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176 Discourses on Strategic Management

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7.I. NfED FOR BUSINESS PORTFOLIO ANALYSIS
answers the question :gl{hilh
. According to Ansoff (1988), Porffolio strategy
business lhull *'" Oe in; u'hile compeh-tive sfrateg)' ans\vels the question : ho\v
Sli-ai1w_iis__u!i_ged in qach 6usiness. Thus, porffolio-straiegy is an important stra-
t"gr. ae.iiio" tirat deiines the scope of business of t!-e.,firm in the long-1yn. For
.ni,ttipt" SBU business firm, pordolio strategy isjramed at the apex level and
thereifter comes the strategic ihoice for each SBU. To f1a-ql-e-"the portfolig strategy,
evafgafq4,a4d analysis of porffolios are needed to first identifJ the existing states
.u_4qignp_porffolios and then match resource use and re-
u"a flot""tiul statgi_of
,orrri" generation'fo. one-of them. Now, given-ifie total-iesouries a'5 the
"iitt
on the firm, the corporate pllnner_can work out the pordolio
OlorutiffeorstraintS
strategy leeping in mind the long-run objectives of the fum'
In casesof diversification, external growth in other product fields and'grow
io sell out strategf , the top management is found to be in the quest of an attractive
pordouo. This slirch activity .u'.t'b" shengthened by undertaking porffolio analy-
sis to rank the alternative pordolios thit the plarmer may have in his mind'
Ranking mav, however, difier from objecfive to objective. If the objective is to
g"n"ru6 .uri it the short run, there may be one type of ranking. If the objective
Is to gron, in terms of market share in the iong-run" there Tg b" another typeof
.anhirg. Ranking of porffolios may also vary along the different stages of the_
prodrrc"tlife cyclJ There may be vaiiations i-fporffolios are measured in respect of
risk of return than rate of return.
fTh.rr, there is an ubnost need to carryout strategic evaluation of both existing
ana iil<ety porffolios for optimization of risk and return, rationalization of product
Iine, elevaiion of corporut" i*ug", maximum utilization of additional resources
and creation of inimitable core iompetencies. These are all needg{ for long-run
surviva{.,of the firm thlgugh clranges in the business de!4itiol ovel yqars. Mostly,
to the
niatrix methods u." ,tr"a iot such-analysis.The earliest reference goes back
works ofiioiton-eiirisqlting GJoup other matrix methods are
@CG) ..Basically,
oi bCC mitri" eitner in resliect of characters under study or in
modifications
respect of number of cells or both. The cbncept of gap analysis and Ansoff's
cascade analysis are also applicable for searching porffolios'

7.2. METHODS FOR PORTFOLIO ANALYSIS

Two dimensional matrix method is very useful for both anaiytical and graphicai
one
presentation of porffolios. In the simplest case, each dimension represents
no such hard and fast rule that
iharacter of stratlgic importance. HowLver, there is
char-
each dimension siould iepresent one character only. In fact, any number of
acters can be taken into consideration to rePresent one dimension of the porffolio
matrix. In case, multiple characters are chosen, the evaluator must specifu their
relative weightage and a method for combiaing all the characters into one com-
bined measrire.For example, industry attractivenessmay represent one dimension
of the porffolio matrix. io evaluate industry attractiveness one may consider
market growth rate as a single character of importance. Alternatively, one may
consider"profitability and mirket growth rate as tl-retwo characters representing
rate
the industry attractiveness. A weighted average of profitability and growth
may be considered as a measure for industry attractiveness (IA). Ansoff (1984)
Etri,-:;,-.. -
-.:r-:i;-.r"....:t:-,j.:;-,..,,*.r_::-

t
F

PortfolioStrategy 177

considered profitability (P), gron'th rate (G) and opportunities/threats (O/T) for
this purpose and suggested a weighted mean
IA:cP+BG+y(O/T),
n'here 0<c,9,T<7,c+B+y=1.
Thus, choice of dimersion is very important for developing a porffolio matrix.
Along each climension, one has to idenfify major in{luencing characters and sug-
gest a conposite measure for evaluation of the state of the portfolio, under consid-
eration, in respect of that dimension. Mostly one goes for tn'o dimensions - one
dimension representing tire industry situation and the other dimension represent-
ing the businesssitr"rationof the firm.

f7.2.1. BCG l\{atrix N{ethod

./
The Po*o-n 99-n5qlring-Group(BCG) nrahix (1974),also knou,n as the gron,th-
-sharenr atr r\, ir *' ri ri pffi .arq,jn&a,rr po*f p1o_a:iirGfi . I t
has tu'o dimensions. " For each dimension,there is onlv one character.Industrv
situad6frE;fr6;,su1_e{ly-.geffiiallpio rA*pJ_gL6lli. B'";i;;;;;idti." iiffiai-
q.9dff-ihg .ffi. ;c@; :,&g!-tluii, tn f ait, to .6rpe bility, nkrt* laryk t
slwrgb being used il place absol_ute mq1let ""r"r"
share.By relative market share we
mean the ratio of a division's onn market shareto the n.raximummarket shareof
tix:tar$trffi iltej.oil$ngl9-Le-q+*"f
gnfqdtiiiierari'"ai.eoittte?aiti"e."-urtet
shareposition is lessthan 0.5 we considerit as a low value.If, on the other hand,
the relative market share pGition lies between 0*.STild:lwe consider it aqe bigh
v4lge" Thus, trvo distinct classes- high.relative"-rnarketsh41e*pp_s_i!.qnand kty_
tei5frrremarket shareposition,describetle dimersion of businesssituation.Similarlv,
mdd4,"sa:1ds"gi:oi^/tfr'raiein percendge from is tt"i"g i" poittly indusfr
"i"d
situation. A positive industry gron'th rate in sales (reasonably, higher than the
averagerate of gror.r'thof the economy)representshigh growth rat€ and a negative
industry gron'th rate represenblow growth rate. v ,
Becauseof a two-way classificationrvith eachdimeruion hqyingJW_o_catego-
ries there are altogetherLau;.cellsi." f.o@he?ottovt'ing figure
representstlreBCGmatrix,rt,here@.Theareroith"
circle is i" pfgpg:ligf1to-r:e-\Lenue
#Gr-a!e-*U@_grt. The pie slice
*'ithint :=l: Tf:"!":k .p*.sBegs:f-rp
* : g** lt l::lT::"1_1T i""
t tl
ll
(High)
c)
(g

o0) Questian marks Stars

!O- 0 IV ill
av
-o g. (Medium)

3 Dogs Cashcows
(low) 0.0 (low) 0.5 fimedium) 1.00 (high)

Relativemarketshareposition
BCG MATRIX
Diagram 7.1
 178 Discourses on Strategic Management

It may be noted from the above figure that the gga_drantI represents
question
pa1ks,.gu1f,ra1!.]I represenrs
*qtr, q"ggdfgnt III repreients eapl:pty, uni {rua_
rant IV represents
*o€s" Let uf expliin these termi in details.
(eV*:: lfirks are those divisions, which have a lou, retative-.mar!-e-!--s_!_arg
p9!t_fi,9" rllhe p-roduct field. rvhich is ha'u,ing hjgh ina;;/ sales grg)r:th liie
These mean that divisions failing under q"es-tion irarks regitn
require high vol-
ume of cash if tl-refirm dec_idesto strengthen these divisioni for .or",titrrL,g
it tn"
concerned product fields. Lou' generation of cash from these division-.
miy also
prornpt firm management to retreat from these businesses.Thus,
a maior decision
q!.gllj_r!91g$Sl*g.g-f dr,vgg$g.r! t9 be r4!g;in leqpectof e_aqli f"llft
.Gi"&
quadrant.ofth.qBCGmakix. one*rire, tttey frpil
5l€ftffllt
SrreEgrc-ghqlces ryix_ll9lomL.usn
are mostly reshictedto ggrglh -s-trategy ind divesLmentstrategy.
ftcrJ are those divisions,u'hich have.a.highlglqtiye..4arketshale positiil
in aproduct field having n:gl *dUggy-dt95€ptlh_gtu Here, both cashgenera-
and caqh-iryrgslne-rr-t.ere^hlgh,As u ies"tt, ry!_qffh_g9ldat_ed bya
lglJ8lqt:)
division, falling under this category,
ls lgr,* These *ea.rlo6if investments are
required to retain the strgng posi{g_1of the divisioirTfiele investineii6'Aie-to
be
aimed at elirh-iniiing marginal competitors'and reducing sharesof formidable
players.The fum may go for verticalintegrationin both directions,product
devel-
opment for achieving differentiation, hoiizontal integration, marklt penetration,
market deveiopmentand mergersfor elimination of coirpetition. Thus,itars
are the
prestigiousclivisionswheregrowth strategies arefollowedand are the future base
of the firrft,
representthe basicbusinesses.ofthe frrm u,herethe relati.verr4r,ket
, .QwluurLs
l!3re-position is very.-hign b;ilfi6-in--d;iFy*,qeler-grq-wth rate is ra[tre1,_t.ow.
Becauseof the dominantpos-1ti'ry_.ofthese divisio* L their concerned
product
fields, they_canggl"_fglg}lgl1.._e,p!
Gtqss). The invesrmentrequiremenrsare com_
paratively low bJca'se ofifr'J;iiiitaglag,qr._oJthage
Br,oduir.fields.As a resurr,
net cash generated from these divisions are arso irgn. ri ir
etltqa !y q-tlt qory1!'31lg"gqe"d-hyjhe-tu--sr ""ty !.3,q!_ggrr-
fo-r-nqw-gry"sirels, for"*tru
strensthenins
qwffin**.a;I;;-al;reSetgdjise"r"sgrex!]rq_.eiesr",_ie|i1#.p--rf;
strategy or any other suitable variant of ttte iiilie gio*tnltr-utegy is most suited
strategy for a cash cow division of the firfr.)
iW*2are the weak divisions of the firn/where relatiye
. . 4ark-et slqr,ep,osition
is low and the industry-se]e*s-gr'*wth rq,!g-i9.ar5g
row. In of tn" weak internal
pb-sltionand unatrracive e*ternal situation, theseclivisions"E*
pose real problems to
the management.Nelc4r*h*generated-from-dogsare=-grfls,rg.trgy*negative
and if
t!-eii-e-
9J4!es-are.all5ire-aqgg..ontinue,
the future-of th;;;;ariiseif ge_tbrocked.
fJe*t}*.ateful-planning.is-lequired foi these divisiors u'i if ,-,"Jd"d timely
liggida!9n,sf-a!,egiesmay be adopted.By careful planning we mean
a well-drawn
turnaround strategy. In that case,the dqg joay_b*e*a$g
-to*boq1f.q!g.S-kto become
a pr-ofitableunit. i
Generally a division starts from quadrant I, i.e., the question
mark state.
S::-:g::i.{.--qJ9*..!b-9kf.gy helps it in entering into quadrant rI
i.e. the star

?' :a:- ---: -t-,-ry nl

,:.:..::...e1:-:1i:.

't'1;

, , :. 1 :

'.t',:..1i
. t;.-...i;' ;
i

I Portfolio Strategy 179

!

:
position (see Ansoff, 1984). Unsuccessful gron'th strategv pushes it down to dog
state i.e. the quadrant IV. A division belonging to today's star position graclually
gets converted into a cash cou'unit in future, i.e., it moves to quadrant III with the
slowing don'n in the industry growth rate. From quadrant III the final state of a
division may reach the dog state rvhen it frequently becomesa burden for tl,e firm.
Sometimes, because of a re-excitement created in the industry, dogs become ques-
tion marks and the cycle gets repeated.
Less frequentiy, stars come out as question marks, question marks become
dogs, dogs reach the cash co$' position and the cash cows turn into stars. Here
the state of development follon's clockwise movement. For some cases,no cyclical
movementcan be obsen'ed.
When the first oil crisis took place rn 1973, corporate planners had to face
deteriorating performalce r,r'ithout any clue to move out. BCG mahix filled up this
vacuum by providing with a tool to planners for reasserting control over its
different divisions.

{rrre ryflg1*b-e-19lle--pf a BCG matti-x are

its *qry-lg !1.r4ty-qj!eq!ia[ t c3sh
{g11jly.gf tnren-t-requirements, to develoLfuLulglljlis:Lonal phalggies and to.+-ssign
priorities among dir-is-io-ns.It is also eaSylS-Utde$tand and help-fu1-fpj":ryleg,g-
ta,[on. Simpie strategic prescriptions like sustaia the cash con' units, divest or
harvest dogs, invest in question marks and increase the market shares of stars are
appealing to many managersfsee Hedley, 1977).
Hou'ever, the major problem with portfolio makix, as pointed out by Collis
and Montgomery (1995), lies in its inability to address hon value is being created
across divisions. It only takes into consider the cash based relafionship. Some
autlrors like Hofer and Schendel, (1978) believe that a four-cell presentation/
ciassification is an oversimplification of business portfolio analysis, as it does not
keep any room for average performance. A few authors also believe that the
assumption of carrying out business under self-sufficiency in capital is erroneous.
Cash, needed in future, need not be generated internally. There is no scope of
incorporating into the model the ability for external generation of cash. Further, it
does not take into consideration the most important aspect of a business i.e. the
business life cycle. In the absence of business life cycle information, it may be
difficult to make a choice between two alternafive pure shategies. For example, a
question mark position during introduction and the same state during maturity do
not call for the same strategic planning. Hofer and Schendel (1978) believe that
choice of growth rate in place of profitability is not a proper measure of attractive-
ness of an industry. Christensen et al., (1981)are also against the BCG prescription
for Dog units. According to Abell and Hammond (1979), within cell comparison
is not possible under BGC matrix method. This iast criticism, however, is equally
applicable for most of the matrix models.

7.2.2. GE l\{ultifactor Matrix Method

General Electric company, in their annual planning cycle, rates the business units
in terms of business strengths and industry attractiveness. This has led to the
development of GE Multifactor Matrix Method, also known as GE Stop light method

-, -'.:r----:l-j
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180 Discourseson StrategicManagement

of GE matrix is ittdustry
and GE Nine-cell Planning Gid. The first dimension
size, sales grou'th rate, degree of compe-
attracttueness,measured th"rough market
social image and profitability' De-
irio", chakrge of technologica'i obsolescence,
fieii one may add a few more factors like market diversity,
f"r.,a-g o.,ih" product Effects of these
legal and human factors and pricing flexibility.
"r,rirori*".rtal, index of industry attractiveness'
factors are combiied to arrive at the overall
is the rating of an
Thus, iJ the weight of the i-th factor is w,(>0) and- if f
weighted rating for industry
industry in respect oi l-tn factor, then the overall
= I w,R, , which represents the attractiveness
attractiveness 1ia; is given by IIA
of that industry in relation to the chosen factors'
Evaluation of Industry Attractiveness

Weights Ratings Weighted ratings

Factors
wt R1 W,R,
Market size
rJ W,R,
Sales growth rate ,"
,42

w" R" w^R"

Degree of comPetition
R4 wnRn
Chance of technological
obsolescence
w-R-
Social image J

wu-.
D
I\, W,R,
Profitability
1.00 f w.R
Total tl

measured through
The other dimersion of GE matrix is brrsinessstrength
sales growth late, plant capaclty, profit mar-
market share, market size, business
strength' Depending. cfn the nature of the
gin, corporate image, and technological
a fei more_ faitors Like location and distribution
iroa.r.i field, onJmay add, resource/manage-
ihar'rels, worgorce, htor-o.rurrugement relationship, corporate
ment,competenciesanddegreeo"fpollution-Thecombinedmeasureintheformof
following way:
an index of business streri[th can be developed in the
Evaluation of Business Strength

Weights Ratings Weighted ratings

Factors
-1 trS-,
Market share I

Market size Yz s" 2 vrs,

q v^S"
Business sales growth rate V. J

Plant capacitY
s vnS,

Profit margin v.5 s J

v-S.
3J

Corporate image v .o s V,S,

Technological strength Yz s" 7 uF,

1.00 F v .l tS .
Total

i
f:
i,
i
i
Ii:
!.
i
::
i
ir
L" .-,

PortfolioStrategy 181

Thus, the index of business strength (B$ is given by the total rveighted rating,
i.e.,fBS.= r.',S,, n'here v,(>0) is the weight o, the i-th factor and s, is lhe rating Jf
the business unit of the firm in respect of i-th factor. Generally, .uting,
1n, and'S,)
are measured on a 10-point scale taking values from 1 to 10. In that case, both IIA
and IBS *'ill vary betu'een 1 and 10. If 10 represents the best position and 1
represenis the *.orst position, then the range of IIA and IBS can be broken down
into three parts to indicate high, medium and lorv situations. Let
[1,4) correspond
to lo'rv situation, [4,7) correspond to medium situation and [2,10] correspoird to
high situation. This three-classcategorization of both business strength o.t.l ir-td,rr-
try athactiveness results in nine-cell planning grid for GE matrix as shown belou,:
in the diagram 7.2 industry atLractivenessis presented along the vertical axis
_
and business strength is presented along the horizontal axis. Concerned business
portfolio is drarvn in the form of a circle. Area of the circle represents the size of
the total market and the pie wedges n'ithin the circle ,"p."runl the market share
of the fum. The nine cells of GE matri-x are further divided into three regions - green
regron, )'ellow region and red region. "Go" businessesfall under the g-reenregion,
"Go u'ith caution" businessesfall under the yellou'region and "Stop businJsses
fall under the red region. GE's " go" businessesare like stars and cash cows of BCG
Matrix, "go with caution" business are like question marks of BCG matri-r and
"stop" businesses are like dogs of BCG matri-x.

A 10 i*i+***+,i(
I! High
>\l
L I
*+******* ***7"\\*
***{
'..\-" ) Y
**t******

c *********
f'
7 Al\,/\/\ /\/a/\ /\/a.A -;\---_-.4;
Medium /\^./VI /\/\^,A,,\ /\ *************
/\ /\ n/\ /\,A,A^'/1 ++***********
g)
a n/\n^n^
o) n nn^
c
q) A nl\AnA/\,/\n nn
XO Low n/\n n.^.^/1^ .^/\
o(d
n/\ /\nA' ,A,A/\^/\

1 1 Low 4 Medium 7 High 10

Indexof businessstrength
* ,+* * Greenregion

Yellowregion
nn A Red reoion
GE MATRIX
Diagam 7.2
Thus, the yellow regions require managerial discretion for strategic planning
.,
with choices varying between growth and divestment strategies.
The iediegion ii
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182 Discourses on Strategic Management

best suited for turnaround, retrenchment and liquidation

strategies. rhe green
region deserves growth or stable growth as strate ic choice.
This choice of two dimensions of GE matrix, according to
Kotrer (7994), can
make excellent rating of a business from marketing point"of
vieu,. In attractive
product field, a business high streng*, ca"" gi"e the best performance.
3Tt yith
if one of these two is lacking, the perfoimur-,.u ".u. never
1.y be good. If the
industry is attractive but the business ,r.,it iu weak, it
cannot do very rt,ell. simi_
Iarly, if the business unit is strong but the industry is
unattractive then also the
performance of the firm camot be note worthy.
Hofer (7977) criticized GE planning gricl because of inadequate
representa_
tion of new businessesin nen'industries that are going to
grow in future. Accord_
tng to Cutoff (7975), it may not be possible to assign J"ririt"
weights to different
factors of measurement because numerical evaluatiir of
factors of business shength
and industry athactiveness may not be feasible. some
authors are of the opini"on
that the nine planning grid of GE is basically a three-region classification
-c911 of
business porffolios. rn thisiense, it is not an improvement
ove;BCG mahix though
evaluation process in GE matrix is exhaustive and extensive.

7.2.3. Directional policy Matrix

(DpM) Method
Royal Dutch Shell Group (1975) has developed Directionalpoticy
Matrix(DpM) for the
purpose of their porffolio analysis. The two dimensions
of this matrix are industry
Prospectsand business urLit's ContpetitiueCapabilitits. Each dimension
is measured in
terms of multiple factors ajld classified into three categories viz.
high, medium ard
low' For industry prospecb, these three categories are termecl
as afhactive, average
and unathactive prospects. For business ,rrit', .o*p"titive
capabilities the corre-
t-p""9*g categories are kno*n as shong, average and *,eak.upubilitr"r.
Regarding
the choice of two seb of faciors for thesJ two diirensions,
*" ,qf", to earlier discus-
sion on GE mahix where the concept of weighted rating
has'been introduced. A
similar approach will be used for evaluating the two dinensions
of DpM and is
indicateci below. The iist of factors is of cour-seexpandable
or modifiable.
Evaluation of Industry prospects
Factors Weights Ratings Weighted ratings
Availability of factor inputs w, R, W,R,
Factor price w^ n2 *rR,
Market size w- R3 w"R"
Market growth rate w, i?
wrR,
Profitability w-) R-5 w-R- J)
Degree of compeuucn w. I\ w.R. oo
Entry barriers W, R7 wrR,
Ease of Exit w. l\^
d
w^R dU
State of art w^ R^ w^R^
Total 1.00 I w,R,

-f'$.t
=..,=.,'..ui.:::: r=r:a., :.::!;-:rrr.:1.ry::,:::€a
.:-Fr*5..:.111j,r:-1.:1;31r:11.:''-:i:TT.r:-:T1T:=ri+:

_..i ...r.;;.f*;r.,_',j
I

Portfolio Strategy '!

83
The Index of Industry prospects(IIps) is gwen by the total weighted
rating
of all the factors infiuencing industry prospect.Thus,
III'S = I u,,R,.
Evaluationof businessunit,s competitivecapabilities

Factors Weights Ratings Weighted ratings

Market share Vt -,] trS,
Market size V, s- 2 trS,
Business sales growth rate s
"3 v^S^
Branci image c
"a ut vnS,
Product quality t5 q
v-S-
After sales service Vu e
"a v.S.
Cost of production \' 7 vF,
P.roduction tecirnology
"e
5 trS,
Core competencies S tnSn
"s
Totai 1.00 I vs.
Index of Business unit's competitive capabilities
0BCC) is given by the total
n'eighted ratings of ail the factors affecting competitive capabilTties.
Thus,
t
IBCC=It,S,.
If ratings for each factor and for each dimension vary bet*,een
1 and 10 with
a higher value indicating a better rating, then both ilirs
and iBCC will vary
between 1 and 10. In that case a value in the interv al
[7, 4) will indicate ]ow value
[4, \ 'nl indicate an average value and t7,10] wil rnaiiate a high varue. using
this three-class categorization and p."r"ntir'rg II-PSalong the
vertical direction and
IBCC along the horizontal direction *" .ur", d".velop tte
DpM as shown below.

10
Attractive Doubleor Leadel
Tryharder
quit

Phased
0_ Average withdrawal Custodial Growth

f,

Disinvesl Phased Cash

Unattractive withdrawal generation

i Weak 4 Average 7 Strong 10

Business
UnitsCompetitive
Capabilities
DIRECTIONALPOLICYMATRIX
Diagram 7.3

lr
ii
t

F:
r8 . . '
E:,
Fi
H:i

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184 Discourseson Strategic Management

zone is
In the diagram 7.3, nine cells indicate different strategic zones. Each
in the cells. Let us briefly explain these
having its prefJrred strategy as indicated
strategies.
firm
Leader: When industry is attractive and competitive capabilities of the
extremely n'ell and is expected to
are high, the concerned business unit performs
in terms of technology or product
Iead tie industry. This leadership may be
be
qualitl . It may aiso be in terms of cost of production. Absolute priority should
leadership. In case the indus-
assigned to such units for maintaining the industry
management
try frospect is average but bwiness unit is cornpetitively very strong,
may trywith leadershiP strategY.
Growth: Business unit falling in this zone are having strong competitive
in thjs
capabilities with average industry plospects. Growth strategy is most suited
of the business sectol
zone to gain future leadership and to increase the prospect
operation for t'hich plant
also. ThJgrowth may be achieved in terms of sales and
product development or
capacity iJ to Ue simultaneously increased. There may be
development to suppoit product differentiation or cost leadership or both'
p-."r,
Try harder: ln'this zone business unit should try to increase competitive
resources
capabilites to make the best out of the athactive market. Allocation of
high. Otherwise, a busi-
shtuld be liberal and concentration of efforts should be
ness unit belonging to this zone may become a cash trap for the company'

Double or quit: when industry prospect is quite high but the business unit
have
is weak there may be two courses of action. ln case the business unit can
by manifold so as
brighter future, the allocation of resources should be increased
to ;ouble the competitive capabilities at the earliest. If the management does_not
find much scope with the present busjness, it should immediately quit the product
field to searctlfor a betteialternative. This zone is comparable with the'question
mark' zone of the BCG matrix.
Cash generation: From the zone of unathactive induslry prospect but strong
cash fo1
competitive capability the firm can earn high profit and can generate
inveitment in other aieas. Business units falling in this zone are comparable'n'ith
cash cows of the BCG matrix.
Custodial: In this zone of average industry prospects and average competi-
wait
tive capabilities the best course of action is to bear with the business unit and
for an emerging trend. No drastic decision should be taken for such units because
a unit belonging to this region has the chance of moving into any zone.
Phased withdrawal: \Ahen the industry Prospects are avelage and competi-
tive capabilities of the business unit are low, the best course of action is to retreat
from the product field in a phased manner and invest the generated resources in
*or" p.oiituble industriur. Si*ilut should be the coulse of action when the indus- i

try is unathactive and the business capabilities are average'

i
Disinvest: This zone, comparable with dogs of the BCG matrix, Ieplesents
:
business units r,r'ith weak competitive capabilities and unattractivr industry Fros-
- 'irtjtres having
pects. Most of the units belonging to this cell ale loss-maki.
:..
j:
a,l
t::
i

:t
-:----..-*,,..-.
 Portfolio Strategy 185

uncertain future. An early divestment can be a better alternative than an inevitable

moyement towards bankruptcy.
tg'.2,4. Hofer's l\{odel
Hofer criticized both BCG matrix method and GE matrix method on manv counts.
Hisbasiccritiafmjtplies gqgailyto DPMmetiroa.At ui"*edigl-gfee,p-"t",I]gj,qf
(1e74F;oposea i -*tnoa _or-ary\prng pq-{trollqr$Fllqgl*m"
lgejteps- Sq_ryeSri
{ys p-o5ttioxT,f*th,9-business and t}re lfi{U.q.$l__eyoh1!"on (he preferred the term
product/market evolution). He corsidered three stgtgsof c_o*qrpetitive posifion of
the business namely.streng: He also ia_"r,ti{i"!_ff"::9g-"jjl
"y.Sggglndjyilk q[_fif*tgeSce_Ils
*_{tthy evolution. Accordingly, he developed a m4!r8 ild prS.
posed to depict each portrplip in tlrg fqfm pf.e cqgf_qrypresentingltteS-ize*oj_the
The pie iy*q4ge,s*ry_ilbq
g_o*qc,94g$*!1rdu9try. ttg S:rcle indicate the parke!.qh-4;es
of !!9"gorypa1y.
Development

I
c
.F
GroMh

b
Shakeout
o
iU)
=
ro
Maturity

Decline

Weak Average Strong

Competitive position ------------|

HOFER'SMODEL
Diagram 7.4
::
Strategic Choice According to Competitive Position and Industry Maturity

Competitive Industry evolution

Position Development Growth Maturitv Decline
Shong Attempt to imp- Improve position; Hold position Hold position
rove position; all- push for share or harvest
out push for share
Contd...

t
iir:t;:i:..]11rl::ir":1la::;.::-1a.1-:I'r..'.-r?=::'::17i'-::---r.i:--!-:!.-rj':--::'.r::--:i:-r:r.1-sl -:T-Ti:="f
TI*:---:,--.::f 1t'

-
: '-,..o,*;-.r., , .,,-,,r .: r.,,r.,,..-lt-rl'
 186 Discourses on Strategic Management

Competitive Industry evolution

Position Development Growth Maturity Decline
Average Selective or all- Selective push Find niche and Harvest
out push for share for share attempt to
protect
Weak Up or out Turnaround or Turnaround or Quii
quit phased
withdrawal

Whiie Hofer did not spell out the choice of factor for evaluation of the
competitive posirion and thelnciustiy evolution, the first one_can be_rneasured
{opg the-]ingq-f_GE-ntatrix and__D..1,_matrix
and the second one can be meas,ured
in terms sales volume, sa,tgggrowth rate and the age of the industry. The work of
de l,Quy'v9r-(1977) ncludes lglglFFtive procedure for identifying cycle.s! indus-
try evolution. Regarding the choice of porffolio strategy we refer to the work o!.
Patel and Younger (7978) n'ho, hon'ever, did not corsider the shake out sta€e.'

7.3. PROBLEMS WITH PORTFOLIO APPROACH

;
Though portfolio matrices provide with analytical tools in the hands of corporate
planners for best mlr of product/business, yet the management has to face quite
a few problems while taking decisions based on pordolio approach. practical
problems are more acute for hansnationai companies. For exaSnple,consider the
task of determining market share and market growth rate for a business spread
over two or more countries. Based on the concept of relative market share if we
assign a very high score to a firm that focus different major players in different
geograpl-rical areas, the entire analysis will go wrong. similarly, there may be
variation among performances in different areas and an overall measure may not
be depicting any of the situations. Formulation of strategy based on theoretical
measures may fail in each market. To be more specific, the same business of a firm
may have star position in one country and dog position in another and the overall
position may be that of a question mark.
Another problem is related to estimation of sales growth rate. This measure
suffers from periodic effects of a business. As a result, it is difficult to compare
growth rate of one business with the growth rate of another business if they do
not have the same periodic variation. Thus, oversimplified measures may lead to
wrong strategic decision from misleading information. It is difficult to adjust the
periodic effect because business cycles are not very clearly identifiabte, unless
observed over a very long time span.
The portfolio analysis compares individual business units in isolation. A
business unit in the red light zone may have synergic affect with a unit falling in
the green light zone. Divestment of the weaker unit may weaken the position of
the star unit, affecting badly the overall performance of th" fit*. Alternatively,
porffolios may be examined in groups. But no theoretical approach is available in

$t
.1---.:-1--5,,,;--,q:1 !1':t
i

i
F..-

Portfolio Strategy 187

the literature that can suggest the procedure of grouping and translation of an
analysis into a strategic action. Some times, a business unit may be classified as
a dog due to negative synergic effect of another unit on the same.
The effecls of inflationary factors have also been ignored in the porffolio
approach. We all know that inflationary factors can badly affect the cash flow and
profit posilions of any business unit. Mostly, inllationary effects may vary from
business to business. Thus, the overail cash flow and profit position of different
businesses n'ill carry different effects of the inflationary forces. In case profits of
different unit are compared through a common yardstick, there will be significant
distortion in structurilg of pordolios on the porffolio matrix. Strategic decisions
will invariably be wrong if inflationary effects are not correctly adjusted.
Administrative probiems may also creep in while implementing strategic
decisions based on portfolio analysis. For example, BCG matrix may suggest
milking of a business unit belonging to cash cow region and diversion of generated
cash into another business unit belonging to question mark region. But, the
managers of ihe cash cow unit may not like this concept of supporting a
n'ildcat business (i.e. question mark business). They may, instead, like to
bounce back into the star position to retain the past status. Further, there may
be strategic dilemma. A custodial firm may be fit for growth strateg-yto have
a major break through. It may be suitable for stable growth strategy to wait for
the future direction. To some others it may be an appropriate case for sequential
divestment. Extreme administrative problem may arise if strategic business
units (SBUs) are not ciearly demarkable. Two interconnected business units,
not properly demarcateci, may create problem for strategic impleq-rentation, if
their business strategies are polar opposite.

7.4" SEARCH FOR NEW PORTFOLIOS

Porffolio matrices are more popular for analysis of existing porffolios. Quite often
a planner has to search for new porffolios. For a new porffolio, standard method
of evaluation may not be applicable. For example, market share of a new porffolio
will be zero, which may distort the overall measure of business strength or
competitive capabiiities. It may also be kept in mind that a portfolio does not
necessarily mean a product. It may be a market too. Even if the firm wants to
remain busy with the existing offers, it may like to grow through new markets
along rvith the existing ones. For such situations, porffolio matrices are to be
suitably modified to accommodate the special nature of the problem. Two non-
quantitative approaches are also available in the literature for searching new
product portfolios or new market porffolios. One is gap-analysis and the other is
cascade approach. Let us brieflv explain these two approaches, which may be of l
I
use eyyt'of a single SBU firm. I
-,dEup Analysis. In gap analysis the task of the plarurer is to ej{am,ure_:uhelher
I
I

the existing buSueqs-lyiil !g eb-l-q._t.o

I
achieve-the.p;imary__-objectiv_e_o*f the film. In
.i
:l
case the answer is negativr, one qe! Ig4qg_n3bly--eSn-c_lqde -_th_etthere exists a it ii
l$irg gap, which=iiEi_tp_!*trdO4_b*nruking u-es-qfqtiifuq,tir;-e-_bu;{u.ps_s il
.l
it il
r; l l

i.
188 Discourseson StrategicManagement

options.ln case the answer ir g!Ir:13gsr in nature the planner can either rap--e-!he
level of objective or remain satisfied with the current objeetive-t.{ggy -ll{ch.
Ttrus, tTr-egtp dnaly_silhglgs in determ_inqg ftg_Tilig_lggg$.e--91-ae-q9&
Existence of a gap betu'een the iikely !gg14-e_ss-achieyemert and the firm's
objective initiates_tire -p1ere;ggf 5_e-v1ery!1g the existing p-ro-ductmarket strat-
eg1-. ririp.o.esi.u"'g"tt"tJ" uti"i"itlu6 strategic iJeil lJecuuse the major
factors creating the gap can be identified during this stage. Of course, ad-
equate information should be made avaiiable to the reviewers for wide scan-
ning of the causes of gap. What is iep,qrlA_lf! ip_tle ilitlal g_"ql111lig-l_ofth.e
altglltly_e {iatggiqs so that only the moglpqteatal ideas can b^e-ex,a.m,rt_e-d_!n
detailp.lq-1 making the final qhgl.".,
Cascade Approach. The AdaphaeSearchApproachof Ansoff (1968)also known
as CascarleApproacitmakes use of a muitistage procedure for successiveiy refining
the strategic alternatives and arriving at the final choice. The first stage relates to
choice of geographical areas of operation. Once a decision is taken on the geo-
graphic area (for a multinational company this means choice of countries of
destination) of operation, the next decision to be taken is the route of entry. It is
the second stage of cascacieplanning that finalizes the mode and media of entry.
In the third stage, choice of the product fieid and the production technology are
made. Thus, the first three stages define the concept of business and the jurisdic-
tion of business.
Nou', depending on ihe environmental factors,one mav generatelarge number
of aiternative strategies. In the fourth stage some criteria are fixecl up for initial
screening of the alternatives to finally pick up a limited numbe'r of most potential
porffolios. Cost is definitely an important criterion for this initial screening. In the
fifth stage feasibility testing is being carried out by comparing resource require-
ments n'ith resource availabilify. Sixth stage is the stage of synergisfic test. In case
an alternative does not have positive synergy with the existing business, it may
be dropped at this stage of decision-n"raking.In the seventh stage, i.e., the final
stage, oniv a handful of strategic alternatives are matched against the objective of
the firm anci the most suitable one is picked up.

QUESTIONS / DISCUSSIONS
7 . What do you mean by portfolio strategy?
2 . Explain the needsfor portfolio strategy.
3 . What is a portfolio matrix? Discuss.
4 . Describehorv BCG matrix can be used for porffolio analysis.
5 . What are the merits and demeritsof BCG matrix?
6 . Explain the nine-cellplanning grid of GE. What are its limitations?
7. Describethe cell wise strategyof a DPM model.
8 . What do you mean by industry evolution? \Alhichmodel incorporatesthis
conceptfor portfolio analysisand how?