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    Portfolio Models

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    Asiha Gujar
    The document discusses portfolio models and the BCG matrix. It provides details on: - The BCG matrix dimensions of market growth rate and relative market share. - The four positions in the BCG matrix: stars, cash cows, question marks, and dogs. - Strategies for allocating resources depending on a business unit's position in the matrix, such as investing in stars and harvesting cash cows. - Criticisms of the assumptions in the BCG matrix, such as that cost reductions are not guaranteed with experience.

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    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd

    Portfolio Models

    Uploaded by

    Asiha Gujar
    970 views38 pages
    The document discusses portfolio models and the BCG matrix. It provides details on: - The BCG matrix dimensions of market growth rate and relative market share. - The four positions in the BCG matrix: stars, cash cows, question marks, and dogs. - Strategies for allocating resources depending on a business unit's position in the matrix, such as investing in stars and harvesting cash cows. - Criticisms of the assumptions in the BCG matrix, such as that cost reductions are not guaranteed with experience.

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    5. Portfolio Models

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    The document discusses portfolio models and the BCG matrix. It provides details on: - The BCG matrix dimensions of market growth rate and relative market share. - The four positions in the BCG matrix: stars, cash cows, question marks, and dogs. - Strategies for allocating resources depending on a business unit's position in the matrix, such as investing in stars and harvesting cash cows. - Criticisms of the assumptions in the BCG matrix, such as that cost reductions are not guaranteed with experience.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    970 views38 pages

    Portfolio Models

    Uploaded by

    Asiha Gujar
    The document discusses portfolio models and the BCG matrix. It provides details on: - The BCG matrix dimensions of market growth rate and relative market share. - The four positions in the BCG matrix: stars, cash cows, question marks, and dogs. - Strategies for allocating resources depending on a business unit's position in the matrix, such as investing in stars and harvesting cash cows. - Criticisms of the assumptions in the BCG matrix, such as that cost reductions are not guaranteed with experience.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 38

    Portfolio Models

    BCG Matrix

    bcg

    Basic questions of corporate portfolio management


    How should corporate management think about managing a number of businesses? Should other conditions be imposed on a project in addition to requiring that its NPV is positive?

    bcg

    SBU - Definition
     A way of organising a business so that each unit sells an identifiable set of products to an identifiable set of customers in competition with an identifiable set of competitors. SBUs are managed independently with their own set of objectives. Resources , costs and profits are attributed to each unit separately.
    bcg 3

    Strategic Business Unit ( SBU)


    SBU originated from Mckinsay/ GE but well adopted by BCG Organising by SBU allows large diversified companies to compete as though they were a collection of smaller independent firms

    bcg

    SBU Focus External focus


    -SBUs are organised around markets and customers both external factors -each SBU serves a clearly defined market with an identifiable set of products -products are placed in different SBUs but may share same production facilities

    Identifiable competitors Autonomous profit centers Distinct marketing strategies Separate accounting
    bcg

    Portfolio Models: History


    McKinsey sells GE on the idea of Strategic Business Units (SBUs) BCG attacks McKinsey with the GrowthShare Matrix and the Portfolio model McKinsey responds with its own Portfolio model, the Business Attractiveness Matrix Other models (life cycle, financial models)
    bcg 6

    Common Elements
    Graphical display of overall business Axes
    Strength of Business Position (SW) Industry Attractiveness (OT)

    A generic strategy is associated with a businesss position in the matrix Suggestions for allocating resources
    bcg 7

    How Do Company Invest in Products


    At the corporate level future 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 precede Marketing Strategy and represent a logical progression in strategic planning
    bcg 8

    Investment Objectives
    Growth in a business Hold / defend existing position Turnaround the business Harvest / wind down the business Divest /exit from a particular line of business

    bcg

    BCG - Genesis
    Westinghouse wanted to know why per unit costs decline when company gained experience in manufacturing products. This led to experience curve as a derivative of learning curve. Diversified companies could diversify risk and optimise performance of entire organisation by managing parts of their business as they would a portfolio of investments.
    bcg 10

    Experience Effects
    BCG hold that. -There is an opportunity to lower costs as company gains experience producing/marketing a product. Experience is gained by increasing sales volume over time and the more the experience gained the lower the costs to produce / market each unit  A key assumption of matrix
    bcg 11

    Sources of Experience Effects


    The learning curve Specialisation of labour Process innovations New materials Product standardisation Product redesign
    bcg 12

    BCG Strategy Logic


    High Market Growth Market Share Gains Accumulated Experience Lower Costs Than Competitors Higher Profits bcg
    13

    BCG Matrix (Share Growth Matrix )


    Objectives -to optimise the performance of entire portfolio of businesses in which the company competes -to balance the cash flow among those businesses designating some products as sources of funds and some as users of funds

    bcg

    14

    Share Growth Matrix Analysis...


    A balanced portfolio Establishment of trends Competitive evaluation Market growth vs sustainable growth Financial analysis

    bcg

    15

    BCG Portfolio Analysis


    Assumptions * companies with most experience in
    production and marketing a product are likely to incur lowest costs * there is a long time correlation between market share and long term profitability

    bcg

    16

    Share Growth Matrix -Dimensions


    Simple Two by Two matrix based on Market growth ( proxy for PLC) and Market share ( indicator for profit) For Market share , BCG uses concept of Relative Market share
    co.'s sales of a product to Mkt. /segment Mkt..leaders sales of product to Mkt../segment  Relative market share is indicator of efforts required to gain or hold market share
    bcg 17

    BCG Dimensions (contd)


    Third dimension - size of market with bubbles of different sizes ,larger bubbles mean larger markets. -Size of bubbles can represent either sales volume of entire market or sales contribution of that market to companys profits . in either case larger markets are more important than smaller markets
    bcg 18

    BCG Portfolio Matrix


    MARKET SHARE DOMINANCE MARKET GROWTH RATE HIGH HIGH LOW

    LOW

    $
    bcg 19

    BCG Portfolio Matrix


    MARKET SHARE DOMINANCE HIGH MARKET GROWTH RATE LOW High growth Low market share Need cash Poor profit margins

    HIGH

    High growth Market leaders Require cash

    LOW

    $
    Low growth High market share High cash flow
    bcg

    Low growth Low market share Minimal cash flow


    20

    Portfolio Matrix Example


    MARKET SHARE DOMINANCE HIGH MARKET GROWTH RATE HIGH Notebook Computer (STAR) LOW Palmtop (PROBLEM CHILD)

    LOW

    Personal Computer (CASH COW)

    Mainframe Computer (DOG)

    bcg

    21

    Positions of products-current&projected
    STARS Problem 3c children

    4c 5c
    Divest

    2c
    High Market growth

    3f 1c 2f 4f 6c

    7c

    Low

    8c

    Divest

    1f
    Cash Cows Dominant

    6f

    7f

    Dogs
    C - Current position F - Future position

    Subordinate

    Relative market share

    Share Growth Matrix -a Dynamic Analysis ...


     Matrix can be used for dynamic than static analysis - to show how positions will change in the years ahead . - vertical movements of positions means changes expected in market conditions - horizontal movements are results of changes in strategy of company

    By forecasting movements of markets and results of strategic choices for each of those markets company can assess its future position
    bcg 23

    Changes in Positions Within Share Growth Matrix Leads to ...


    category

    ? *** Cash cows Dogs

    Source of funds Low High High Low

    Need for funds High High Low Low

    Cash balance -ve In need 0 In balance + In excess 0 to -ve in balance

    bcg

    24

    Portfolio Models: Flow of Funds


    Lo w High Relative Share Market Growth Rate Hig h Star (Build)

    Cash Cow (Harvest)

    Low

    Dog (Divest)

    Problem Child (????)

    bcg

    25

    Portfolio Models: Evolution of businesses


    Lo w High Relative Share Market Growth Rate Hig h Star

    Cash Cow

    Low

    Dog (????)

    Success sequence Disaster sequence


    bcg 26

    BCG - Unfavorable Business Movements


    Stars Problem children

    Cash cows

    Dogs

    bcg

    27

    Strategies for Resource Allocation


    Provide financial resources if SBU (Problem Child) has potential to be a Star. Preserve market share if SBU is a successful Cash 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 in low-growth markets.
    bcg 28

    Build Hold Harvest Divest

    Strategies for Portfolios


    strategy Strategic thrust Market share stars Invest for growth Maintain or > dominance Fund growth Reduce work in progress, extend credit Cash cows Maintain mkt.position >cash earnings Maintain or milk for earnings Limit fixed investments Tighten credit, <a/c receivable > inv.turnover
    bcg

    Dogs Manage for cash Forego share for profit Minimise & divest Aggressively reduce
    29

    investment Working capital

    Strategies for Portfolios


    Strategy Product Stars
    differentiation line expansion

    Cash cows

    Dogs

    Price

    promotion distribution

    Lead, aggressive pricing for share Aggressive marketing Broaden distribution

    Prune less Aggressive successful , pruning differentiate in key segments Stabilise prices Raise / raise

    limit hold wide distribution

    minimise Slow withdrawal

    bcg

    30

    Strategies for Portfolios


    Strategy Stars Cash cows Dogs

    Production

    Research & Development

    Personnel

    Cost control

    Go for max capacity utilization (offer capacity to others) Invest for line Limit R&D for expansion process /modified improvements products and Cheaper RM Assign key Retain winning managers to team this group Reward for effeciency Tight control Absolute control and go for scale on VPC economies
    bcg

    Expand Invest , JVs Acquisition

    Free up capacity

    No R&D

    Relocate

    Tight control

    31

    Strategies for Portfolios


    strategy Strategic thrust Market share Investment Cash dogs Maintain selectively Maintain selective segments share Selective investment for dominance in segments Reduce Problem children Opportunistic development Invest selectively in share Fund growth

    Working capital

    invest

    bcg

    32

    Strategies for Portfolios


    Strategy Product Cash dogs Emphasise on product quality , differentiate Maintain or Raise Maintain selectively segment Problem children Differentiation , Line extension Aggressive , Price for share gains Aggressive marketing Selective coverage

    Price Promotion Distribution

    bcg

    33

    Functional Strategies for Portfolios


    Strategy Production Cash dogs Increase productivity e.g. specialisation / automation Selective investment on cost savings areas Allocate key managers Tight control
    bcg

    Problem children invest

    R&D

    Personnel Cost control

    Invest on differentiation areas Invest Tight but not at the expense of entrepreunership 34

    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 competition cost structures are alike? Effects of technology
    bcg 35

    Criticisms of BCG Matrix


    BCG strategic prescriptions - dogs are for harvesting or divesting -it may be wise to divest a star if future cash needs outstrip resources or it may not fit the main thrust of business or may be too small to worth keeping -destruction of bread winners -need for industry specific knowledge essential for rational decisions
    bcg 36

    Problems in Portfolio Paradise: Product life cycle


    Product life cycle is a self-fulfilling prophecy
    sales decline, cut support further decline, abandon mature products

    Weak Conceptual Foundations


    Experience and profit/share effects are fuzzy

    Stable or growing portfolio income requires a continuous stream of successful product introduction
    bcg 37

    Problems in Portfolio Paradise: Market Share and Profitability


    The 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 margins and superior profitability

    Niche markets are profitable although they appear to have a low market share (in the larger market)
    Share in the niche is often large
    bcg 38

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