Portfolio Analysis: is It Ready for a Rebirth?

Posted by 22 September, 2008 Comments Off on Portfolio Analysis: is It Ready for a Rebirth?


Perhaps no company has contributed more to the “old” strategic market planning than General Electric (GE). In the 1970s, GE reorganized its forty-eight divisions and nine product lines into strategic business units (SBUs). Each SBU consists of one or more products, brands, company divisions, or market segments that have some­thing in common, such as the same distribution system, similar customers, or the same basic technology. At the same time, each SBU has its own mission, its own dis­tinct set of competitors, and its own strategic plan. About 20 percent of the largest manufacturing firms in the United States have adopted the SBU system. Recently, for example, Campbell’s Soup Company established eight SBUs: soups, beverages, pet foods, frozen foods, fresh produce, main meals, grocery, and food service. The SBU structure’s great merit is that it defines the company according to the markets it serves-one SBU per market. Smaller companies are often focused on a single mar­ket, but larger ones easily lose their marketing orientation without the SBU structure to force it.

The Boston Consulting Group (BCG) suggested in the 1970s that SBUs should be managed as a portfolio the way financial investments are managed (Exhibit 2.2a). Differ­ent SBUs may have different missions, but all work together to achieve the organization’s overall objectives. Top

Optimum Cash Flow

management decides which business units or brands to build up, maintain, phase down, or eliminate. In short, the organization is continually attempting to improve its portfolio of SBUs by divesting itself of units that do not perform well and, at the same time, acquiring promising new ones (Exhibit 2.2b).
The BCG approach focuses on three factors: market growth, the SBU’s relative market share, and cash flow. An SBU’s relative market share is determined by dividing its market share by that of its largest competitor. Thus, if Gillette’s razors-and-blades SBU has a 65 percent share of that market while Schick, its largest competitor, has 16 percent and BIC has 11 percent, their relative market shares are:

Gillette 4.1 (65%/16%)
Schick 0.3 (16%/65%)
BIC 0.2 (11%/65%)

The dividing line between high and low relative market share is set at 1. Only the market leader can lie to the left of this point. The more dominant the leader’s share, the stronger its position in the marketplace.
SBUs are categorized by the amount of cash they generate, resulting in the fol­lowing four categories:

1. Stars-These SBUs are in industries with high sales growth rates, and they have a high relative market share. The stars are the leaders in their markets. They need continual inputs of cash to maintain their high growth rates. Even­tually that growth will slow and they will become cash cows.

2. Cash cows-Cash cows are SBUs with a higher market share than competi­tors in a low-growth market. They have high sales volume and low costs. Thus, they generate more cash than they need; the excess cash can be used to support other SBUs. At Gillette, the razors-and-blades SBU generated 32 per­cent of the company’s 1989 sales revenues, but 64 percent of its profits. Profit margins on this SBU were a whopping 34.7 percent, compared with 15.2 percent for stationary products and 6.9 percent for toiletries.25 Domestic beer is a cash cow for Anheuser-Busch, supporting the new product lines discussed earlier.

3. Question marks-These high-growth, low-market-share SBUs are problems for management because their future direction is uncertain. They require a lot of cash simply to maintain their position, let alone increase their market share. Management must decide whether to pour in enough cash to make them into leaders; if not, these SBUs probably will be phased out of the portfolio.

4. Dogs-Dogs are low-growth, low-market-share SBUs. They may provide enough cash to support themselves, but they are not a substantial source of funds. Such SBUs often are in the process of entering a particular market or phasing out of it. Either way, their position is below average.
The distribution of an organization’s SBUs in the different categories provides a profile of the firm’s health. But such an analysis also needs to consider the direction in which each SBU is moving. Organizations prefer to turn question marks into stars and, as growth slows, into cash cows that can be used to fund other question marks. This is precisely the sequence that occurred at Gillette, where the excess cash from the razor blade business was funneled into disposable lighters. Eventually Gillette’s Cricket lighter became a star.
The portfolio approach aids in the setting of marketing strategies. The follow­ing basic strategies are closely related to this approach:

· Build-This strategy is appropriate for question marks if they are to grow into stars. The firm invests heavily to improve product quality, develop promo­tional campaigns, or subsidize price reductions-all in an effort to beat the competition.

· Hold-This strategy is used to protect cash cows and stars that are strongly en­trenched. The market leader simply defends its market share and maintains cus­tomer loyalty.

· Harvest-When the future looks dim for a weak cash cow, a dog, or even a question mark, the best strategy may be to harvest as much profit from it as possible before letting it go. Marketing (especially promotion) and research and development expenditures are curtailed; economies of production are empha­sized; and customer services are reduced. In short, all costs are lowered as the SBU is “milked” of its cash-generating potential.

· Divest-When a dog or question mark has no future, it is sold off or dropped from the portfolio because the cash needed to fund it can be used better else­where.

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