University of Lincoln

Portfolio Models

by

 Minea Linke

Table of Contents

Introduction 3

1.Portfolio Analysis 4

1.1 The BCG growth – share matrix 6
1.2 The GE business screen 10

2. Comparison 13

2.1 Review of both models 14

3. Synergies and the portfolio models 16

4. Application of the GE business screen 20

5. Conclusion 26

Bibliographic Reference 27

Introduction

The growing and brisk market during the 1950s and 1960s made companies to operate more and more businesses and led not only to larger and complex firms but also to a high number of divisions. The overall corporate strategy was therefore insufficient, especially when divisions led on to diversifications different strategies, business unit strategies, were required.

In order to find out in which business a company should be in and how resources can be allocated amongst them, different portfolio analyses are developed in the 1970s. The idea goes back to the Portfolio Selection Theory from Markowitz (1959) in which a portfolio is described as an ideal mix of different securities. The portfolio analysis in this context can be described as a framework to analysis the balance of an organization’s strategic business units (Johnson and Scholes, 1999, p.186). The objective of this piece of work is to explain the two best-known portfolio analysis approaches: The Boston Consulting Group’s growthshare and growth-gain matrix and the General Electric Company business screen in regard to advantages and disadvantages, generated strategies, interdependence of products, opportunities for synergy as well as the problems which can occur when applying those models in practice.

In the first chapter both models and the different strategies will be explained and definitions will be given. A comparison of both models in relation to their advantages and disadvantages can be found in the second chapter. In the third chapter the relevance of synergy will be discussed. Chapter four contains a GE matrix for Nestlé Waters and the validity of the possible strategies is critically evaluated. The conclusion can be found in chapter five.

1. Portfolio Analysis

The central idea of the portfolio analysis is the realization that strategic planning is influenced by external facts, such as competition or an increase of costs for primary products etc. and by internal facts, like the number of businesses the company operates in or the amount of available assets etc. as well as that the company has strengths and weaknesses and that it has to react on opportunities and threats of the environment.

Another starting point is the assertion that over the long run a firm could not success at a corporate level until it knew how to achieve success at a business level (Hofer, 1975, p.786). Both aspects can be found in the various portfolio diagrams, which consist of a two-dimensional matrix – one axis shows the company’s or internal dimension, the other shows the environment or the external dimension. The position of the different products or strategic business units is the result of the external and internal influences. The term strategic business unit (SBU) emerged in the 1960s and it stands for a single business or collection of related businesses that offers scope for independent planning and that might feasibly stand alone from the rest of the organization, that has its own set of competitors and it has a manager who has responsibility for strategic planning and profit performance, and control of profit- influencing factors (Gilligan and Wilson, 2003, p.453). Another shorter description is given by Cliff Bowman who defined a strategic business unit as a number of discrete and fairly autonomous units or divisions within a company (1989, p.3).

Afterwards the different strategies were deducted depending on the position of the SBUs within the matrix. Those strategies should be applied in order to achieve the aimed-at cash-flow balance, for example.

Balancing cash-generating businesses against cash-absorbing businesses can arouse a cash-flow balance and can be seen as an increase of the overall value of the company.

According to Robert M. Grant (Contemporary Strategy Analysis – concepts, techniques, applications, 4th Edition) it can be summarized that the portfolio models are used to:

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