Using Portfolio Matrices to Plan for the Future

In previous blog entries, I have discussed the Boston Consulting Group Growth/Share matrix as a tool for product portfolio management.  However, this matrices is seen by many business academics as flawed.  Some academics have tried to amend the BCG model and even the BCG have attempted to mitigate the matrix’s defects through other tools, in particular their Growth/Gain matrix.

Given the difficulty in developing a model of portfolio management, several large multinational firms employed academics to build portfolio management tools.  Two of the tools developed are the General Electric Multifactor Portfolio Matrix and the Shell Directional Policy Matrix.

The General Electric Matrix compares the attractiveness of a particular market or market segment with your business’s competitive position in that market.  The matrix does not rely solely on market growth.  A number of market attractiveness measures are used including:

  1. Market Size
  2. Market Growth Rate
  3. Beatable Rivals
  4. Market Entry Barriers
  5. Social, Political and Legal Factors

Similarly competitive strength is not based solely on market share.  Again a number of criteria can be selected including:

  1. Market Share
  2. Business Reputation
  3. Distribution Capability
  4. Market Knowledge
  5. Service Quality
  6. Innovation Capability; and,
  7. Cost advantages.

When using the GE matrix, management decide which criteria are to be used.  Each factor is weighted.  The weighting of all factors combined cannot exceed ten.  Each factor is then given a relative importance out of ten.  By multiplying the weighting with the importance factor, a score for each factor is calculated. These scores are added to give a market attractiveness and competitive position score for each product line.

These scores are then plotted on a 3×3 matrix.  From this matrix, five strategic zones are defined:

  • Zone One: In this zone both market attractiveness and competitive position is strong.  The aim for products in this zone is to build and manage sales for market share growth.  This equates to star products in the BCG matrix.
  • Zone Two: In this zone, your competitive position is strong but the market is not particularly attractive.  The proposed strategy is that you manage the product for consistent profits whilst maintaining market share.  This zone equates to BCG matrix cash cows.
  • Zone Three: Here the market is highly attractive but your competitive strength is relatively weak.  It is a zone where the strategic product policy can be determined by the relative strength of your competitors.  If your competitors are weak or passive, your strategy would be to build the products position in the market. If you face strong competition, the aim would be to retain the existing market position of your product.  If your commitment to the market is low, your aim would be to harvest the product for cash.
  • Zone Four:  Here both competitive position and market attractiveness are weak.  This position is similar to a ‘cash dog’. This could be a product in a declining market or a dog product which is difficult to divest (e.g. a required accessory).  This is a product to be harvested for cash
  • Zone Five:  Here both competitive position and market attractiveness are extremely weak.  The aim should be to divest the product. To run down production or to sell it to another party.

There have been a number of criticisms of the GE matrix.  It is a richer tool in terms of content and it is therefore more flexible. However, it is much harder to use than the BCG matrix and it can be affected by managerial bias, power games and empire building.  Decisions on the use of the matrix and resulting strategies need to be made above the level of strategic business units.

The Shell Directional Policy (created by research financed by Shell Oil) does something a bit different to the GE matrix and the BCG matrix in that it looks to the future rather than relying on existing product portfolios.

The Shell Matrix compares the attractiveness of a market or segment with the potential for profitability in that market.  Again multiple weighted factors are used to give products scores. Again a three by three matrix is produced which delivers eight strategic positions:

  1. Leader: Here a firm has strong competitive capabilities and strong profitability prospects.  this is your core market where you have a leadership position.
  2. Growth Leader:  Here prospects for profitability are average but you have strong competitive capabilities. Here you look to improve the prospects of profitability using tools such as value chain analysis.
  3. Try Harder:  Here prospects for profitability are strong but your competitive capabilities are only average.  the aim is to improve those competitive capabilities through training and recruitment.
  4. Double or Quit:  Here prospects of profitability are strong but your competitive capabilities are weak.  So the decision is whether it is worth investing in improving those capabilities.
  5. Custodial Growth:   Here both profitability and competitive capabilities are average.  This and Double or Quit are similar to the Question Mark products of the BCG matrix.
  6. Phased Withdrawal:  Here profitability is average but your competitive capabilities are weak. The aim is a managed withdrawal from the market or segment.
  7. Cash Generation: Here you have strong competitive capabilities but the prospects for high profit margins are weak.  This equates to the BCG matrix cash cow.
  8. Disinvest: Here both competitive capabilities and profitability prospects are weak.  This is a dog product ripe for disinvestment.

Both the Shell Matrix and GE matrix require significant levels of information gathering and analysis. However, if your in business, shouldn’t you be doing this anyway?

All portfolio management matrices have strengths and weaknesses.  When using these tools you must be aware of those strengths and weaknesses.  perhaps the best option is to use these matrix tools in combination.

These are tools to help strategic decision-making: They are not the source of mandatory instruction.

So use these tools, in full awareness of their attributes to give a rounded and comprehensive view of your product portfolio.