Product portfolio analysis.
market share (i.e. market share as a percentage of the share of the product’s largest competitor, expressed
15 as a fraction). A relative share of 0.8 means that the product achieves 80 per cent of the market leader’s sales volume (or value). This is not the strongest competitive position, but it is not a weak position either. A relative market share of 1 means that the company shares market leadership equally with a competitor. A relative market share of 2 means that it has twice the market
20 share of its nearest competitor.
In Figure 4.2, the vertical axis refers to the product’s market growth rate and the horizontal axis refers to its market strength, as measured by relative market share. The size of the circles represents the sales revenue generated by the product. Relative market share is generally regarded as high when you are the
25 market leader (i.e. when the relative market share is 1 or greater). Determining the rate of market growth of a product is more problematic and depends on the industry to some extent. In some industries a market growth rate of 5 per cent is regarded as high, whereas in others this might be 10 per cent. The benchmark between high and low is, however, often taken to be 10 per cent.
The BCG identified four categories of product. Question marks (also known as ‘problem children’) are products that exist in growing markets but have low market share. As a result there is negative cash flow and they are unprofitable. Stars are probably market leaders, but their growth has to be financed through fairly heavy levels of investment. Cash cows, on the other hand, exist in fairly
35 stable, low-growth markets and require little on-going investment. Their very high market share provides both positive cash flows and high levels of profitability. Dogs experience low growth, low market share, and generate negative cash flow. These performance indicators suggest that they are operating in declining markets and they have no real long-term future.
Portfolio analysis is an important analytical tool as it draws attention to the cash flow and investment characteristics of a company’s products and indicates
45 how financial resources can be manoeuvred to attain optimal strategic performance over the long term. Essentially, excess cash generated by cash cows should be
50 utilized to develop question marks and stars, which are unable to support themselves. This enables stars to become cash cows and therefore be self-supporting assets.
55 Dogs should only be retained as long as they contribute to positive cash flow and do not restrict
the use of assets and resources elsewhere in the business. Once
60 they do, they should be divested or removed from the portfolio.
Plotting all of a company’s products on to the matrix, it becomes easier to see how well
65 balanced the product portfolio
is. An unbalanced portfolio is one that has too many products grouped in one or two quadrants. Where products are distributed
70 equally, and where market shares and cash flows equate with their market position, the portfolio is said to be financially healthy and well balanced.
Portfolio analysis is an important