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Portfolio planning
 

Portfolio planning

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    Portfolio planning Portfolio planning Presentation Transcript

    • • The Portfolio PlanningCompanies with multiple product line or business units must ask themselves how variousproduct and business units should be managed to boost overall corporate performance1) How much of the time and money should be spent on the best products and business unitsto ensure that they continue to be successful.2) How much of the time and money should be spend developing new costly products mostof which will never be successfulIn portfolio analysis top management assumes the role of an internal banker and its productlines or business units as a series of investment. Two of the most popular approaches farethe BCG growth share matrix and GE business screen. This concept can also be used tochoose strategies as mentioned in earlier section.The Boston consulting group business matrix: The main objective of the Boston consultinggroup (BCG) technique is to help senior managers identify the cash flow requirementsof the different businesses in their portfolio. The BCG approach involves 3 main steps. (1)dividing a company into strategic business units (SBU’s) and assessing the long termprospects of each (2) comparing SBU’s against each others by means of a matrix thatindicates the relative prospects of each and (3) developing strategic objectives withrespect to each SBU.
    • Defining and evaluating Strategic Business UnitsAccording to BCG a company must create an SBUfor each economically distinct business area that itcompetes in. When top management identify SBUstheir objective is to divide a company into strategicentities that are relevant for planning purposes.Normally a company defines its SBU’s in terms ofthe product markets they are competing in. Havingdefined SBUs top managers then assess eachaccording to two criteria (1) SBUs relative marketshare (2) the growth rate of the SBUs industry.
    • (1) Relative market share:The objective whenidentifying an SBU’s relative market share is tocheck whether it can be considered as a weakness orstrength.(Relative market share =SBUs market share________________Market share held up targetrival in the industry
    • According to the Boston Consulting group market sharegives a company cost advantage from economies of scaleand learning effects. An SBU with relative market sharegreater than 1.0 is assumed to be down the experience curveand therefore to have a significant cost advantage overits rival. (if the above is less than a disadvantageousposition.)(2) Growth rateThe objective when assessing industry growth rate is todetermine whether industry conditions offer opportunitiesfor expansion or whether they threaten the SBU. The growthrate of an SBU’s industry is assessed according to whether itis faster or slower than the growth rate of the economy as awhole. BCG’s position is that high growth industry offer
    • a more favorable competitive environment andbetter long term prospectus than slow growthindustries.Comparing strategic Business unitsThe next step of BCG approach is comparingSBU’s against each other by means of matrix basedon two dimensions. Relative market share and highgrowth. The fig. Provides an example of such amatrix.
    • Cell 4DogsHigh Relative market share LowHighLowIndustrygrowth rateCell 1StarsCell 3Cash cowsCell 2Question marks
    • The horizontal dimension measures relative market share. Thevertical dimension measures industry growth rate. Each circlerepresents an SBC. The centre of circle represents the position of thatSBU on the two dimensions of a matrix. The size of each circle isproportion to the sales revenue generated by each business in thecompany’s portfolio. The bigger the circle the larger is the size of anSBU relative to total corporate revenue.The matrix is divided into four cells. SBU’s in cell 1 are defined asstars in cell 2 as question marks in cell 3 as cash cows and in cell 4 asDogs. BCG argues that these different types of SBUs have differentlong term prospects and different implications for cash flows
    • • StarsThe leading SBUs in a company’s portfolio are the stars. They haveahigh relative market share and are based in high growth industries.They have both competitive strength and opportunities forexpansion.Thus they offer long-term profit and growth industries.Question MarksSBUs that are relatively weak in competitive terms i.e.; they havelow relative market share-are question marks. However they arebased in high-growth industries and thus may offer opportunities forlong term profit and growth. A question mark can become a star ifnurtured properly. To become a market leader, the question markrequires substantial injection of cash; it is cash hungry. Thecorporate head office has to decide whether a particular questionmark has the potential to become a star and is therefore worth thecapital investment necessary to achieve stardom.
    • Cash CowsSBUs that have a high market share in low growthindustries and a strong competitive position in matureindustries are cash cows. Their competitive strengthcomes from being farthest down the experience curve. Theyare the cost leaders in their industries. BCG argues that thisposition enables such SBUs to remain very profitable.However low growth implies a lack of opportunities forfuture expansion. As a consequence BCG argues that thecapital investment requirements of cash flows are notsubstational and thus they are depicted as generating astrong positive cash cows.
    • DogsSBUs that are in low growth industries but have alow market share are dogs. They have a weakcompetitive position in unattractive industries andviewed as offering few benefits to a company.BCG suggest that such SBUs are unlikely togenerate much in the way of a positive cash flowand indeed may become cash dogs. Foroffering few prospects for future growth,dogs may require substantial capital investmentjustto maintain their low market share.
    • Strategic implicationsThe objective of the BCG portfolio matrix is to identifyhow corporate cash resources can best be used tomaximize a company’s future growth and profitability.Recommendations: (1) cash surplus from any cash cowshould be used to support the development of selectedquestion marks and to nurture stars. The long termobjective is to consolidate the position of stars and to turnfavored question marks into stars; thus making thecompany’s portfolio more attractive.
    • (2)Question marks with the weakest or most uncertain longterm prospectus should be divested to reduce demands oncompany’s cash resources.(3) The company should exit from any industry where theSBU is a dog(4) If a company lacks sufficient cash flows from stars orcows, it should consider a questions fordivestments to build a more balanced portfolio. A portfolioshould contain enough stars and question marks to ensure ahealthy growth and profit for the company and enough cashcows to support the investment requirements of the starsand question marks.
    • LimitationsThe use of highs and lows to form 4 categories is toosimplistic.The link between market share and profitability isquestionable low share business also can be profitable.Growth rate is only one aspect of industry attractiveness.Similarly market share is only one aspect of overallcompetitive position.Product line or business units are considered only inrelation to one competitor , the market leader. Smallcompetitor with fast growing market share are ignored..
    • GENERAL ELECTRICBUSINESS SCREENGeneral electric with the assistance of the Mckinsay andcompany consulting firm developed a more complicatedmatrix.• Building on the BCG matrix, the General Electric BusinessScreen is an extension of the portfolio idea with a morestakeholder oriented approach . Like BCG Matrix GEBusiness Screen examines the organisations portfolio ofproducts along two dimensions Industry attractiveness(External factor evaluation) and Competive positions .Thebusiness screen simply divides each axis into 3 generalcategories Low, Medium and High for industryattractiveness and week ,average and strong forcompetitive positions.• As shown this creates a nine cell matrix
    • clutchesjointsAerospace fittingsFuel pumpsReliefvalvesFlexiblediaphragmsHydraulicpumpsStrong average WeakCompetitive PositionlowMedianHighndustryAttractivnessGrow &buildHold & maintainHarvest&Divest
    • The size of each cycle represent the size of therelevant market rather than the size of the company’sbusiness .The dark brown shaded part of the circlerepresent that business’s market share. Thus the GEcompany’s clutch Business operates in a moderatesize market and enjoys 30% market share.
    • Each business is rated in terms of two dimensionsIndustry attractiveness (market attractiveness-/External factor evaluation) and business strength(competitive strength).These two factors makesexcellent marketing sense for rating a business.Companies are successful to the extent that theyenter attractive markets and posses the requiredcompetitive strength (business strength )to succeed inthose markets.
    • To measure these dimensions we can use theEFE (External factor evaluation) andcompetitive strength evaluation studied earlierfor each portfolio. Factors underlying marketattractiveness & competitive positions ie GEMultifactor portfolio Model for hydraulicpumps .A GE portfolio of Business is shown belowSample calculation of external factor evaluationand competitive strength evaluation is givenbelow
    • ExternalFactorEvaluationCompetitiveStrengthOver all market sizeAnnual market growth rateHistorical profit marginTechnologicalrequirementsInflationary vulnerabilityEnergy requirementsEnvironmental impactSocial political legalMarket shareShare growthProduct qualityBrand reputationDistribution networkPromotionaleffectivenessproductive capacityProductive efficiencyProductive efficiencyUnit costsMaterial suppliesR&D performanceManagerial personnelweight Rating =1-5 score.20.20.15.15.15.05.05.05Must beAcceptable1.0045424323.801.00.60.30.60.15.10.153.70.10.15.10.10.05.05.05.05.15.05.10.051.00424543323534.40.30.40.50.20.15.15.10.45.25.30.203.40
    • Some suggested strategies for portfolios (or SBU) when its position comes in each cellis given belowProtect position•Invest to grow at maximumdigestible rate•Concentrate effort onmaintaining strengthInvest to build•Challenge for leardership•Build selectively on strength•Reinforce vulnerable areasBuild selectively•Specialize aroundLimited strength•Seek ways to overcomeWeakness•With draw if indications of sustainableGrowth are lackingBuild selectively•Invest heavily in mostAttractive segments•Build up ability tocountercompetitions•Emphasis profitabilityBy raising productivitySelectivity /manage forearnings•Protect existing program•Concentrate investmentsIn segments where profitability isgood and riskare relatively lowLimited expansion forHarvest•Look for ways to expandWithout high risk , other wise,minimise investment and rationaleoperationsProtect and refocus•Manage for currentEarnings•Concentrate onattractive•Defend strengthsManage for earnings•Protect positions in mostProfitable segments•Upgrade product line•Minimize investmentDivest•Sell at time that willMaximixe cash value•Cut fixed costs and avoidInvestment meanwhile
    • International Portfolio AnalysisTo add international strategic planning, portfolio analysiscan be applied to international markets. Two factors, formthe average of the matrix.1.A country’s attractiveness composed of its market size, themarket rate growth the extent and type of governmentregulations and economic and political factors.2A products competitive strength is composed of its marketshare, product fit, contribution margin and market support
    • Advantages and limitations of portfolio analysisPortfolio analysis is commonly used in strategy formulations because it offers followingadvantages.1. It encourages top management to evaluate each of the corporate business individuality andto set objectives and allocate resources for each.2. It stimulates the use of externally oriented date to supplement management judgment.3. It raises the issue of cash flow availability for use in expansion and growth.4. Its graphic depiction facilitates communication.Portfolio analysis does however have some very real limitations that have caused somecompanies to reduce the use of this approach.1. It is not easy to define product/market segment.2. It suggests the use of standard strategies that can mis opportunities or be in practical.3. It provides an illusion of scientific rigor when in reality positions are based on subjectivejudgment.4. Its value –ladder terms like cash cow, Dog etc. can lead to self fulfilling prophecies5. It is not always clear what makes an industry attractive or where a product is with life cycle.6. Naively following the prescriptions of a portfolio model may actually reduce corporateprofit if they are used in appropriately
    • Note: Strategic Business Unit (SBU)A Strategic Business Unit is a significant organization segment that is analyzed to develop organizationalstrategy aimed at generating future business or revenue.Definition:An organizational entity of the company that is given the responsibility to serve the particular demandsof one business area and therefore has its own mission, objectives and business strategy is the subjectof corporate level strategy.Characteristics• SBU is the subject of business level strategy while the entire corporation is the subject of corporatelevel strategy.• A business unit within the overall corporate identity which is distinguishable from other businessbecause it serves a defined external market where management can conduct strategic planning inrelation to product and market.• When companies become really large, they are best thought of as being composed of a number ofbusinesses (or SBUs)• It can encompass an entire company, or can simply be a smaller part of of a company set up to performa specific task.• It has its own business strategy, objectives and competitors and these will often be different from thoseof the parent company.• It could be a company division, a single product, or a complete product line.• In smaller organizations, it might be the entire company.• Are a single business (or collection of business), have their own competitors and a manger accountablefor operations, and can be independently planned for.• It has a manger who is accountable for its operation.• It is an area that can be independently planned for within the organization.