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Marketing Analytics and Strategy, MKT 455

Marketing Strategy Teaching Note 2, MSTN2

Portfolio Analysis

Dr. Rebecca Wells

Revised October 2017

Preface

A strategic marketing plan is a statement of organization-wide long-term priorities regarding markets and products intended to enhance the value of the overall company. An organization’s success ultimately depends on its ability to satisfy the expectations of both consumers and investors. It is through a clearly articulated strategic marketing plan that the organization expresses how it intends to satisfy consumer expectations, relative to competitors, within a relevant product market. Investors rely on that same strategic marketing plan to assess the current and future value of the organization and thus its financial attractiveness.[footnoteRef:1] [1: MSTN1]

An organization’s product portfolio is the totality of its offerings. The analysis of a product portfolio considers the contribution of each product or product line to the company’s objectives and its intrinsic value. An assessment of organizational competencies and an industry analysis to assess the attractiveness of relevant product markets are incorporated in the product portfolio models presented here.

Analysis of product contribution to firm value:

· Assessment of organizational objectives, resources and areas of competency that allow the firm to address opportunities emanating from macro trends and differentiate the organization from competitors in the relevant product market.

· Assessment of the relevant product market’s attractiveness based on metrics recognized by the industry. Examples include growth rate, profitability, profit margins, intensity of competition, and government regulation.

· Determination of viable product portfolio strategies consistent with all of the above.

Corporate Objectives, Resources, and Competencies: In a dynamic environment, the organization relies on its resources and competencies to pursue opportunities and address threats identified through the analysis of macro trends. The firm’s competencies are analyzed relative to the; (1) capabilities of the competition, (2) alignment with organizational objectives, (3) value perceived by consumers in the relevant product market, and (4) value perceived by investors in the financial markets. This component of a product portfolio analysis focuses on the internal assessment of the firm.

Attractiveness of the Relevant Product Market: Macro trends, intensity of competition, attractiveness and growth rate of consumer potential, and access to consumer segments are measures of conditions external to a firm that contribute to the attractiveness of a relevant product market. This component of a product portfolio analysis focuses on the external forces with industry-wide impact.

Corporate level product portfolio marketing strategy analysis: Both qualitative and quantitative models are available for the systematic evaluation of alternative product portfolio strategies. The attractiveness of the relevant product market and competencies relative to competitors are critical to the alignment of portfolio strategies with consumer demand and with the expectations of investors and are incorporated in all of the portfolio models presented in this note.[footnoteRef:2] [2: For an in-depth discussion of Product Portfolio Analysis see: Yip. George S. (1981) “Market Selection and Direction: Role of Portfolio Planning,” Harvard Business School Publishing, Cambridge.]

Ansoff Product-Market Growth Matrix: Ansoff’s qualitative model is applicable when a firm’s objectives include product or product line growth. The Product-Market Growth Matrix assesses the most fundamental strategic options for a firm and provides a foundation for further refinement of corporate level marketing strategies.

This model analyzes external, industry-wide opportunities and a firm’s competencies to pursue those opportunities. The analysis requires an inventory of a firm’s current products, product lines, or business units and the firm’s existing markets, the industry-defined consumer segments currently targeted by the firm. The analysis also requires an assessment of the firm’s ability to develop and offer new products, product lines, or business units and/ or pursue new markets (i.e. industry-defined consumer segments not currently targeted by the firm). Therefore, growth is supported by one or more of the following:

· Growth for a firm’s current offerings, its products, product lines, and/or business units

· Growth in the potential of consumer segments currently served by a firm

· Development of new products

· Expansion into industry-defined consumer segments not currently served by a firm

The Ansoff Product Market Growth Matrix, Table 1 below, distinguishes alternative portfolio strategies through which a firm might reach its growth objectives. The strategic options that best align the firm’s competencies with external opportunities, once identified, are further assessed using appropriate analytical models.[footnoteRef:3] [3: Refer to marketing metrics and analytical tools presented in class]

Table 1: Ansoff Product Market Growth Matrix
	Existing Products	New Products
Existing Markets	Penetration	Product Development
New Markets	Market Development	Diversification

The four strategies identified by this analysis are presented in the matrix above and described below:

· Penetration Strategy: Aligned with its competitive capabilities, a firm, through the management of marketing mix variables associated with its current offerings, pursues industry-identified growth opportunities based on increases in the demand potential of its currently served consumer segments.

· Market Development Strategy: Aligned with its competitive capabilities, a firm, through the management of marketing mix variables associated with its current offerings, pursues industry-identified potential demand in consumer segments not currently served by the firm.

· Product Development Strategy: Aligned with its competitive capabilities and expertise regarding currently served consumer segments, a firm invests in the development and marketing of new offerings for its currently served consumer segments. Expansion of a firm’s product portfolio in pursuit of growth is attractive only if significant potential demand is expected in the firm’s currently served consumer segments.

· Diversification Strategy: Aligned with its competitive capabilities, a firm invests in the development and marketing of new offerings in pursuit industry-identified potential demand in consumer segments not currently served by the firm. The firm’s investment in research, product development, and marketing is a function of the extent to which the firm has expertise related to the new offerings and/or experience serving consumers similar to those in the new segments.

Consolidation Strategies: When, through qualitative or quantitative analyses, a firm identifies significant threats emanating from macro trends, changes in competitive intensity, and/or changes in the behavior of consumers, implementation of consolidation strategies may be required. Through consolidation, the firm amasses resources for investment elsewhere. Consolidation strategies include the following three:

· Retrenchment Strategy: The firm withdraws its offerings from selected consumer segments. Strategic decisions to withdraw may be based on a segment’s weakening or poor performance, changes in the intensity of competition, a forecasted decrease in demand potential, or the firm’s choice to alter its segmentation strategy.

· Pruning Strategy: The firm reduces the number of products, product lines, or business units in its current portfolio. Strategic decisions to reduce the number of offerings may be based on weakening or poor sales performance, changes in the intensity of competition, a forecasted decrease in demand for the offerings or the firm’s decision to eliminate all costs associated with the offerings.

· Divestment Strategy: The firm sells off parts of its business. To invest in a firm’s most attractive initiatives, it may be necessary to realize financial resources from the sale of selected products and/or business units. While it may be possible to sell the assets of underperforming units to unique, specialized buyers, it is more likely that attractive, high-performing units will garner the resources desired.

Product Life Cycle Analysis: The life cycle stage of a product, product line, or business unit relative to the life cycle stage of the industry informs strategic decisions regarding the firm’s product portfolio. A multi-product, multi-line firm with offerings in every stage of the life cycle insulates itself from risks associated with changes in the relevant product market that might threaten any single offering. A quantitative Product Life Cycle analysis looks at sales over time, using shifts in sales growth rate to define the boundaries of each life cycle stage.[footnoteRef:4] [4: Refer to marketing metrics and analytical tools presented in class]

Analysis of the life cycle stage for each product, product line, or business unit relative to the life cycle of the industry informs the firm’s management of its product portfolio. For example, if a firm’s product is in its growth stage when the industry is still in its growth stage, the product should be managed to gain competitive advantage. During its growth, an industry realizes attractive profits. These profits attract viable competitors to the relevant product market, with each working to establish their unique position in the targeted segments. A firm’s investment to secure the competitive advantage of its product will likely produce positive returns well into the product’s maturity.

Boston Consulting Group (BCG) Model: The Boston Consulting Group, a global management consulting firm, developed the growth-share matrix as a method to assess viable strategies for each of a firm’s offerings. The original analysis focused on the comparative assessment of a firm’s strategic business units. Over time, its application has been adapted to the comparative assessment of a firm’s product lines and/or its individual products. The level of analysis is based on the firm’s organization of offerings into independently managed divisions. The results of the analysis provide a picture of how each of a firm’s products, product lines, or business units contributes to the overall value of the firm and alternative strategies through which to manage the strategic unit through its life cycle.

Table 2: Boston Consulting Group (BCG) Model
Industry Growth Rate
High 20.0%	Star (Growth)	Question Mark (Introduction)
10%
	Cash Cow (Maturity)	Dog (Decline)
Low 0.0%
	10 High 1.0 Low 0.1
Relative Market Share

The analysis is dependent on two quantitative variables; 1) the annual growth rate of the industry in which each strategic units operates, and 2) each strategic unit’s relative market share. The annual market (industry) growth rate is an indicator of the attractiveness of the industry and can be defined as the average annual growth over a specified number of years, the growth rate over the most recent twelve months, or the growth rate over the most recent fiscal year.[footnoteRef:5] The scale of this variable is dependent on the industry being analyzed. [5: Refer to marketing metrics and analytical tools presented in class ]

The relative market share of a strategic unit is the ratio of its market share relative to the market share of the largest competitor or, if the unit is the largest competitor, relative to the market share of the next largest competitor. Relative market share is an indication of the strength of a firm’s competitive capabilities. A relative market share of 0.10 means the organization’s sales volume is only 10 percent of the largest competitor’s sales volume; and a relative market share of 10 means that the organization has ten times the sales of the next largest competitor. Relative market share is usually depicted on a scale using 1.0 as the dividing point between high and low share. Strategic units are depicted on the matrix using circles sized proportional to the dollar-volume of the strategic unit.

The BCG growth-share matrix identifies four cells, each with a descriptive label, to depict high and low combinations of the two variables. Each cell aligns with a specific life cycle stage and with specific strategies. Table 2 depicts the BCG model, labels the cells, and identifies the typical life cycle stage of strategic units in that position. Strategic alternatives and resource allocations are listed here.

· Question Marks: Strategic units with low relative market share operating in high growth industries are typically in the introduction stage of the life cycle. Due to the attractiveness of the industry, these offerings require significant resource investment to realize their potential for growth.

· Stars: Strategic units with high relative market share operating in high growth industries are typically in the growth stage of their life cycle. Resources devoted to these offerings should sustain market share and drive continued industry growth.

· Cash Cows: Strategic units with an attractive relative market share operating in an industry with low annual growth tend to be mature offerings. These strategic units generate resources for investment in the firm’s other offerings and should be managed to sustain their current position.

· Dogs: Strategic units with low relative market share operating in industries with low growth rates are in the decline stage of the life cycle. These offerings offer limited opportunities and are candidates for consolidation strategies that require minimal resources.

The General Electric/McKinsey Business Screen: The GE Business Screen rates each strategic unit in terms of relative competitive capability and the overall attractiveness of the industry. Companies will be successful to the extent they invest in attractive markets where they have distinct competitive advantages.

Table 3: GE Business Screen Portfolio Analysis: Examples of Criteria for Evaluation
Overall Market Attractiveness	Relative Competitive Capability
Potential Size	Potential of target segments
Growth	Growth
Competitive intensity	Relative share
Price levels	Customer loyalty
Profitability	Margins
Technical sophistication	Distribution
Government regulations	Technology
	Marketing expertise
	Patents

With the GE model, the specific criteria used to define the relative competitive capabilities and the overall industry attractiveness are variable. In this way the model is customized to the firm and its industry. As either a qualitative or quantitative model, the business screen offers a great deal of flexibility in its application. The list of possible criteria in Table 3 provides examples and is not indented to be a complete list of all possible criteria.

Each strategic unit is analyzed based on the selected criteria using either qualitative judgment or quantitative assessment. Qualitative judgment is based on industry and firm expertise, with strategic units positioned on the matrix based on these judgments.

Using quantitative assessment, each of the criteria is given an importance weight and each unit in the analysis is evaluated and rated based on the extent to which it satisfies each criteria. The two dimensions of the matrix are then scaled and the units of analysis positioned accordingly.

Table 4: The GE/McKinsey Business Screen Portfolio Matrix
	Relative competitive capability
Overall market attractiveness	Strong	Moderate	Weak
Highly attractive	Build	Build	Question
Moderately attractive	Build or Hold	Hold or Question	Question or Harvest
Relatively unattractive	Hold or Harvest	Harvest	Harvest or Terminate

The nine-cell GE/McKinsey Business Screen model appears in Table 4 with the alternative strategies identified in each cell. The fundamental purpose of each strategy is described in Table 5 below.

Table 5: Purpose of each GE Business Screen Strategy
Strategy	Purpose
Build	Increase sales volume
Hold	Maintain cash flow and position
Question	Increase share of the market
Harvest	Build cash flow
Terminate	Resource investment elsewhere

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