Portfolio Analysis: SBU, BCG Matrix & Experience Curve

Posted on Apr 5, 2025 in Business Administration and Management (BAM)

Portfolio Analysis and Life-Cycle Concepts

Strategic Business Unit (SBU)

Definition

An SBU is a single unit within a company responsible for a well-defined market. It may formulate and conduct its own strategic plans in this market.

Impact

SBUs are typically smaller but more flexible than large organizations.

Criteria

  • Technology
  • Product
  • Application
  • Customer
  • Country

Features

  • Technical data
  • Age
  • Position in the product life-cycle
  • Units sold (aggregate quantity, currently)
  • Market share (percentage of total market, relative to the largest competitor)
  • Knowledge of the market
  • Market growth
  • Competitors
  • Market volatility
  • Market attractiveness

Boston Consulting Group (BCG) Matrix

Market Position Categories

  • Stars: High growth, high share
  • Question Marks: High growth, low share
  • Cash Cows: Low growth, high share
  • Dogs: Low growth, low share

Recommended Strategies

  • Stars: Invest to maintain or strengthen the position.
  • Question Marks: Develop into Stars or divest/skim.
  • Cash Cows: Hold position and use cash surplus to fund Stars or Question Marks.
  • Dogs: Divest/skim or quit the market.

Pros and Cons

Pros:
  • Complexity reduction
  • Visualization
  • Systematic strategy recommendations
  • Flexibility
Cons:
  • Recommended strategies can be too general.
  • The importance of market share may be lower for differentiated goods.
  • Market definition is crucial but often ambiguous.

Experience Curve Concept

The recommended strategies in the BCG growth-share matrix are often based on the experience curve concept: higher experience leads to lower costs and potentially higher profits. In the long run, market share can serve as a proxy measure for experience.

Concept Definition

The total unit cost for a firm’s value contribution to a product decreases with the cumulative aggregate output. With each doubling of aggregate output, costs are typically reduced by a certain percentage.

Reasons for Cost Reduction

  • Decreased labor input per unit due to learning effects.
  • More efficient use of machinery.
  • Cost-reducing substitution of inputs.
  • Investment in improved machinery.
  • Increased specialization.

Benefits

  • Fundamentally sound concept.
  • Provides a starting point for cost management discussions.
  • Can be used as an argument for supplier price reductions based on volume.
  • A useful analytical tool.

Market Attractiveness & Competitive Strength

These dimensions are often used in portfolio analysis (e.g., the GE/McKinsey Matrix) as alternatives or complements to the BCG matrix axes.

Market Attractiveness Factors

  • Market size
  • Growth rate
  • Profit margins
  • Intensity of competition
  • Volatility

Competitive Strength Factors

  • Market share
  • Prices
  • Product quality
  • Knowledge of customers
  • Synergies with other SBUs
  • Geographic aspects

Advantages (Compared to BCG)

  • No restriction to using only market growth for market attractiveness.
  • No restriction to using only market share for competitive strength.

Disadvantages

  • Construction of the matrix can be subjective or arbitrary.
  • Quantification of factors is not always obvious.
  • Can be more complicated to implement than the BCG matrix.