GENERATING ALTERNATIVE STRATEGIES USING PORTFOLIO MODELS 15 NOV 2017

BISMILLAHIRAHMANIRAHIM.....  15 NOV 2017 Created by fatihah

Shell directional policy matrix (Portfolio analysis) only enter those segments where the company has the
opportunity to succeed

Strategic Emphasis
The traditional way of looking at the business units’ strengths and weaknesses as well as comparing
business sector prospects was to use historical and forecast rates of return on capital employed. This was done because a sector where prospects were favorable and the company’s position strong tended to show
higher profitability. Shell found that these records and forecasts were not sufficient for the guidance of
management in the corporate planning and allocation of resources.

Reasons for this being:
1. Records and forecasts do not provide a systematic explanation why one business sector has more
favourable prospects than another or why the company’s position in a particular sector is strong or weak.
2. Records and forecasts do not provide enough insight into the underlying dynamics and balance of the
individual business sectors or the balance between the sectors.
3. Using the forecast and record method, when new products are being considered, actual experience cannot
be consulted.
4. Worldwide inflation has severely weakened validity and credibility of financial forecasts especially in the
case of businesses that are affected by oil process.
The basic method of the directional policy matrix is to identify and place on the horizontal and vertical
axes

• The main criteria by which prospects for a business may be judged to be favourable or unfavorable (favorable meaning a high profit and growth potential)
• The main criteria by which a company’s position in a sector may be judged to be strong or weak

HORIZONTAL AXIS

Horizontal labels for the quadrants are the reverse of those on the GE matrix. The extreme left quadrant is
labelled unattractive while the corresponding quadrant on the GE matrix is labelled High
The horizontal axis is labelled ‘Business Sector Prospects’ while the vertical axis is named ‘Company’s
Competitive Capabilities/Position’

VERTICAL AXIS

Note that the y-axis labels are the reverse of those in the GE McKinsey matrix and the lowest quadrant is labelled Strong versus the

GE matrix Low. The Shell directional policy matrix can be used to analyse different business sectors in an industry as well as competitors within a business sector

BOSTON  CONSULTING GROUP MODEL

Stars (high share and high growth)

Star products all have rapid growth and dominant market share. This means that star products can be seen as market leading products. These products will need a lot of investment to retain their position, to support further growth as well as to maintain its lead over competing products. This being said, star products will also be generating a lot of income due to the strength they have in the market. The main problem for product portfolio managers it to judge whether the market is going to continue to grow or whether it will go down. Star product can become Cash Cows as the market growth starts to decline if they keep their high market share.

Cash Cows (high share, low growth)

Cash cows don’t need the same level of support as before. This is due to less competitive pressures with a low growth market and they usually enjoy a dominant position that has been generated from economies of scale. Cash cows are still generating a significant level of income but is not costing the organisation much to maintain. These products can be “milked” to fund Star products.

Dogs (low share, low growth)

Product classified as dogs always have a weak market share in a low growth market. These products are very likely making a loss or a very low profit at best. These products can be a big drain on management time and resources. The question for managers are whether the investment currently being spent on keeping these products alive, could be spent on making something that would be more profitable. The answer to this question is usually yes.

Problem Child (low share, high growth)

Also sometime referred to as Question Marks, these products prove to be tricky ones for product managers. These products are in a high growth market but does not seem to have a high share of the market. The could be reason for this such as a very new product to the market. If this is not the case, then some questions need to be asked. What is the organisation doing wrong? What is competitors doing right? It could be that these products just need more investment behind them to become Stars.

A completed matrix can be used to assess the strenght of your organisation and its product portfolio. Organisations would ideally like to have a good mix of cash cows and stars. There are four assumptions that underpin the Boston Consulting Group Matrix:

• If you want to gain market share you will need to invest in a competitive package, especially through investment in marketing
• Market share gains have the potential to generate a cash surplus due to the effect of economies of scale.
• The maturity stage of the product life cycle is where any cash surplus is most likely to be generated
• The best opportunities to build a strong market position usually occur during a market’s growth period.

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