Global Business

Strategy
Corporate Strategy – Portfolio & Parenting
Contents

Concepts
Portfolio Strategy
BCG Growth-Share Matrix

GE Business Screen
Parenting Strategy
Portfolio Strategy
 Portfolio Analysis
Companies with multiple product lines or business units must ask themselves how
these various products and business units should be managed to boost overall
corporate performance.

One of the most popular aids to developing corporate strategy in a multibusiness

corporation is Portfolio Analysis.

Portfolio Analysis puts the corporate headquarters into the role of an internal banker.

In portfolio analysis top management views its products lines and business
units as a series of investments from which it expects a profitable return.
 Portfolio Analysis
The product lines / business units form a portfolio of investments that top management
must constantly juggle to ensure the best return on the corporation´s invested money.

Two of the most popular approaches are the BCG Growth-Share Matrix and the GE
Business Screen.
 Portfolio Analysis
BCG Growth-Share Matrix.

The BCG (Boston Consulting Group) Growth-Share Matrix is the simplest way to
portray a corporation´s portfolio of investments.

Each of the corporation´s product lines or business units is plotted on the matrix
according to both the growth rate of the industry in which it competes and its relative
market share.

The business growth rate is the percentage of market growth, that is, the percentage by
which sales of a particular business unit classification of products have increased.
Portfolio Analysis
BCG Growth-Share Matrix.

The BCG Growth-Share Matrix has a lot of common with the product life cycle. As a
product moves through its life cycle, it is categorized into one of four types for the
purpose of funding decisions:

• Question marks.

• Stars.

• Cash cows.

• Dogs.
Portfolio Analysis
22 Stars Question Marks
Drawbacks
20 • Assumes market share is key
18 to high profitability.
16 • Too simplistic.
14 • Focus only on industry growth
12 and market share as factors.

10 Cash Cows Dogs • Ignores all but market leader.

8
6
4
2
0

Relative Competitive Position

(firm’s market share/share of largest competitor)
 Portfolio Analysis
BCG Growth-Share Matrix.

• Question marks: are new products with the potential for success, but they need a
lot of cash for development.

• Stars: are market leaders typically at the peak of their product life cycle and are
usually able to generate enough cash to maintain their high share of the market.

• Cash cows: typically bring in far more money than is needed to maintain their
market share. In this declining stage of their life cycle these products are «milked»
for cash that will be invested in question marks.
 Portfolio Analysis
BCG Growth-Share Matrix.

• Dogs: have low market share and do not have the potential (because they are in an
unattractive industry) to bring in much cash. According to the BCG Growth-Share
Matrix, dogs should be either sold off or managed carefully for the small amount of
cash they can generate.
 Portfolio Analysis
BCG Growth-Share Matrix.

The goal of any company is to maintain a balanced portfolio so it can be self-

sufficient in cash and always working to harvest mature products in declining
industries to support new ones in growing industries.

Advantages of the BCG Growth-Share Matrix:

• It is quantifiable and easy to use.

• Cash cows, dogs, and stars are an easy to remember way to refer to a
corporation´s business units or products.
 Portfolio Analysis
BCG Growth-Share Matrix.

Disadvantages of the BCG Growth-Share Matrix:

• The use of highs and lows to form four categories is too simplistic.

• The link between market share and profitability is not necessarily strong. Low-share
businesses can also be profitable.

• Growth rate is only one aspect of industry attractiveness.

• Product lines or business units are considered only in relation to one competitor: the
market leader. Small competitors with fast-growing market shares are ignored.

• Market share is only one aspect of overall competitive position.

Portfolio Analysis
Portfolio Analysis
General Electric’s Business Screen
Winners Winners C
A B Question
High Marks
D

Winners

E Average
Businesses
Medium F
Losers
Losers H

G
Low
Profit
Producers Losers
Strong Average Weak

Business Strength/Competitive Position

 Portfolio Analysis
GE Business Screen.

At GE, business attractiveness includes:

• Market growth rate.

• Industry profitability.

• Size.

• Pricing practices.
 Portfolio Analysis
GE Business Screen.

At GE, business strengh or competitive position includes:

• Market share.
• Technological position.
• Profitability.
• Size.

The individual product lines and business units are identified by a letter and plotted as
circles on the GE Business Screen. The area of each circle is in proportion to the size
of the industry in terms of sales.
 Portfolio Analysis
GE Business Screen.

The pie slices within the circles depict the market share of each product line or
business unit.
 Portfolio Analysis
GE Business Screen.

To plot product lines or business units on the GE Business Screen, we must follow
four steps:

• Step 1: select criteria to rate the industry for each product line or business unit.
Assess overall industry attractiveness for each product line or business unit on a
scale from 1 (very unattractive) to 5 (very strong).

• Step 2: select the key factors needed for success in each product line or business
unit. Assess business strenght / competitive position for each product line or
business unit on a scale of 1 (very weak) to 5 (very strong).
 Portfolio Analysis
GE Business Screen.

• Step 3: plot each product line´s or business unit´s current position on a matrix like
that in the following matrix.

• Step 4: plot the firm´s future portfolio assuming that present corporate and business
strategies remain unchanged. Is there a projected gap between projected and
desired portfolios? If so, this gap should serve as a stimulus to seriously review the
corporation´s current mission, objectives, strategies, and policies.
 Portfolio Analysis
GE Business Screen.

Overall, the nine-cell GE Business Screen is an improvement over the BCG Growth-
Share Matrix. This matrix considers many more variables and does not lead to such
simplistic conclusions.

Advantages of the GE Business Screen:

• The attractiveness of an industry can be assessed in many different ways (other

than simply growth rate).

• Allows Users to select whatever criteria they feel are most appropriate to their
situation.
 Portfolio Analysis
GE Business Screen.

Disadvantages of the GE Business Screen:

• It can get quite complicated and cumbersome.

• The numerical estimates of industry attractiveness and business

strenght/competitive position give the appearance of objetivity, but they are in reality
subjective judgments that may vary from one person to another.

• It cannot effectively depict the positions of new products or business units in

developing industries.
 International Portfolio Analysis
To aid international strategic planning, portfolio analysis can be applied to international
markets. Two factors form the axes of the matrix:

Country´s Attractiveness: is composed of:

• Market size.
• Market rate of growth.
• Extent and type of government regulation.
• Economic and political factors.
 International Portfolio Analysis
Product´s Competitive Strenght: is composed of:

• Market share.
• Product fit.
• Contribution margin.
• Market support.

Depending on where a product fits on the matrix, it should either receive more funding
or be harvested for cash.
International Portfolio Analysis
Competitive Strengths

High Low

Country Attractiveness
• Market size
Invest/Grow Dominate/Divest • Market growth rate
Joint Venture
• Gov’t regulation
• Econ/political factors
Product Competitive Strengths
• Market share
Selective • Product fit
Strategies • Contribution margin
• Market support

Harvest/Divest
Combine/License
 International Portfolio Analysis
Portfolio Analysis might not be useful, however, to corporations operating in a global
industry rather than a multidomestic one.

Porter argues against the use of portfolio analysis on a country-by-country basis:

In a global industry, however, managing international activities like a portfolio will

undermine the possibility of achieving competitive advantage. In a global industry, a
firm must in some way integrate its activities on a worldwide basis to capture the
linkage among countries.
 International Portfolio Analysis
Advantages of Portfolio Analysis:

• It encourages top management to evaluate each of the corporation´s businesses

individually and to set objectives and allocate resources for each.
• It stimulates the use of externally oriented data to supplement management´s
judgment.
• It raises the issue of cash flow availability for use in expansion and growth.
• Its graphic depiction facilitates communication.
 International Portfolio Analysis
Limitations of Portfolio Analysis:

• It is not easy to define product / market segments.

• It suggests the use of standard strategies that can miss opportunities or be
impractical.
• It provides an illusion of scientific rigor when in reality positions are based on
subjective judgments.
• Its value-laden terms like cash cow and dog can lead to self-fulfilling prophecies.
• It is not always clear what makes an industry attractive or where a product is in its
life-cycle.
• Naively following the prescriptions of a portfolio model may actually reduce corporate
profits if they are used inappropriately.
Parenting Strategy
 Corporate Parenting
Corporate strategists must address two crucial questions:

• What businesses should this company own and why?

• What organizational structure, management processes, and philosophy will foster

superior performance from the company´s business units?

Portfolio Analysis attempts to answer these questions by examining the

attractiveness of various industries and by managing business units for cash flow, that
is, by using cash generated from mature units to build new product lines.
 Corporate Parenting
Portfolio analysis fails to deal with the question of what industries a corporation should
enter or with how a corporation can attain synergy among its product lines and
business units.

As stated previously, portfolio analysis tends to primarily view matters financially,

regarding business units and product lines as separate and independent investments.
 Corporate Parenting
Corporate Parenting in contrast, views the corporation in terms of resources
and capabilities that can be used to build business unit value as well as
generate synergies across business units.

According to some especialists:

Multibusiness companies create value by influencing – or parenting – the businesses

they own. The best parent companies create more value than any of their rivals would
if they owned the same businesses. Those companies have what we call parenting
advantage.
 Corporate Parenting
Corporate parenting generates corporate strategy by focusing on the core
competencies of the parent corporation and on the value created from the relationship
between the parent and its businesses.

This approach to corporate strategy is useful not only in deciding what new businesses
to acquire, but also in choosing how each existing business unit should be best
managed.

The primary job of corporate headquarters is to obtain synergy among the business
units by providing needed resources to units, transferring skills and capabilities among
the units, and by coordinating the activities of shared multifunctions to attain economies
of scope.
Corporate Parenting
 Parenting-Fit Matrix
The Parenting-Fit Matrix summarizes the various judgments regarding corporate /
business unit fit for the corporation as a whole. Instead of describing business units in
terms of their growth potential, competitive position, or industry structure, such a
matrix emphasizes their fit with the corporate parent.

As shown in the following slide, the parenting-fit matrix is composed of two

dimensions: the positive contributions that the parent can make and the negative
effects the parent can make. The combination of these two dimensions creates five
different positions, each with its own implications for corporate strategy.
Parenting-Fit Matrix
Low

Heartland

Ballast

Edge of
Heartland

Alien
Territory

Value Trap
High
Low High
FIT between parenting opportunities
and parenting characteristics
 Parenting-Fit Matrix
Heartland Businesses:

Have opportunities for improvement by the parent, and the parent understands their
critical success factors well. These businesses should have priority for all corporate
activities.

Edge-of-Heartland Businesses:

Some parenting characteristics fit the business, but others do not. The parent may not
have all the characteristics needed by a unit, or the parent may not really understand
all of the unit´s critical success factors.
 Parenting-Fit Matrix
Ballast Businesses:

Fit very confortably with the parent corporation but contain very few opportunities to
be improved by the parent.

This is likely to be the case in units that have been with the corporation for many years
and have been very successful. The parent may have added value in the past, but it
can no longer find further parenting opportunities.
 Parenting-Fit Matrix
Alien Territory Businesses:

Have little opportunity to be improved by the corporate parent, and a misfit exists
between the parenting characteristics and the unit´s critical success factors.

There is little potential for value creation, but high potential for value destruction on the
part of the parent.

Value Trap Businesses:

Fit well with parenting opportunities, but they are a misfit with the parent´s
understanding of the unit´s critical success factors.