates the extent
to which the product should be capable of generating cash. Relative
market share is an important measure as it reflects the degree of
dominance enjoyed by the product in the market.

Of course, the market growth-market share matrix is simply one way of
conceptualising the product portfolio. It has been useful as a defice for
synthesising the analyses and judgements of the earlier steps in the
planning process, especially in facilitating an approach to strategic
decision making that considers the firm to be a whole that is more than the
sum of its separate parts.

The Boston Consulting Group Growth-Share Matrix

We can now examine the approach of the BCG to this issue. Their matrix
is used to evaluate the contribution of each product in an organisation in
relation to all other products. It may be used to evaluate both the current
position of each product, its likely future needs, and its potential. It may
also be used to assess the strategic potential of major competitors.