2. Lecture Outline
• What is Portfolio Management
• What is Portfolio Analysis
• Boston Box
• McKinsey/GE Matrix
• AD Little Life-Cycle Matrix
3. Portfolio Management
• “enable strategic planners to select the
optimal strategies for the individual
products whilst achieving overall
corporate objectives”
(Mcnamee, 1985)
• Multi-business
• And/or multi-location
4. Portfolio Analysis
“ the strategic units that make up the company
and the attempts to evaluate current
effectiveness and vulnerabilities” (McDonald
et al, 1992)
– How much of our time and money should we
spend on our best products to ensure that
they continue to be successful?
– How much of our time and money should we
spend developing new costly products, most
of which will never be successful?
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
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.
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
13. Boston Box - Uses
• Simplifies complex situations
• Target setting tool
• Encourages strategists to view their
business as a collection of diversified cash
flows and investments
• Success sequences
• Disaster Sequences
14. Disadvantages
• Uses 2 factors only
• Many businesses are “Average”
• Dogs -10% mkt share –most fall into this
category
• Can use dogs as a tactical tool- barrier to
entry
• Cash flow? – Why not ROI?
16. General Electric’s Business Screen
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
IndustryAttractiveness
Source: Adapted from Strategic
Management in GE, Corporate Planning
and Development, General Electric
Corporation. Used by permission of
General Electric Company.
17. GE Matrix- uses
• More sophisticated than BCG – uses more
variables
• Condenses much information into 2
variables?
18. Limitations
• Complex and Weighty
• The numerical estimates can be
“objective”
• What about new products or business
units in growth industries.
19.
20. Uses
• 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
21. Limitations
• Limited strategic prescription
• Once defined prescription is limited
• Some businesses “skip” cycles
• Go from Growth to Decline in a short time.
• Duration of “cycles”
• Eg. Mars (1930)
22. International Portfolio Analysis
2 Factors:
• Country’s attractiveness
• Market size, rate of growth, regulation
• Competitive strength
• Market share, product fit, contribution
margin, market support
23. Portfolio Matrix for Plotting Products by Country
Harvest/Divest
Combine/License
Invest/Grow Dominate/Divest
Joint Venture
LowHigh
High Low
Competitive Strengths
CountryAttractiveness
Selective
Strategies
24. Portfolio Analysis
Advantages:
– Top management evaluates each of
firm’s businesses individually
– Use of externally-oriented data to
supplement management judgment
– Raises issue of cash flow availability
– Facilitates communication
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”
Issues of – Resource allocation, Cash movement, Skills and competencies
Some examples of portfolio companies. Any others??
The best known of the portfolio matrices is the Boston Box –BCG matrix, or growth share matrix. Devised by the Boston Consulting Group, this model assess business units and products along two dimensions;
Relative market share- relative to the the market leader.
Industry growth Rate- how fast or slow the industry is growing compared to the overall economy. Takes into consideration the external threats and opportunities facing the business.
According to the BCG products or business units are classified as follows
Question Marks- Problem Child –have a low market share in an attractive growing market. Questions is do you invest more to make this product a market leader or what? If having assessed the business unit you decide that it calls for too much in terms of resources then divest- spread too thin. Levi 501s Apple’s iMac.
Possible strategic choices are market penetration, prod, development,
Cash Cows- High market share in low growth market. Needs little investment, and can divert resources away form it to fund questions marks or stars. Ford transits, kellogg’s cornflakes. Other possible strategies are divestment,
Stars –high market share in a growing market. Require cash to reach its full potential. MPV, people Carriers
Possible choices are- market penetration, market development, horizontal integration, vertical integration.
Dogs- in a declining industry with a low market share. Liquidation, retrenchement,
The BCG is influenced by the product life cycle.
Can you identify which ones may be in which category.?
The BCG can be used to plot business units and products along the product life cycle curve
From a market entry position as a 'Question Mark' product. Products are usually launched into high growth markets, but suffer from a low market share.
To a 'Star' position as sales and market share are increased. If the investment necessary to build sales and market share is successfully made, then the product’s position will move towards the star position of high growth / high market share.
To a 'Cash-Cow' position as the market growth rate slows and market leadership is achieved. As the impact of the product life cycle takes effect and the market growth rate slows the product will move from the star position of high growth to the Cash Cow position of low growth / high share.
Finally to a 'Dog' position as investment is minimised as the product ages and loses market share.
The BCG also helps managers to make decision regarding their products or business units.
Hold strategy – relatively inactive- do enough to maintain the product or business unit without it losing market share.
Allocating resources from eg, cash cows to invest in stars and problem children
Is a middle ground between maintenance and abandonment.
Reinvestment min.
Operating budget slashed
Capital investment little
Non essentials are curtailed
Stringent cost controls
Getting rid of units, liquidation , sale
Idea is to reallocate corporation resources to other units.
It is simple and easy to use- managers can assess business units according to their market share and the attractiveness of the industry In which they operate.
Target set- where to put resources
In terms of cash- it forces management to look and see who needs cash, who is generating cash and who is losing cash.
Success from ? To Star to CC.
2 dimensions- Heller (1996) in the 1990s the top 100 companies in the UK only had 2.65 growth.
Grant & King (1982) Low market share companies may be very profitable> olivetti low share but still profitable selling type writers via mail order.
Small firms have low market share but are profitable.
Likewise average businesses are profitable.
Dogs can be used as a barrier to entry.
Hambrick & MacMillan (1982) in a survey suggested that roughly ½ USA firms wer dogs. – wouldn’t be goog to liquidate them.
GE Business Screen- Jack welch –GE used the McKinsey – 43 businesses
Shell directional policy matrix.
Developed by Mckinsey and co in the 1970s.
Suggested that the BCG matrix measures of relative market share and industry growth rate were incomplete.
Devised the GE matrix
Assessed business along two dimensions:
Industry Attractiveness: Market growth rate, mkt size, profitability, demand, rivalry, opportunities.
Business Strength: Mkt share, Growth in mkt share, production capacity, quality, brand loyalty
Size of the circle represents the industry size in terms of sales and the slices of pie within the circle represent the market share of the business.
According to the GE matrix there are 3 possible strategies:
Green light strategy- high to med attractiveness and high and med business strength- invest and encourage to grow.
Red light- med to low attractiveness and business strength- low investment priority- ,
Yellow light- unsure what to do/
Judging products and business units across a number of dimensions can be cumbersome and complex.
Rate each factor between 1 and 109 and then find an average.
This assessment can be very subjective
Hofer & Schendel (1978) suggest that the GE matrix does not take into account new businesses.
What about the interaction of the business units.
Bases on the product life cycle model.
Assesses products and businesses across 2 dimensions
Stage of industry maturity- from embryonic to decline
Competitive position –strong to weak.
Not only does it allow managers to plot the distribution of their products across the stages of evolution- the idea is that a business should not have all products in the maTURITY OR DECLINE STAGE, THERE SHUOLD BE OTHERS COMING THROUGH.
But it also allow managers to asses resource needs along the product life cycle curve:
Introduction_ invest heavily, to build sales and product awareness, refine product, R&D- need for resources in terms of management as well.
Growth stage- further investment required to build product , heavy marketing needed.
At maturity stage- emphasis shifts to efficiency, management attempts to maintain profit margins
Decline- emphasis is on cash flow, considerations for selling or divesting.
Once plotted on the matrix the prescription is limited. In terms of cash investment and allocation of resources- some businesses can be revived – eg Levi 501.
Cabbage patch dolls and other fads-
Can also be used to assess businesses in different locations.
