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PORTFOLIO ANALYSIS MODELS TOOLS PRESCRIPTIONS & STRATEGIES.
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Transcript of PORTFOLIO ANALYSIS MODELS TOOLS PRESCRIPTIONS & STRATEGIES.
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PORTFOLIO ANALYSIS
MODELS
TOOLS
PRESCRIPTIONS &
STRATEGIES
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PORTFOLIO MODELS
A multidivisional firm has the problem of how to allocate resources and to back winners in their ‘portfolio’.
Certain Portfolio models are linked with: The Product Life Cycle concept The Experience Curve Concept The PIMS Study
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PORTFOLIO ANALYSIS
Portfolio Models can be used to provide strategic insights by:»Acting as a diagnostic aid»Providing a conceptual framework»Being a prescriptive guide»Being a planning tool
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PORTFOLIO ANALYSIS
THE BOSTON CONSULTANCY GROUP
MATRIX
THE BOSTON CONSULTANCY GROUP
MATRIX
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The BCG Matrix is called the Growth Share Matrix because the model combines market growth and relative market share
THE BCG MATRIX
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MARKET GROWTH RATEMARKET GROWTH RATE
““High Growth” businesses are in High Growth” businesses are in markets growing faster than markets growing faster than economyeconomy
““Low growth” businesses are in Low growth” businesses are in markets growing slower than markets growing slower than economyeconomy
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Assumptions under which the Matrix is based
Cash Generated is proportional to Relative Market ShareCash is needed to keep pace with
market growth rateAdditional cash is needed to increase
market shareGrowth rate eventually slows to allow
cash to be generated
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BCG GROWTH SHARE MATRIX
The model is drawn for products or SBUs in the following way:ȣ Sales - is represented by the area of a
circle»Market share is relative to the firm’s
largest competitor»Growth rate of the market is computed
after being corrected for inflation»Draw the circle at the points of
intersection
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STAR QUESTION MARK
CASH COW DOG
MARKET
GROWTH
RELATIVE MARKET SHARE
LOW
HIGH
HIGH LOW
?
BCG GROWTH SHARE MATRIX
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BCG STRATEGY PRESCRIPTIONS
Within the portfolio context there are FOUR basic strategies that can be pursued:»BUILD - a strategy of building market share»HOLD - a strategy of holding share relative
to competitors and to market growth rate»HARVEST - a cash out strategy with little or
no new investment»QUIT - a strategy of exit or withdrawal
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STAR QUESTION MARK
CASH COW DOG
MARKET
GROWTH
RELATIVE MARKET SHARE
LOW
HIGH
HIGH LOW
BCG GROWTH SHARE MATRIX
Strategies: Build Strategies: Build / Harvest Quit
Strategies: Hold / Harvest Strategies: Harvest / Quit Build (?)
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PLC and an Extended Form of Growth-Share Matrix
Introduction Stage
Growth Stage
Maturity
Decline
Infants - negative cash flow
Stars Question Marks Cash Cows Dogs War Horses Dodos
Life Cycle Stage Extended Growth Share Types
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STAR QUESTION MARK
CASH COW DOG
MARKET
GROWTH
RELATIVE MARKET SHARE
LOW
HIGH
HIGH LOW
BCG Cash Flow Position Chart
Modest positive ornegative cash flow
Large negative cashflow
Large positive cashflow
Modest positive or negative cash flow
Optimum Cash Flow
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STAR QUESTION MARK
CASH COW
DOG
MARKET
GROWTH
RELATIVE MARKET SHARE
LOW
HIGH
HIGH LOW
BCG Product Dynamics Portfolio Chart
Disaster Sequence
SuccessSequence
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USING THE MATRIX
Check for internal balanceLook for trendsEvaluate the competitionConsider factors not captured by
the displayDevelop possible target portfoliosCheck for financial balance
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PORTFOLIO BALANCE ?
THE BALANCED PORTFOLIO IS REGARDED AS DESIRABLE - CAN WE HAVE OTHER ‘UN-BALANCED PORTFOLIOS? TOO MANY STARS ? TOO MANY CASH COWS ? TOO MANY QUESTION MARKS ? TOO MANY DOGS ?
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Too Many Stars - (High Growth Oriented Companies)
Problems of cash flowHigh marketing investments in high
growth markets are a pre-requisite to build or hold market share
NPD costs need to be funded & capitalised
Problems of high growth can be problematical - need for high borrowings
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Too Many Question Marks
Negative cash flows can be problematic for development - can be undercapitalised
Question marks can become cash trapsHigh development costs must be cappedQuestion marks are costly in management
timeCan question marks be ‘turned around’?
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Too Many Cash Cows - (Profit Orientated Company)
Excessive cash inflowsWhere is the future growth to come
from ?High profitability can be used to fund
dividendsHow do you plan for fading cash
cows ?
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Too Many Dogs - A Company in Decline
No growthModest cash flowsWhere is the future to beBut DOGS can be profitable in the
short runSlow or fast decline in the business
fortune
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Advantages of the Growth-Share Matrix
Easy of Use - 2x2 matrixSimple yet powerful constructsAids strategic thinking - the theory
underpinning the matrix quite straightforward
Psychological issuesPopular and well known in the literatureWidely taught in business schools
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WEAKNESSES OF GROWTH- WEAKNESSES OF GROWTH- SHARE MATRIXSHARE MATRIX
Assessment of relative long-term Assessment of relative long-term attractiveness of business units requires more attractiveness of business units requires more than just market growth and relative market than just market growth and relative market shareshare
Connection between relative market share Connection between relative market share and profitability is not as tight as experience and profitability is not as tight as experience curve effect implies. Many firms with small curve effect implies. Many firms with small relative market shares are profitable.relative market shares are profitable.
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WEAKNESSES OF GROWTH- WEAKNESSES OF GROWTH- SHARE MATRIXSHARE MATRIX
Four-cell matrix hides fact that many businesses Four-cell matrix hides fact that many businesses are in “average” growth rate markets and have are in “average” growth rate markets and have “average” relative market share positions“average” relative market share positions
Misleading simplification to categorise Misleading simplification to categorise businesses into just four typesbusinesses into just four types
Matrix doesn’t identify which businesses offer Matrix doesn’t identify which businesses offer best investment opportunitiesbest investment opportunities
Being a leader in a slow growth market doesn’t Being a leader in a slow growth market doesn’t guarantee cash cow status.guarantee cash cow status.
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STAR QUESTION MARK
CASH COW DOG
MARKET
GROWTH
RELATIVE MARKET SHARE
LOW
HIGH
HIGH LOW
BCG BALANCED GROWTH SHARE MATRIX
1
2 3
5
6
78
9
10
4
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DIRECTIONAL POLICY MATRIX
This model is an alternative to the BCG Matrix, and is based on different criteria.
MARKET ATTRACTIVENESS
BUSINESS STRENGTHS
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DPM Cont.
The two factors of Market Attractiveness and Business Strengths are COMPOSITE measures of potential opportunities open to the firm and the opportunities that the firm can take by leveraging its internal business
strengths or competencies.
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MARKET ATTRACTIVENESS
Market SizeGrowth RateProfit MarginCompetition
IntensitySeasonalityCyclicalicity
Social ImpactRegulationEnvironmentOpportunities
& ThreatsBarriers to
Exit/EntryTechnology &
Capital
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BUSINESS STRENGTH
Market ShareCore CompetenciesProfit Margin vs CompetitorsAbility to Match Price/ServiceRelative CostsKnowledgeTechnological AbilityManagement Caliber
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CONSTRUCTING ATTRACTIVENESS/ BUSINESS STRENGTH MATRIX
Quantitative measures of market attractiveness and business strength used to plot each business unit’s position in the matrix
Each business unit appears as a circle. Area of the circle is proportional to size of market. Pie slices within circle reflect business’s market share.
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DPM PRESCRIPTIVE STRATEGIES
GROWTHCUSTODIALLEADERSHIPTRY HARDERDIVESTMENTPHASED WITHDRAWALDOUBLE OR QUIT
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PORTFOLIO MODELS IN USE
CARE WHEN USING SUCH MODELSMODELS HELP - BUT - REMEMBER
THE ASSUMPTIONSDIFFERENT MODELS CAN OFFER
DIFFERING SOLUTIONSUSE YOUR JUDGMENTTHINK OF THE ‘OTHER’ FACTORS
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Different models different results
Results of a study by Wind, Mahajan and Swire (1983) concluded that when using standardized portfolio models the classification of any business into a specific portfolio position depends on four factors:
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Wind, Mahajan and Swire cont.
The operational definition of the dimension used
The rule used to divide a dimension in high or low categories
The weighting of the variables used in constituting the composite dimensions
The specific portfolio model used
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Wind et al cont.
The issue here is that different models can offer different strategic solutions as SBUs can be classified in different positions
There may be unintended benefits - different portfolio models give different positions can cause a debate in the strategic process
Cash Cow or Dog ?
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Problems with Portfolio Models
Cash Flow vs ROI - which should a company adopt ?
Prescriptions can lead to errors in strategy
Growth Rate and Share may be too simplistic a measure to use for market assessment
No assessment of competitors’ strategies How does the centre add value?