MARKETING MANAGEMENT ASSIGNMENT - MBA 708

LECTURER: MR TAKAIDZA SIBANDA

GROUP 9
Explain the limitations of Portfolio Analysis
tools in strategy formulation (focus on BCG and
GE Multifactor Portfolio Matrix).
 Definitions
• B. Whiting (2021) defines portfolio analysis as a process of looking at company’s
products and services and categorising them based on how well they are performing and
their competitiveness.

• Keegan et al. (1992) defined portfolio analysis as “a way to assess the needs, allocate
resources, and spread risk across SBUs which, taken together, contribute to the
achievement of corporate objectives”.

• The process involves categorising the business into Strategic Business Units (SBUs)
and select the best combination from a variety of possible alternatives and opportunities
which are open to a firm.
 Portfolio Analysis
• The main purpose for portfolio analysis is to minimise risks and maximise returns using the limited
resources in which the company must operate.

• It also helps companies to be sure that the company is developing new products to ensure future growth and
profits as well as to competitively align these products into strategic business units to maximise long term
growth and earnings of the company.

• There are different portfolio analysis tools (matrixes) which include BCG (Boston Consulting Group) -
Growth Share, GE (General Electric) Multifactor, Hofer’s Product Market Evolution, Ansoff’s Product -
Market Growth, Market Life Cycle – Competitive Strength, just to mention a few.

• However, the BCG and GE Multifactor have gained popularity in many companies because they are simple
to use. Both BCG and GE use a two-dimensional model and are most appropriate for companies with
several product lines and business units. GE was developed to improve the limitations of BCG.
BCG Matrix
• is a growth share model, representing the growth of business and the market share enjoyed by the firm
(Surbhi S, 2017).

• It is used to establish the best mix of businesses to maximise the long-term earnings growth of the firm
(H. Mohajan, 2017).

• Abdul Kader, Hanif Hossain (2020) stressed that BCG helps firms to identify business units to invest in,
sell off or shut down, and distribute available resources efficiently.

• It is based on two variables, Market Growth Rate (vertical axis) measures how attractive the market is
and Relative Market Share (horizontal axis) which is an indicator of how strong the company’s
position is?

• These are further classified into 2 degrees; high and low as shown in the below diagram.
BCG Matrix
 BCG Matrix
• Stars represents the products growing at a faster rate and requires the huge
investment to maintain their position in the market.

• Cash cows are the products with a low growth rate but have a high market share,
and they can bring in lots of cash in the business and do not require finance for
expansion.

• Question Marks are the products with low market share in a high growth market,
therefore they need heavy investment to hold their share in the market.

• Dogs represent those products which are low in both market share and growth rate,
and they generate enough to sustain themselves but will not survive in the future.
GE Multifactor
• Is used in business strategy to analyse strategic business units and
product lines using two principal dimensions:

o Competitive/Business Strength (horizontal axis),

o Attractiveness (vertical axis) and

• These are further classified into 3 degrees; high, medium and low
(other authors use strong, average and weak on the horizontal axis)
as shown in the below diagram
GE Multifactor
 GE Multifactor
• The idea of GE is based on the notion that the success of a business is determined by the extent to which it operates in attractive
markets and also by the extent to which it possesses competitive business strength.

• Industry attractiveness is demonstrated by how beneficial it is for a company to enter and compete within a certain industry based
on the profit potential of that specific industry.

• The high the profit potential, the more attractive it becomes.

• It is influenced by factors such as pricing trends, long-run growth rate, industry structure, macro environment, market segmentation,
etc. When companies are evaluating industry attractiveness, it is important to focus on how an industry will change in the long run
rather than in the near future since the investments needed for a business usually require long lasting commitment.

• Competitive strength measures how strong or competent a particular company is against its rivals; thus, it shows the company’s
ability to compete within a certain industry.

• It is also important to evaluate the sustainability of competitive advantage in the long run before making concrete decisions.

• The common factors to consider are profitability, market share, business growth, brand equity, firm resource, etc.
GE Multifactor
• The products falling in the green section (invest/grow strategy), reflects a good position for the
business, therefore a company should consider investing and/or expanding in these product
lines.
• The yellow section (selectivity/earnings strategy) reflect product lines with low to moderate
competitive position in an attractive market with high competition in a less attractive industry.
• Decisions for yellow products should made carefully and if the company decides to invest in
them should closely monitor progress all the way.
• The products lying in the red (harvest/divest strategy) section are in the danger zone, they
represent products with low competitive position as well as unattractive market. These products
have no promising returns; therefore, companies are advised to either divest or harvest.
• Divesting is selling the business line for a reasonable price, whilst harvesting is investing a little
for a short-term period whilst reaping few benefits that may come out of that business line
 Limitations

• BCG assesses the attractiveness of the business using only 2

dimensions/indicators, thus the market share and growth rate.
• The model ignores and overlooks other factors that influence profitability
such as customer needs, technological changes, elasticity of demand,
cyclicality of sales etc.
• This is also the same with GE, there are other relevant factors which
determined market attractiveness (e.g., market size, industry profit margin,
entry barriers) and competitive strengths (e.g., price competitiveness,
product quality, geographical advantage)
 Limitations
• Thompson and Strickland, 1996 argued that BCG classifies business as high and low, but business
can be average as well, therefore, the true nature of business may not be reflected. The products
with average growth rate and market share do not have space to fall into.

• High market share does not always lead to high profits and the vice versa, since there is high cost
involved in the high market share.

• The relationship between market share and profitability is not well justified. Therefore, market
share may not be the best measure of the firm’s success, for example product differentiation for a
particular market segment may have low market share but produce high profits within a market
segment.
 Limitations

• Portfolio analysis heavily relies on estimates/forecast about the future. If the

forecasting is not accurate, the analysis result will also be inaccurate, therefore, it will
not guarantee optimal return on investment.

• Both BCG and GE matrix assumes that each strategic business unit is independent of
the other, but most products are interdependent, for example they share costs like
technological cost, and these interdependencies should be factored in the model. It is
also possible for sales in one product to influence the sales of the other product even
if they are not in the same product category.
Limitations
• Portfolio analysis involves separation company’s products and services into
deferent categories that represents the business portfolio, and both BCG and GE
do not give a clear guideline on how to categorise products and services,
therefore, this might lead to subjective decisions.
• The GE matrix looks at the current position of SBU but does not consider how
their future positions might change due to changes in the industry. It does not also
consider how their positions might change due to change in their lifecycle (Hill &
Jones, 1989). B. D, Henderson argues that portfolio analyses models ignore the
impact of both internal and external environment on the company’s success, yet
the firms’ decisions should be made within its environment.
 Limitations
•Portfolio analyses focuses more on the products and services that a business offers, and it ignores the possible
alternative investments that could be better than investing more in current product offerings.
•It is difficult to perform portfolio analysis for start-up companies or small-scale industries with limited product
lines, thus it become relevant to bigger companies only.

•McDonald (1990) argues that there is a big gap between theory and practice in portfolio analysis, there is little
evidence which show that these models have been or are being used in reality. This is supported by research
findings by H. Kong et al (1989), that most respondence were ignorant of all portfolio analysis tools, the
majority were not familiar with any by name.
• To harness this point Kennedy et al (1990) stated that the awareness and usage of these tools is very low, and
the reasons vary. Some companies completely do not know the existence of these tools, while others do not
understand how to use them, while others have tried using them and found that they are largely irrelevant.
Conclusion
• Despite the shortfalls of portfolio analysis tools, they are very
important business practices especially for businesses
operating with scarce resources, complex business portfolios
and also availability of varied opportunities.
• In a nutshell portfolio analysis tools help management to
determine the role that each business unit plays in the
company and allocate resources accordingly.
 Reference List
• A, Pesic, (2019), Adjusting General Electric Multifactor Portfolio Model For Fuzzy
Analysis of SBUS Performances
• Brownlie, D. (1990) Strategic Marketing Concepts and Models, Journal of
Marketing Management 6
• F. R. David (2008), Strategic Management Concepts and Cases, 12th Edition,
Prentice Hall
• H. Hossain and M. A Kader, (2020), An Analysis on BCG Growth Sharing Matrix,
International Journal of Contemporary Research and Review, India
• McKinsey & Company (2008), Enduring Ideas: The GE- McKinsey nine-box matrix
• N. Zaware, (2012) Business Portfolio Analysis, Indial
• S. Zic, et all (2009), Portfolio Analysis – A Useful Management Tool, Technical
Gazette 16, Croatia