portfolio planning models

8/4/2019 Portfolio Planning Models

1/15

PORTFOLIO PLANNING MODELS


2/15

3 ?Question marks

?2

1

Cash cow

6

Dogs

8

710x 4x 2x 1.5x 1x

Relative Market Share

.5x .4x .3x .2x .1x

Stars

5

4

Boston Consulting Groups Growth-Share Matrix

20%-18%-16%-14%-

12%-10%-8%-6%-4%-2%-

0

Mar

ketGrow

thRate


3/15

BCG and EXPERIENCE CURVE

Experience curve = Learning curve + economy of scale

Thus a function of time
http://upload.wikimedia.org/wikipedia/en/8/81/Experience_curve.gif


4/15

Reasons for the Experience effect

Labour efficiency

Standardization, specialization, and methods

improvements

Technology-Driven Learning

Better use of equipment

Changes in the resource mix Product redesign -

Value chain effects

Shared experience effects


5/15

COST / PRICE TRENDS IN UNSTABLE

MARKET

COST CURVE

PRICE CURVE

ACCUMULATED VOLUME

UNIT

COSTS/PRICES


6/15

WHY MARKET GROWTH?

UNIT

COSTS/PRICES

COST IN YEAR 2

COST IN YEAR 4

FIRM B IN LOW

GROWTH MARKET

FIRM A IN HIGH GROWTH MARKET

COST IN YEAR 1

ACCUMULATED VOLUME


7/15

WHY MARKET SHARE?

UNIT

COSTS/PRICES

FIRM B s

UNIT COSTS

ACCUMULATED VOLUME

CURRENT MARKET PRICE

FIRM As UNIT COSTS

FIRM Bs PROFIT


8/15

LOGIC OF THE BCG

High market Growth

Market Share Gains

Accumulated Experience

Lower Costs than Competitors

Higher profits


9/15

BCG SOURCE AND USE OF FUND

STAR ?

MARK

CASH GENERATED = + + + + CASH GENERATED = +

CASH USED = -- -- -- -- CASH USED = -- -- -- --

NET = 0 NET = -- -- --

CASH DOG

COW

CASH GENERATED = + + + + CASH GENERATED = +

CASH USED = - CASH USED = -

NET = + + + NET = 0

USE

OF

FUND

SOURCE OF FUND


10/15

BCG STRATEGIES

CASH COW

MAINTAINPOSTION

LIMITEDINVESTMENT

INVENTORY T.O

MAINTAIN

PRUNE PRODUCTDIFFERENTIATION

STABILISEPRICING

HOLD

LIMIT

DOG

CASHMANAGEMENT

DIVEST

REDUCE FAST

REDUCE

PRUNE

RAISE

WTHDRAW

MAINTAIN

STAR

INVEST FORGROWTH

HIGH LEVEL

>CREDIT>INVENTORY

INC/MAINTAIN

DIFFERENTIATIONLIMIT EXTENSION

AGGRESSIVEPRICING

BROADER

AGGRESSIVE

QUESTION MARK

OPPORTUNISTICDEVELOPMENT

SELECTIVELYINVEST

INVEST

INCREASE

DIFFERENTIATIONLINE EXTENSION

AGGRESSIVEPRICING

SELECTIVE

AGGRESSIVE

STRATEGICTHRUST

INVESTMENT

WORKINGCAPITAL

MS%

PRODUCT

PRICE

PLACE

PROMOTION


11/15

QUIZ- BCGSBU

MKTs

GR%

SBU

SALE as %

to

COMPANY

SALE

SBUs

MS%

COMP1

MS%

COMP2

MS%

COMP3

MS%

SBU1 18% 10% 10% 50% 20% 20%

SBU2 13% 12% 20% 15% 40% 25%

SBU3 16% 18% 36% 10% 9% 45%

SBU4 19% 20% 60% 30% 2% 8%

SBU5 11% 10% 40% 15% 25% 20%

SBU6 4% 20% 60% 15% 10% 15%

SBU7 4% 5% 40% 5% 5% 50%

SBU8 1% 5% 8% 40% 22% 30%

IS COMPANY HEALTHY? RECOMMEND STRATEGIES FOR EACH SBU


12/15

Portfolio Planning Model - GE

matrix

MARK

ETATTRACTIV

ENESS 5.00

3.67

2.33

1.00

Low

Medium

High

Reliefvalve

Flexiblediaphragms

Fuelpumps

Aerospacefittings

Clutches

Hydraulicpumps

Joints

Strong Medium Weak

BUSINESS STRENGTH

1.002.333.675.00

Invest/grow Selectivity/earnings Harvest/divest


13/15

Market Attractiveness Factors

- Market size

- Market growth rate

- Market profitability

- Pricing trends

- Competitive intensity / rivalry

- Overall risk of returns in the industry

- Entry barriers

- Opportunity to differentiate products

- Demand variability

- Segmentation

- Distribution structure

- Technology development

Competitive Strength Factors

- Strength of assets and competencies

- Relative brand strength (marketing)

- Market share

- Market share growth

- Customer loyalty

- Relative cost position (cost structure compared

with competitors)

- Relative profit margins (compared to competitors)

- Distribution strength and production capacity

- Record of technological or other innovation

- Quality

- Access to financial and other investment resources

Portfolio Planning Model - GE matrix


14/15

Approach to implementation of portfolio analysis1. Specify drivers of each dimension.

The corporation must carefully determine those factors that are

important to its overall strategy

2. Weight drivers. The corporation must assign relative

importance weights to the drivers

3. Score SBU's each driver

4. Multiply weights times scores for each SBU

5. View resulting graph and interpret it



15/15

Often, Strategic Business Units are portrayed as a circle plotted

in the GE Matrix such that,

-The size of the circles represent the Market Size

- The size of the pies represent the Market Share of the SBU's

-

Arrows represent the direction and the movement of the SBU's

in the future


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