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8/3/2019 5. Portfolio Models
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bcg 1
Portfolio Models
BCG Matrix
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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?
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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.
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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
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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
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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)
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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
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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
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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
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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.
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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
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bcg 12
Sources of Experience Effects
The learning curve
Specialisation oflabour
Process innovations
New materials
Product standardisation
Product redesign
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bcg 13
BCGStrategy Logic
High Market Growth
Market Share Gains
Accumulated Experience
Lower Costs Than Competitors
Higher Profits
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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
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bcg 15
Share
Growt
hMatrix Analysis...
A balanced portfolio
Establishment oftrends
Competitive evaluation
Market growth vs sustainable growth
Financial analysis
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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
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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
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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
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bcg 19
BCG
Portfolio Matrix
MARKE
TGROWTHRATE
MARKET SHARE DOMINANCE
HIGH LOW
LOW
HIGH
??
$$$$
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bcg 20
BCG
Portfolio MatrixMARKET SHARE DOMINANCEHIGH LOW
MARKE
TGROWTHRATE
LOW
HIGH High growth
Market leaders
Require cash
Low growth
High market share
High cash flow
Low growth
Low market share
Minimal cash flow
High growthLow market share
Need cash
Poor profit margins
$$$$
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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
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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
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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
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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
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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)
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bcg 26
Portfolio Models: Evolution of
businesses
Low
High
Market GrowthRate
Low
High
RelativeShare
Cash Cow Star
Dog(????)
Success sequence
Disaster sequence
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bcg 27
Stars Problemchildren
Cashcows Dogs
BCG - Unfavorable Business Movements
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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.
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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
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bcg 30
Strategies for Portfolios
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
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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
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bcg 32
Strategies for Portfolios
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
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bcg 33
Strategies for Portfolios
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
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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
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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
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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
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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
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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