Portfolio Analysis


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  • Many large corporations have more than one product, have many business units and operate in more than one location- this is what is termed a portfolio of businesses. If we look at the investment industry, many investors have a collection of investments called a portfolio. There are good reasons for this. Some of which we mention before. In terms of risk- spreading risk across a number of businesses or locations . Products may be at different stages of the product life cycle- inception, growth, maturity, decline and so on. This poses questions for the strategic manager – How to manage these firms in terms of cash, resources, marketing, In other words how does the manager manage this portfolio. To assist managers portfolio management using portfolio matrices was devised in the late 1960s and early 1970s, to encourage managers to view their individual business units as a series of investments. To address these units in terms of resource allocation. The idea behind portfolio management is to, as McNamee suggests “ to enable strategic planners to seek the optimal strategy for the individual products whilst achieving overall corporate objectives”
  • Portfolio Analysis

    1. 1. Multi-Business Strategy Multi-regional strategy
    2. 2. Lecture Outline <ul><li>What is Portfolio Management </li></ul><ul><li>What is Portfolio Analysis </li></ul><ul><li>Boston Box </li></ul><ul><li>McKinsey/GE Matrix </li></ul><ul><li>AD Little Life-Cycle Matrix </li></ul>
    3. 3. Portfolio Management <ul><li>“ enable strategic planners to select the optimal strategies for the individual products whilst achieving overall corporate objectives” </li></ul><ul><li>(Mcnamee, 1985) </li></ul><ul><li>Multi-business </li></ul><ul><li>And/or multi-location </li></ul>
    4. 4. <ul><li>Portfolio Analysis </li></ul><ul><li>“ the strategic units that make up the company and the attempts to evaluate current effectiveness and vulnerabilities” (McDonald et al, 1992) </li></ul><ul><ul><li>How much of our time and money should we spend on our best products to ensure that they continue to be successful? </li></ul></ul><ul><ul><li>How much of our time and money should we spend developing new costly products, most of which will never be successful? </li></ul></ul>
    5. 5. Examples of Portfolios <ul><li>Unilever : ice cream, tea, spreads, </li></ul><ul><li>Proctor & Gamble: Detergents, nappies, </li></ul><ul><li>Gillette : batteries, Shaving products </li></ul><ul><li>Virgin ; trains, planes, cola, music stores </li></ul>
    6. 9. Hold Strategy To enjoy continued strong cashflow. Relatively high market share / low market growth rate ‘Cash Cow’ opportunities should be able to maintain market share at or around existing levels
    7. 10. Build Strategy To grow the business. Relatively low relative market share / high market growth rate ‘Question Mark’ opportunities need investment in order to grow.
    8. 11. Harvest Strategy To develop short term cashflow irrespective of the long term damaging effect to the product or business. This strategy is appropriate for any weak products where disposal in the form of a sale is unavailable or not preferred due to high exit barriers
    9. 12. Divest Strategy To change the capital of the business and allow resources to be used elsewhere
    10. 13. Boston Box - Uses <ul><li>Simplifies complex situations </li></ul><ul><li>Target setting tool </li></ul><ul><li>Encourages strategists to view their business as a collection of diversified cash flows and investments </li></ul><ul><li>Success sequences </li></ul><ul><li>Disaster Sequences </li></ul>
    11. 14. Disadvantages <ul><li>Uses 2 factors only </li></ul><ul><li>Many businesses are “Average” </li></ul><ul><li>Dogs -10% mkt share –most fall into this category </li></ul><ul><li>Can use dogs as a tactical tool- barrier to entry </li></ul><ul><li>Cash flow? – Why not ROI? </li></ul>
    12. 15. GE Business Screen Long-term industry attractiveness Business strength/competitive position
    13. 16. General Electric’s Business Screen Source: Adapted from Strategic Management in GE , Corporate Planning and Development, General Electric Corporation. Used by permission of General Electric Company. A Winners Winners B C Question Marks D F Average Businesses E Winners Losers G Losers H Losers Profit Producers Strong Average Weak Low Medium High Business Strength/Competitive Position Industry Attractiveness
    14. 17. GE Matrix- uses <ul><li>More sophisticated than BCG – uses more variables </li></ul><ul><li>Condenses much information into 2 variables? </li></ul>
    15. 18. Limitations <ul><li>Complex and Weighty </li></ul><ul><li>The numerical estimates can be “objective” </li></ul><ul><li>What about new products or business units in growth industries. </li></ul>
    16. 20. Uses <ul><li>The power of the Life-cycle matrix is the story it tells about the distribution of the firm’s businesses across the stages of the industry evolution </li></ul>
    17. 21. Limitations <ul><li>Limited strategic prescription </li></ul><ul><li>Once defined prescription is limited </li></ul><ul><li>Some businesses “skip” cycles </li></ul><ul><li>Go from Growth to Decline in a short time. </li></ul><ul><li>Duration of “cycles” </li></ul><ul><li>Eg. Mars (1930) </li></ul>
    18. 22. International Portfolio Analysis <ul><li>2 Factors: </li></ul><ul><li>Country’s attractiveness </li></ul><ul><ul><li>Market size, rate of growth, regulation </li></ul></ul><ul><li>Competitive strength </li></ul><ul><ul><li>Market share, product fit, contribution margin, market support </li></ul></ul>
    19. 23. Portfolio Matrix for Plotting Products by Country Harvest/Divest Combine/License Invest/Grow Dominate/Divest Joint Venture Low High High Low Competitive Strengths Country Attractiveness Selective Strategies
    20. 24. <ul><li>Portfolio Analysis </li></ul><ul><li>Advantages: </li></ul><ul><ul><li>Top management evaluates each of firm’s businesses individually </li></ul></ul><ul><ul><li>Use of externally-oriented data to supplement management judgment </li></ul></ul><ul><ul><li>Raises issue of cash flow availability </li></ul></ul><ul><ul><li>Facilitates communication </li></ul></ul>
    21. 25. <ul><li>Portfolio Analysis </li></ul><ul><li>Disadvantages: </li></ul><ul><ul><li>Difficult to define product/market segments </li></ul></ul><ul><ul><li>Standard strategies can miss opportunities </li></ul></ul><ul><ul><li>Illusion of scientific rigor </li></ul></ul><ul><ul><li>Value-laden terms </li></ul></ul>