Presentation on theme: "PORTFOLIO MANAGEMENT TOOLS Alokesh Banerjee. The aim of a portfolio analysis 1) Analyze its current business portfolio and decide which SBU's should receive."— Presentation transcript:
PORTFOLIO MANAGEMENT TOOLS Alokesh Banerjee
The aim of a portfolio analysis 1) Analyze its current business portfolio and decide which SBU's should receive more or less investment, and 2) Develop growth strategies for adding new products and businesses to the portfolio 3) Decide which businesses or products should no longer be retained. The BCG Matrix (Boston Consulting Group Matrix) is the best-known portfolio planning framework. The GE / McKinsey Matrix is a later and more advanced form of the BCG Matrix.BCG Matrix
GE VS BCG The GE / McKinsey Matrix is more sophisticated than the BCG Matrix in three aspects: 1. Market (Industry) attractiveness replaces market growth as the dimension of industry attractiveness. Market Attractiveness includes a broader range of factors other than just the market growth rate that can determine the attractiveness of an industry / market. 2. Competitive strength replaces market share as the dimension by which the competitive position of each SBU is assessed. Competitive strength likewise includes a broader range of factors other than just the market share that can determine the competitive strength of a Strategic Business Unit. 3. Finally the GE / McKinsey Matrix works with a 3*3 grid, while the BCG Matrix has only 2*2. This also allows for more sophistication.
GE(General Electric)/McKinsey Multi- Factor Matrix Originally developed by GE’s planners drawing on McKinsey’s approaches Market attractiveness is based on as many relevant factors as are appropriate in a given context Business-position assessment also made on a many factors – SBU needs to be rated on each factor – Attempt to explain why different SBU had different profitability
* InternalFactors Market Share Sales Force Marketing Customer service R&D Manufacturing Distribution Financial resource Image Breadth of product line Quality/Reliabilit y Managerial Competence ** External Factors Market size Market growth rate CyclicalityCompetitiv e structure Barriers to entry Industry profitability Technolog y Inflation Regulation Manpower availability Social issuesEnvironmental issues Political issuesLegal issues ** *
High Attractiveness Strong Competitive Position The strategy advice for this cell is to invest for growth. Consider the following strategies: provide maximum investment diversify consolidate your position to focus your resources accept moderate near-term profits to build share High Attractiveness Average Competitive Position The strategy advice for this cell is to invest for growth. Consider the following strategies: build selectively on strength define the implications of challenging for market leadership fill weaknesses to avoid vulnerability High Attractiveness Weak Competitive Position The strategy advice for this cell is to opportunistically invest for earnings. However, if you can't strengthen your enterprise you should exit the market. Consider the following strategies: ride with the market growth seek niches or specialization seek an opportunity to increase strength through acquisition Medium Attractiveness Strong Competitive Position The strategy advice for this cell is to selectively invest for growth. Consider the following strategies: invest heavily in selected segments, establish a ceiling for the market share you wish to achieve seek attractive new segments to apply strengths Medium Attractiveness Average Competitive Position The strategy advice for this cell is to selectively invest for earnings. Consider the following strategies: segment the market to find a more attractive position make contingency plans to protect your vulnerable position Medium Attractiveness Weak Competitive Position The strategy advice for this cell is to preserve for harvest. Consider the following strategies: act to preserve or boost cash flow as you exit the business seek an opportunistic sale seek a way to increase your strengths Low Attractiveness Strong Competitive Position The strategy advice for this cell is to selectively invest for earnings. Consider the following strategies: defend strengths shift resources to attractive segments examine ways to revitalize the industry time your exit by monitoring for harvest or divestment timing Low Attractiveness Average Competitive Position The strategy advice for this cell is to restructure, harvest or divest. Consider the following strategies: make only essential commitments prepare to divest shift resources to a more attractive segment Low Attractiveness Weak Competitive Position The advice for this cell is to harvest or divest. You should exit the market or prune the product line.
Strategic implications from the Industry Attractiveness – Business Strength Matrix -Grow -Seek dominance -Maximise investment -Indentify growth segments -Invest strongly -Maintain position elsewhere -Maintain overall position -Seek cash flow -Invest at maintanence level -Evaluate potentila for leadership via segmentation -Identify weaknesses -Build strengths -Identify growth segments -Specialise -Invest secratively -Prune lines -Minimise investment -Position to divest -Specialise -Seek niches - Consider acquisition -Specialise - seek niches -Consider exit -Trust leader’s statemenship - Sic on competitors cash generation - time exit and divest Industry Attractiveness Business Strengths High MediumLow Medium High
GE Multifactor Portfolio Matrix Industry Attractiveness Business Strengths High Medium Low Invest/Grow Selectivity /earnings Harvest /Divest Protect Position Invest to Build Build selectively Selectively manage for earnings Limited expansion or harvest Protect & refocus Divest Manage for earnings
The nine cells in the matrix can be grouped into three major segments: Segment 1: This is the best segment. The business is strong and the market is attractive. The company should allocate resources in this business and focus on growing the business and increase market share. Segment 2: The business is either strong but the market is not attractive or the market is strong and the business is not strong enough to pursue potential opportunities. Decision makers should make judgment on how to further deal with these SBUs. Some of them may consume to much resources and are not promising while others may need additional resources and better strategy for growth. Segment 3: This is the worst segment. Businesses in this segment are weak and their market is not attractive. Decision makers should consider either repositioning these SBUs into a different market segment, develop better cost-effective offering, or get rid of these SBUs and invest the resources into more promising and attractive SBUs.
Strategy Implications of Attractiveness/Strength Matrix Businesses in upper left corner – Accorded top investment priority – Strategic prescription is grow and build Businesses in three diagonal cells – Given medium investment priority – Invest to maintain position Businesses in lower right corner – Candidates for harvesting or divestiture – May be candidates for an overhaul and reposition strategy
The Attractiveness/Strength Matrix Allows for intermediate rankings between high and low and between strong and weak Incorporates a wide variety of strategically relevant variables Stresses allocating corporate resources to businesses with greatest potential for – Competitive advantage and – Superior performance
Decide Resource Allocation Priorities and Strategic Direction Objective: – “Get the biggest bang for the buck” in allocating corporate resources Procedure: – Rank each business from highest to lowest priority for corporate resource support and new investment (steer resources to high opportunity areas and limit support to low opportunity areas) – Develop a general strategic direction for each business
The GE matrix has 5 steps: One - Identify your products, brands, experiences, solutions, or SBU's. Two - Answer the question, What makes this market so attractive? Three - Decide on the factors that position the business on the GE matrix. Four - Determine the best ways to measure attractiveness and business position. Five - Finally rank each SBU as either low, medium or high for business strength, and low, medium and high in relation to market attractiveness.
Some Limitations of the GE Model Subjective measurements across SBUs Process also highly subjective – From the selection and weighting of factors to the subsequent development of both a firm’s position and the market attractiveness Businesses may have been evaluated with respect to different criteria Sensitive to how a product market is defined There is no research to prove that there is a relationship between market attractiveness and business position. The interrelationships between SBU's, products, brands, experiences or solutions is not taken into account. This approach does require extensive data gathering. Scoring is personal and subjective. There is no hard and fast rule on how to weight elements. The GE matrix offers a broad strategy and does not indicate how best to implement it.
The Life Cycle Portfolio Matrix OR Arthur D. Little Matrix MATURITY COMPETITIVE POSITION Dominant Strong Favourable Tenable Weak Nonviable EmbryonicGrowth Mature Aging Wide range of strategic options Caution, selective develop ment Danger, withdraw to market niche,divert or liquidate
Strategic positioning in terms of market share suggested by Life – cycle Portfolio Matrix All out push for share Hold position Hold share Hold position Grow with industry Hold position Attempt to Improve position All out push for share Attempt to improve position Push for share Hold position Grow with industry Hold position Or Harvest Selective or all out Push for share Selectively attempt to Improve position Attempt to improve position Selective push for share Custodial or maintenance Find niche and attempt to protect Harvest Or Phased withdrawal Selectively push for position Find niche and protect it Find niche and hang on Or Phase withdrawal Phased withdrawal Or Abandon Up Or Out Turnaround Or Abandon Turnaround Or Phased withdrawal Abandon Favorable Dominant Strong Tenable Weak Embryonic GrowthMatureAging
Strategic positioning in term sof investment requirements suggested by the Life Cycle Portfolio Matrix Invest Slightly Faster Than Market DictatesInvest to Sustain Growth Rate (andPreempt New (?)Competitors) Reinvest as Necessary Invest as Fast as Market Dictates Invest to Increases Growth Rate (andImprove Position) Reinvest as NecessaryMinimum Reinvestment or Maintenance Invest SelectivelySelective Investment to Improve Position Minimum and/orSelective Reinvestment Minimum Maintenance Investment or Disinvest Invest (VerySelectively)Selective InvestmentMinimum Reinvestment or Disinvest Disinvest or Divest Invest or Divest Invest Selectively or DisinvestDivest The terms invest and divest are used in the broadest sense and are not restricted to property, plant & equipment. Dominant Strong Favorable Tenable Weak
Strategic positioning in terms of Profitability and Cash flow suggested by Life – cycle Portfolio Matrix Probably Profitable, But Not Necessary Net Cash Borrowe Profitable Probably Net Cash Producer (But NotNecessary) Profitable Net Cash Producer May Be Unprofitable Net Cash Borrower Probably Profitable Probably Net Cash Borrower Profitable Net Cash Producer Probably Unprofitable Net Cash Borrower Marginally Profitable Net Cash Borrower Moderately Profitable Net Cash Producer Moderately Profitable Cash Flow Balance Unprofitable Net Cash Borrower Unprofitable Net Cash Borrower or Cash Flow Balance Minimally Profitable Cash Flow Balance Unprofitable Net Cash Borrower Unprofitable Net Cash Borrower or Cash Flow Balance Unprofitable Possibly Net Cash Borrower or Net Cash Producer Unprofitable (Writeoff) Dominant Strong Favorable Tenable Weak EmbryonicGrowthMature Aging
Criteria for classification of competitive position Dominant – dominant competitors are very rare. Dominance often results from a quasi – monopoly or from a strongly protected technological leadership. Strong – not all industries have a dominant or strong competitors. Strong competitors can usually follow strategies of their choice, irrespective of their competitor’s move Favourable – when industries are fragmented, with no competitors clearly standing out, the leader tend to be in a favourable position Tenable – a tenable position can usually be maintained profitable through specialisation in a narrow or protected market niche. This can be a geographical specialisation or a project specialisation Weak – weak competitors can be intrinsically too small to survive independently and profitably in the long term, given the competitive economies of their industries, or they can be larger and potentially strong competitors, but suffering from costly past mistakes or from a critical mistake
EXAMPLE: Portfolio planning models such as those developed by General Electric or the Boston Consulting Group are widely used and commonly known. Nevertheless, proving that popularity in itself is not necessarily a guarantee of suitability, Ciba-Geigy decided to develop a customized model to fit its intention “to improve the process of resource allocation and performance assessment.” The main idea was to differentiate the various strategic business units – to give them different objectives, different types of managers, and to allow them to adopt the organization structure that was appropriate to them. The model that Ciba-Geigy developed categorizes strategic business units into five types: 1. Development – new products at the beginning of the product life cycle. 2. Growth – products that have the potential to become profitable. 3. Pillar – profitable products targeted to wide-breadth markets. 4. Niche – similar to pillar products, but differing in the size of the market. 5. Core – traditional products that compete in mature markets and should therefore be managed as such. (Source: "Portfolio Planning at Ciba-Giegy and the Newport Investment Proposal", 1995, Harvard Business School Case Services Order Number Rev. 6/95.)
Shell’s directional policy matrix Figure 20.5
Shell’s Directional Policy Matrix Developed by Shell international Chemical Company to identify the areas in which they should operate The vertical axis measures the company’s present competitive position The horizontal axis gives the prospect for profitable operation in that sector The criteria used are market growth rate, market quality, feed stock and environmental aspects
Shell considered that creating a single strategy plan did not work in the changing environment. It tried to develop many scenarios based on a number of assumptions about the future environment, these could be optimistic, pessimistic and straightline Depending upon events different scenario was used
Positions in Shell’s Matrix Each of the zones is described as follows: Leader - major resources are 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 - just like a cash cow, milk it and do not commit any more resources. Cash Generator - Even more 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 a fast as you can.
Business Sector Prospects. (Horizontal x-Axis) Profitability prospects (or attractiveness) for businesses in the petroleum sector are judged on four criteria 1. Market Growth Rate – market growth is necessary for the growth of sector profits but sectors with the highest growth rate are not necessarily those with the largest profit growth. Shell advocated a rating system for this factor where the midpoint was the average growth rate for the industry. A star rating system was used rating the growth rate from a one star to a five star. 2. Market Quality – this is a difficult concept to quantify and to get to a rating for the sector. A number of questions must be answered – (Shell questions) Has the sector a record of high, stable profitability? Can margins be maintained when manufacturing capacity exceeds demand? Is the product resistant to commodity pricing behaviour? Is the technology of production freely available or is it restricted to those who developed it? Do relatively few producers supply the market? Is the market free from domination by a small group of powerful customers? Has the product high added value when converted by the customer? In the case of a new product, is the market destined to remain small enough not to attract too many producers?
Is the product one where the customer has to change his formulation or even his machinery if he changes supplier? Is the product free from the risk of substitution by an alternative synthetic or natural product? A business sector rating yes on all or most of these questions would score a four or five star rating. 3. Industry Feedstock Situation Expansion of productive capacity is often hindered by the uncertainty of feedstock supply. If the feed stocks in the sector have a strong pull towards an alternative use or are difficult to assemble in large quantities then this is a plus for sector prospects and the rating is better than average. If the feedstock is a by-product of another process and the main product consumption is growing at a faster rate than that of the by-product, pressure might result due to low prices or direct investment by the by-product producer to increase its consumption. This would be given a lower than average rating. 4. Environmental (Regulatory) Aspects Business sector prospects can be affected by restrictions on manufacture, transportation and marketing of a product. If this has not been built into the forecast of market growth, it must be assessed separately. Strong positive or negative environmental pr regulatory influences must be taken into account.
Competitive Capabilities (Vertical y- Axis) A petroleum company can be judged as strong, average or weak on three major criteria. Shell recommended reviewing these criteria in relation to significant competitors in the relevant business sector. (this axis is similar to the Business Strength axis on the GE-McKinsey matrix) Market Position The percentage share of the total market as well as the degree to which this share is secure is of primary importance. Shell looked at this factor in terms of a relative market leadership position rather than market share and rated this factor on a 5 star rating scale as follows: Leader – 5 stars – this type of company has market leadership and technical leadership usually accompanies this. Major Producer – 4 stars – this occurs where no single company is leader but there are two to four competitors are closely placed. Viable Producer -3 stars – this type of company has a strong viable stake but falls below the top league Minor- 2 stars - businesses in this category are less than able to support research and development in the long term Negligible- 1 star – companies with a negligible position in the market fall into this category
Major Advantage The general technique of this model can be applied to any business with separate identifiable sectors even though it was developed for the petro-chemical industry This model works well in the petroleum industry but adaptations should be made when using it outside the industry.
Model weaknesses The Shell DPM has been used in different industries and some practical problems have been raised. 1. There is a need to change the questions for companies not in the petroleum industry and the questions regarding the factors should be customised for the company doing the analysis. 2. Shell advocated equal weightings for the criteria on each of the axes. This worked for Shell but other companies may feel that certain factors are more important than others and therefore the weights should be adjusted accordingly 3. The environment was the fourth factor on the business sector prospects axis yet Shell often left this factor out altogether. Environment can be a very important factor as it deals with the wider question of risk 4. When using the Shell DPM methodology, it was found that the star rating system added very little value and a point’s allocation rating was superior.
Shell’s Vs BCG / GE BCG has problem with market share as it may not inclue viable and minor producers, as will as leaders and majors. Shell’s is based on the concept of market leadership instead of market share. In this one can select criteria for different industry sector’s and situations Mckinsey’s portfolio planning at GE was paralleled in Europe by Shell which pioneered the concept of scenario planning
Product/market Evolution Portfolio Matrix
The product/market evolution matrix was formulated to allow the analyst to focus corporate- and business-level strategy decisions on the stage of product/market evolution and its relationship with market position Products are plotted in terms of their product/market evolution and the competitive position Circles vary in size according to their respective industry size that represent business units Each circle contains a pie wedge that corresponds in size to its Market Share
PROCEDURE TO DEVELOP THE BUSINESS PORTFOLIO MATRIX Classify various activities of the company into different business segments or strategic business units (SBUs). For each business segment determine the growth rate of the market. This is later plotted on a linear scale Compile the assets employed for each business segment and determine the relative size of the business within the company
Estimate the relative market shares for the different business segments. This is generally plotted on a logarithmic scale Plot the position of each business on a matrix of business growth rate and relative Market Share. A bubble represents the size of the business; a circle with a diameter corresponding to say the assets employed in that business. For precise plotting, it has been recommended that the radius of a bubble corresponding to a business/product may be defined thus: r = square root of (P * R 2 ) Where, R = radius of the large circle (total company sales) P = sales of a product as percentage (expressed in decimal) of the total sales
IDENTIFICATION OF STRATEGIES FOR DIFFERENT PRODUCTS A product in the Development or Growth stage has a potential to be a Star. If the market share is: (1 ) large in these growth-oriented stages, more resources must be invested to develop competitive position. (2)If market share is low, a strategy to improve the same must be developed. (3)If the industry is relatively small and market share is low despite high growth stage, Management must consider divesting and redeploying resources in other more competitive business A business in the Shakeout or Maturity stage has a potential to be Cash Cow. Investments could be made to maintain high market share
. A business in Decline stage with a low market share would be a Dog business. Though in the short run it may generate cash, in the long run, however, it should be considered for divestment or liquidation