portfolio analysis

Multi-Business Strategy

Multi-regional strategy

Lecture Outline

• What is Portfolio Management

• What is Portfolio Analysis

• Boston Box

• McKinsey/GE Matrix

• AD Little Life-Cycle Matrix

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

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?

Examples of Portfolios

• Unilever: ice cream, tea, spreads,

• Proctor & Gamble: Detergents, nappies,

• Gillette: batteries, Shaving products

• Virgin; trains, planes, cola, music stores

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

Build Strategy

To grow the business. Relatively low relative market share / high market growth rate ‘Question Mark’ opportunities need investment in order to grow.

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

Divest Strategy

To change the capital of the business and allow resources to be used elsewhere

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

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?

GE Business Screen

Long-term industry attractiveness

Business strength/competitive position

General Electric’s Business Screen

AWinners Winners

B

C

Question Marks

D

F

Average Businesses

EWinners

Losers

GLosers H

LosersProfit

Producers

Strong Average Weak

Low

Medium

High

Business Strength/Competitive Position

Indu

stry

Att

ract

ive

ness

Source: Adapted from Strategic Management in GE, Corporate Planning and Development, General Electric Corporation. Used by permission of General Electric Company.

GE Matrix- uses

• More sophisticated than BCG – uses more variables

• Condenses much information into 2 variables?

Limitations

• Complex and Weighty

• The numerical estimates can be “objective”

• What about new products or business units in growth industries.

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

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)

International Portfolio Analysis

2 Factors:

• Country’s attractiveness• Market size, rate of growth, regulation

• Competitive strength• Market share, product fit, contribution

margin, market support

Portfolio Matrix for Plotting Products by Country

Harvest/Divest Combine/License

Invest/Grow Dominate/Divest Joint Venture

Lo

wH

igh

High Low

Competitive Strengths

Co

un

try

Att

ract

iven

ess

Selective Strategies

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

Portfolio Analysis

Disadvantages:– Difficult to define product/market

segments– Standard strategies can miss

opportunities– Illusion of scientific rigor– Value-laden terms