product portfolio models
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DESCRIPTIONProduct Portfolio Models. Group 8 Zaid Azmi01 Pratik Malde20 Nisha Pancholi31 Sneha Sahani39 Dhaval Shah41. Why product portfolio management?. Allocate Resources amongst various businesses/products Maximizing product portfolio value Project Prioritization - PowerPoint PPT Presentation
Product Portfolio Models
Product Portfolio ModelsGroup 8Zaid Azmi01Pratik Malde20Nisha Pancholi31Sneha Sahani39Dhaval Shah41
Why product portfolio management?Allocate Resources amongst various businesses/productsMaximizing product portfolio valueProject PrioritizationAligning product portfolio to overall business strategyClassification of Product Portfolio ModelsStandardized Models
Standardized Models assume that the value of market position or market share depends on:Structure of CompetitionStage in PLCArthur D Little's method is based on PLCUses dimensions of Environmental Assessment and Business Strength AssessmentEnvironmental measure is the Industrys life cycle.A.D.Littles Business Profile Matrix5ADL Matrix
Calculating Competitive Position Illustration
Competitive position:Dominant: Rare. Results from near monopoly, protected leadership.Strong: Not too many rivalsFavorable: Fragmented, No clear leader.Tenable: Business has a niche Weak: Business too small to be profitable or survive over long term.Limitations:Difficult to identify the current phase of industry life cycle.There is no standard life cycle
ADL Matrix8Similar to GE MatrixX- Axis is Sector ProspectsY-Axis is Companys Competitive Capability
Shells Directional Policy Matrix
9Sample CalculationCompetitive Advantage
Sample CalculationSector Prospects
Placing the SBU on the matrix
Leader - major resources to be focused upon the SBU.Try harder - could be vulnerable over a longer period of time, but fine for now.Double or quit - gamble on potential major SBU's for the future.Growth - grow the market by focusing just enough resources here.Custodial Maximize Cash Flow, do not commit any more resources. Almost like Cash CowCash Generator Exactly like a cash cow, milk here for expansion elsewhere.Phased withdrawal - move cash to SBU's with greater potential.Divest - liquidate or move these assets on as fast as you can.
The 9 Cells Explained13LimitationsNo fixed factorsSubjective
Customized ModelsProduct Performance MatrixConjoint AnalysisAnalytic Hierarchy Process
Product Performance MatrixAllows management flexibility to choose customized dimensionsE.g. in the below matrix, 4 dimensions Industry Sales, Product Sales, Market Share & Profitability are chosenCompany Sales->DeclineStableGrowthProfitability ->Below TargetOn TargetAbove TargetBelow TargetOn TargetAbove TargetBelow TargetOn TargetAbove TargetIndustry SalesMarket ShareGrowthLeadingAverageMarginalStableLeadingAverageMarginalDeclineLeadingAverageMarginalConjoint AnalysisOverall utility for a product can be decomposed into the utilities of the individual attributes of the product.Rankings or ratings of the product profiles in terms of preference, purchase probability, etc.Pairwise comparisons of product profiles in terms of preference, purchase probability, etc.Choice of a product from a set of product profiles
Example: Laptop ProfilesBrandHard DriveRAMScreenPriceABDell320 GB2 GB15.4 in$1,20096Apple320 GB4 GB15.4 in$1,200612Dell160 GB4 GB15.4 in$900125Apple320 GB2 GB15.4 in$9001111Dell320 GB4 GB12.1 in$1,50043Apple320 GB2 GB12.1 in$1,50019Apple160 GB4 GB15.4 in$1,500310Apple160 GB2 GB12.1 in$90087Apple160 GB4 GB12.1 in$1,20058Dell160 GB2 GB12.1 in$1,20071Dell320 GB4 GB12.1 in$900104Dell160 GB2 GB15.4 in$1,50022Consumer AConsumer BAttribute levelMean for level across all profilesMean as deviation from zeroRange on attributePercentage importanceMean for level across all profilesMean as deviation from zeroRange on attributePercentage importanceApple5.67-.831.6614%9.50+3.006.0050%Dell7.33+.833.50-3.00160HD6.17-.33.676%5.50-1.002.0017%320HD6.83+.337.50+1.002RAM6.33-.17.333%6.00-.501.008%4RAM6.67+.177.00+.5012.1in5.83-.671.3311%5.33-1.172.3319%15.4in7.17+.677.67+1.17$90010.25+3.757.7566%6.75+.25.756%$12006.75+.256.75+.25$15002.5-4.006.00-.50Uses of conjoint analysisMarket segmentationNew product design Trade-off analysis (esp. in pricing decisions) Financial ModelsRisk Return Model
Expected ReturnThe expected rate of return on a SBU represents the mean of a probability distribution of possible future returns on the SBU.Given a probability distribution of returns, the expected return can be calculated using the following equation: N E[R] = S (piRi) i=1Where:E[R] = the expected return on the stock N = the number of statespi = the probability of state iRi = the return on the SBU in state i.
22Expected ReturnThe table below provides a probability distribution for the returns on SBU A and SBU BScenario Probability Return On Return On SBU A SBU B 1 20% 5% 50% 2 30% 10% 30% 3 30% 15% 10% 4 20% 20% -10%
The probability reflects how likely it is that the state will occur. This is management assumption.The last two columns present the returns or outcomes for SBU A and SBU B that will occur in each of the four states. Again this is management assumption.23In this example, the expected return for SBU A & B would be calculated as follows:
E[R]A = .2(5%) + .3(10%) + .3(15%) + .2(20%) = 12.5%E[R]B = .2(50%) + .3(30%) + .3(10%) + .2(-10%) = 20%
SBU B offers a higher expected return than SBU A.However, we haven't considered risk.
24Expected ReturnMeasures of RiskRisk reflects the chance that the actual return on an investment may be different than the expected return.Way to measure risk is to calculate the variance and standard deviation of the distribution of returns.
Variance is calculated as NVar(R) = s2 = S pi(Ri E[R])2 i=1
Where:N = the number of states pi = the probability of state i Ri = the return on the stock in state iE[R] = the expected return on the stock
SD is root of Variance
25The variance and standard deviation for SBU A is
s2A = .2(.05 -.125)2 + .3(.1 -.125)2 + .3(.15 -.125)2 + .2(.2 -.125)2 = .002625
sA = (.002625)0.5 = .0512 = 5.12%
Similarly for SBU B
s2B = 0.042 and sB = 20.49%
Although SBU B offers a higher expected return than SBU A, it also is riskier since its variance and standard deviation are greater than SBU A's.
26Measures of RiskPortfolio Risk and ReturnMost companies do not hold SBUs in isolation.Instead, they choose to hold a portfolio of several SBUs.A portion of an individual SBUs risk can be eliminated, i.e., diversified away.From our previous calculations:the expected return on SBU A is 12.5%the expected return on SBU B is 20%the variance on SBU A is .00263the variance on SBU B is .04200the standard deviation on SBU A is 5.12%the standard deviation on SBU B is 20.49%
27The Expected Return on a Portfolio is computed as the weighted average of the expected returns on the SBUs which comprise the portfolio.The weights reflect the proportion of the portfolio invested in the SBU.This can be expressed as follows: NE[Rp] = S wiE[Ri] i=1Where:E[Rp] = the expected return on the portfolioN = the number of SBUs in the portfoliowi = the proportion of the portfolio invested in SBU i E[Ri] = the expected return on SBU i28Portfolio Risk and ReturnIf we have an equally weighted portfolio of SBUA and SBU B then the expected return of the portfolio is: E[Rp] = .50(.125) + .50(.20) = 16.25%
The risk on the entire portfolio can also be calculated using Variance and Standard Deviation for the entire portfolioThe purpose of diversification is that by forming portfolios, some of the risk inherent in the individual SBUs can be minimized.
29Portfolio Risk and ReturnTHANK YOU