5. portfolio models

8/3/2019 5. Portfolio Models

1/38

bcg 1

Portfolio Models

BCG Matrix


2/38

bcg 2

Basic questions of corporate portfolio

management

How should corporate management think

about managing a numberofbusinesses?

Shouldother conditions be imposedon a

project in addition to requiring that its NPV

is positive?


3/38

bcg 3

SBU - Definition

Away oforganising a business so that eachunit sells an identifiable set ofproducts to

an identifiable set ofcustomers incompetition with an identifiable set ofcompetitors.

SBUs are managed independently with

theirown set ofobjectives.Resources , costs and profits are attributed

to each unit separately.


4/38

bcg 4

Strategic Business Unit ( SBU)

SBU originatedfrom Mckinsay/ GE but

well adopted by BCG

Organising by SBU allows large

diversified companies to compete as

though they were a collection ofsmaller

independent firms


5/38

bcg 5

SBU Focus

Externalfocus-SBUs are organised around markets andcustomers both externalfactors-each SBU serves a clearly defined market with an

identifiable set ofproducts-products are placed in different SBUs but mayshare same production facilities

Identifiable competitors

Autonomous profit centers

Distinct marketing strategies

Separate accounting


6/38

bcg 6

Portfolio Models: HistoryMcKinsey sells GE on the idea ofStrategic

Business Units (SBUs)

BCG attacks McKinsey with the Growth-

Share Matrix and the Portfolio model

McKinsey responds with its own Portfolio

model, the Business Attractiveness Matrix

Other models (life cycle, financial models)


7/38

bcg 7

Common Elements

Graphicaldisplay ofoverall business

Axes

Strength ofBusiness Position (SW)

Industry Attractiveness (OT)

A generic strategy is associatedwith a

businesss position in the matrix

Suggestions for allocating resources


8/38

bcg 8

How Do Company Invest in Products

At the corporate levelfuture earnings for

the businesses are determined as basis for

investment

Investment Objectives act as a guideline for

Resource allocation

Corporate strategy ,Business strategy

Investment strategy logically precedeMarketing Strategy and represent a logical

progression in strategic planning


9/38

bcg 9

Investment Objectives

Growth in a business

Hold / defend existing position

Turnaround the business

Harvest / winddown the business

Divest /exit from a particularline ofbusiness


10/38

bcg 10

BCG - Genesis

Westinghouse wanted to knowwhy perunit

costs decline when company gained

experience in manufacturing products.

This led toexperience curve as a derivativeof learning curve.

Diversified companies coulddiversify risk

andoptimise performance ofentireorganisation by managing parts oftheir

business as they would a portfolioof

investments.


11/38

bcg 11

Experience Effects

BCG hold that.-There is an opportunity tolower costs ascompany gains experience

producing/marketing a product. Experienceis gained by increasing sales volume overtime and the more the experience gained thelower the costs to produce / market eachunit

A key assumption ofmatrix


12/38

bcg 12

Sources of Experience Effects

The learning curve

Specialisation oflabour

Process innovations

New materials

Product standardisation

Product redesign


13/38

bcg 13

BCGStrategy Logic

High Market Growth

Market Share Gains

Accumulated Experience

Lower Costs Than Competitors

Higher Profits


14/38

bcg 14

BCG Matrix (Share Growth Matrix )

Objectives

-tooptimise the performance ofentire

portfolioofbusinesses in which thecompany competes

-to balance the cash flow among those

businesses designating some products as

sources offunds and some as users offunds


15/38

bcg 15

Share

Growt

hMatrix Analysis...

A balanced portfolio

Establishment oftrends

Competitive evaluation

Market growth vs sustainable growth

Financial analysis


16/38

bcg 16

BCG Portfolio Analysis

Assumptions

* companies with most experience inproduction and marketing a product are likely

to incur lowest costs* there is a long time correlation betweenmarket share and long term profitability


17/38

bcg 17

Share Growth Matrix -Dimensions

Simple Two by Two matrix basedon Market

growth ( proxy for PLC) and Market share

( indicatorfor profit)

For Market share , BCG uses concept ofRelative Market shareco.'s sales ofa product to Mkt. /segment

Mkt..leaders sales ofproduct to Mkt../segment

Relative market share is indicatorofefforts required

to gain or hold market share


18/38

bcg 18

BCG

Dimensions (contd)

Thirddimension

- size ofmarket with bubbles ofdifferent

sizes ,larger bubbles mean larger markets.

-Size ofbubbles can represent either sales

volume ofentire market or sales

contribution ofthat market to companysprofits . in either case larger markets are

more important than smaller markets


19/38

bcg 19

BCG

Portfolio Matrix

MARKE

TGROWTHRATE

MARKET SHARE DOMINANCE

HIGH LOW

LOW

HIGH

??

$$$$


20/38

bcg 20

BCG

Portfolio MatrixMARKET SHARE DOMINANCEHIGH LOW

MARKE

TGROWTHRATE

LOW

HIGH High growth

Market leaders

Require cash

Low growth

High market share

High cash flow

Low growth

Low market share

Minimal cash flow

High growthLow market share

Need cash

Poor profit margins

$$$$


21/38

bcg 21

Portfolio Matrix Example

Notebook

Computer(STAR)

Palmtop

(PROBLEMCHILD)

Personal

Computer(CASH COW)

Mainframe

Computer(DOG)

MARKETGROWTHRATE

LOW

HIGH

MARKET SHARE DOMINANCE

HIGH LOW


22/38

Positions of products-current&projected

2c

2f1c

1f

5c

4c

4f

8c7c

7f

3c

3f

Divest

6c

6f

Divest

C - Current positionF - Future position

STARSProblemchildren

Cash Cows Dogs

High

Low

Dominant Subordinate

Relative market sh

are

Marketgrowth


23/38

bcg 23

Share Growth Matrix -a Dynamic

Analysis ...Matrix can be usedfordynamic than static analysis

- to show how positions will change in the years

ahead .

- vertical movements ofpositions means changes

expected in market conditions

- horizontal movements are results ofchanges in

strategy ofcompany

By forecasting movements ofmarkets andresults ofstrategic choices for each ofthose

markets company can assess its future

position


24/38

bcg 24

Changes in Positions Within Share

Growth Matrix Leads to ...category Source of

funds

Needfor

funds

Cash balance

? Low High -ve In need

*** High High 0 In balance

Cash cows High Low + In excess

Dogs Low Low 0 to -vein balance


25/38

bcg 25

Portfolio Models: Flow of Funds

Lo

w

Hig

h

Market GrowthRate

Low

High

RelativeShare

Cash Cow Star

Dog Problem Child

(Harvest)

(Divest)(????)

(Build)


26/38

bcg 26

Portfolio Models: Evolution of

businesses

Low

High

Market GrowthRate

Low

High

RelativeShare

Cash Cow Star

Dog(????)

Success sequence

Disaster sequence


27/38

bcg 27

Stars Problemchildren

Cashcows Dogs

BCG - Unfavorable Business Movements


28/38

bcg 28

Strategies for Resource Allocation

Build

Hold

Harvest

Divest

Provide financial resources if SBU(Problem Child) has potential to be a Star.

Preserve market share if SBU is a successfulCash Cow. Use cash flow for other SBUs.

Increase short-term cash return.Appropriate for all SBUs except Stars.

Get rid of SBUs with low shares inlow-growth markets.


29/38

bcg 29

Strategies for Portfolios

strategy stars Cash cows Dogs

Strategic

thrust

Invest for

growth

Maintain

mkt.position

>cash earnings

Manage for

cash

Market share Maintain or >

dominance

Maintain or

milkfor

earnings

Forego share

for profit

investment Fund growth Limit fixed

investments

Minimise &

divest

Working

capital

Reduce work

in progress,

extend credit

Tighten credit,

inv.turnover

Aggressively

reduce


30/38

bcg 30


Strategy Stars Cash cows Dogs

Product differentiationline expansion

Prune less

successful ,

differentiate in

key segments

Aggressive

pruning

Price Lead,aggressive

pricing for

share

Stabilise prices

/ raise

Raise

promotion Aggressive

marketing

limit minimise

distribution Broadendistribution

holdwide

distribution

Slow

withdrawal


31/38

bcg 31

Strategies for PortfoliosStrategy Stars Cashcows Dogs

Production Expand

Invest , JVs

Acquisition

Go for max

capacity

utilization (offer

capacity to

others)

Free up capacity

Research &Development

Invest for lineexpansion

/modified

products

Limit R&D forprocess

improvements

and Cheaper RM

No R&D

Personnel Assign key

managers to

this group

Retain winning

team

Reward foreffeciency

Relocate

Cost control Tight control

and go for scale

economies

Absolute control

on VPC

Tight control


32/38

bcg 32


strategy Cash dogs Problem children

Strategic thrust Maintain

selectively

Opportunistic

development

Market share Maintain selective

segments share

Invest selectively in

share

Investment Selective

investment for

dominance in

segments

Fund growth

Working capital Reduce invest


33/38

bcg 33


Strategy Cash dogs Problem children

Product Emphasise on

product quality ,

differentiate

Differentiation ,

Line extension

Price Maintain or Raise Aggressive , Price

for share gains

Promotion Maintain

selectively

Aggressive

marketingDistribution segment Selective coverage


34/38

bcg 34

Functional Strategies for PortfoliosStrategy Cash dogs Problem children

Production Increase

productivity e.g.

specialisation /

automation

invest

R&D Selective

investment on costsavings areas

Invest ondifferentiationareas

PersonnelAllocate keymanagers Invest

Cost control Tight control Tight but not at the

expense of

entrepreunership


35/38

bcg 35

Criticisms of BCG Matrix

Assumptions on experience effects

-no guaranteed cost reductions.It requires

concentrated effort and pressure

-assumed cost reductions presupposes

stability in product design and non erratic

production rates

-are we right in assuming that competitioncost structures are alike? Effects of

technology


36/38

bcg 36

Criticisms of BCG Matrix

BCG strategic prescriptions

- dogs are for harvesting ordivesting

-it may be wise todivest a star iffuture cash

needs outstrip resources or it may not fit themain thrust ofbusiness or may be too small

toworth keeping

-destruction ofbreadwinners-needfor industry specific knowledge

essentialfor rationaldecisions


37/38

bcg 37

Problems in Portfolio Paradise:

Product life cycleProduct life cycle is a self-fulfilling prophecy

sales decline, cut support

furtherdecline, abandon mature productsWeak Conceptual Foundations

Experience and profit/share effects are fuzzy

Stable or growing portfolio income requires acontinuous stream ofsuccessful product

introduction


38/38

bcg 38

Problems in Portfolio Paradise:

MarketSh

are and ProfitabilityThe relationship between market share and

profitability is not direct, but rather indirect

Share is related to providing superior customer

value

Superior customer value leads to better marginsand superior profitability

Niche markets are profitable although theyappear to have a low market share (in thelarger market)

Share in the niche is often large

5. portfolio models

Documents