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Portfolio Models

:GEORGE MAMIRE
(R0436023)
: NORWAY MUBAU
(R159936W)
: JOHN CHARUKA (R159935C)
: EBRAHIM MAKUNGANYA
(R159932A)
: CLOUDIUS MAFUTA
(R0538981)
Portfolio Analysis

Objective: to introduce one of a key element of


self-analysis method which assess the
strength of a business in the market
Simply, the purpose of conducting Portfolio
Analysis is;
To understand what businesses the company
operate in - the collection of businesses and
products that make up the company.
And how these businesses relate to each other
in: (a) their ability to supply financial
resources to the organization, or (b) their need
for financial resources from the organization -
What is an SBU?

The first step in the portfolio analysis is to


identify the key businesses making up the
company. The companys key businesses (a
company division, a product line, or a single
product or brand) are called strategic business
units (SBU).
It may be less difficult to define SBUs in multi
business organizations (such as General
Electric, Christian Dior, etc) which are
diversified into many different businesses.
Portfolio Models
Portfolio Models: History
McKinsey sells GE on the idea of Strategic
Business Units (SBUs)
BCG attacks McKinsey with the Growth-
Share Matrix and the Portfolio model
McKinsey responds with its own Portfolio
model, the Business Attractiveness Matrix
Portfolio Models

Boston Consulting Group Matrix


(BCG Matrix)

General Electric Grid


GE Grid
Strategic Business Units (SBUs)

Most firms consist of multiple units producing


numerous products.
The mission, objectives, strategies, and tactics
will be different for each unit.
For efficiency, a multiproduct organization
should be divided according to its major
markets or products
These divisions are called Strategic Business
Units (SBUs)
Characteristics of a Strategic
Business Unit (SBU)

It is a single business or collection of related


businesses that can be planned for separately
from the rest of the company.
It has its own set of competitors.
It has a manager who is responsible for
strategic planning and profit performance and
who controls most of the factors affecting
profits.
Assigning Resources to Each SBU

Analytical tools are needed for classifying


businesses by profit potential, for decisions on
whether TO:
Build: increase market share.
Maintain/hold: preserve market share.
Harvest: increase short-term cash flow.
Divest: sell or liquidate
Two well-known business portfolio evaluation
models are the Boston Consulting Group (BCG)
growth/share matrix and the General Electric
multi-factor portfolio matrix
Boston Consulting Group Matrix

To understand the Boston Matrix you need to


understand how market share and market
growth interrelate.
Market share is the percentage of the total
market that is being serviced by your
company, measured either in revenue terms
or unit volume terms.
RELATIVE MARKET SHARE
RMS = Business unit sales this year
Leading rival sales this year
The higher your market share, the higher
proportion of the market you control
Boston Consulting Group Matrix

Market growth is used as a measure of a


markets attractiveness.
MGR = Individual sales - individual sales
this year last year
Individual sales last year
Markets experiencing high growth are ones
where the total market share available is
expanding, and theres plenty of opportunity
for everyone to make money.
THE BCG GROWTH-SHARE MATRIX

It is a portfolio planning model which is


based on the observation that a companys
business units can be classified in to four
categories:
Stars
Question marks
Cash cows
Dogs
It is based on the combination of market
growth and market share relative to the next
best competitor.
THE BCG GROWTH-SHARE MATRIX
STARS: High growth, High market
share

Stars are leaders in business.


They also require heavy investment, to
maintain its large market share.
It leads to large amount of cash consumption
and cash generation.
Attempts should be made to hold the market
share otherwise the star will become a CASH
COW.
CASH COWS: Low growth , High
market share

They are foundation of the company and often


the stars of yesterday.
They generate more cash than required.
They extract the profits by investing as little
cash as possible
They are located in an industry that is mature,
not growing or declining.
DOGS: Low growth, Low market share

Dogs are the cash traps.


Dogs do not have potential to bring in much
cash.
Number of dogs in the company should be
minimized.
Business is situated at a declining stage.
QUESTION MARKS: High growth , Low
market share

Most businesses start of as question marks.


They will absorb great amounts of cash if the
market share remains unchanged, (low).
Why question marks?
Question marks have potential to become star
and eventually cash cow but can also become
a dog.
Investments should be high for question
marks.
WHY BCG MATRIX ?

To assess :
Profiles of products/businesses
The cash demands of products
The development cycles of products
Resource allocation and divestment
decisions
.
MAIN STEPS OF BCG MATRIX

Identifying and dividing a company into SBU.


Assessing and comparing the prospects of
each SBU according to two criteria :
1. SBUS relative market share.
2. Growth rate OF SBUS industry.
Classifying the SBUS on the basis of BCG
matrix.
Developing strategic objectives for each SBU.
BENEFITS

BCG MATRIX is simple and easy to understand.


It helps you to quickly and simply screen the
opportunities open to you, and helps you think
about how you can make the most of them.
It is used to identify how corporate cash
resources can best be used to maximize a
companys future growth and profitability.
LIMITATIONS
BCG MATRIX uses only two dimensions, Relative market
share and market growth rate.
Problems of getting data on market share and market
growth.
High market share does not mean profits all the time.
Business with low market share can be profitable too
It is very simple; focuses only on two dimensions - growth and
market share. Although they are important, much more is
needed. E.g. a restaurant could have a low market share with
minimal industry growth but be producing an excellent profit.
It assumes that growth markets are attractive markets,
therefore strategies are developed accordingly.
The analysis is highly sensitive to the definition of the product
market. E.g. laptop computers or all personal computers?
BCG MATRIX Practical
example

scorpio

Jeep
balero
Conclusion of BCG
Though BCG MATRIX has its limitations it is one
of the most FAMOUS AND SIMPLE portfolio
planning matrix ,used by large companies
having multi-products.
The General Electric Model
(GE):
To eliminate some of the limitations of the BCG
growth/share matrix, a more complete matrix
analysis was developed by the General Electric
planners and mostly used McKinsey & Co - a
management consulting firm.
The General Electric Model
(GE):

The primary improvement of BS/IA matrix is


that it allows for the analysis of multiple
variables (rather than only market share and
growth) depending on the context.
And, rather than focusing on cash flow , it
concerns potential future return on investment
The General Electric Model(GE):
The General Electric Model
(GE):
The General Electric Model
(GE):
Industry Attractiveness
Factors
Market size and projected growth
Intensity of competition
Emerging opportunities and threats
Seasonal and cyclical factors
Resource requirements
Strategic fits and resource fits with present
businesses
Industry profitability
Social, political, regulatory, and
environmental factors
Degree of risk and uncertainty
Example: Rating Industry
Attractiveness
Weighted
Attractivenes
Industry Attractiveness Factor Weight Industry
s Rating
Rating
Market size and projected growth 0.15 5 0.75

Intensity of competition 0.30 8 2.40


Emerging industry opportunities
0.05 2 0.10
and threats
Social, political, regulatory, and
0.05 6 0.30
environmental factors
Seasonality and cyclical
0.05 4 0.20
influences
Resource requirements 0.15 7 1.05

Industry profitability 0.15 4 0.60

Degree of risk and uncertainty 0.10 5 0.50

Sum of weights 1.00

Industry attractiveness rating 5.90

Rating Scale: 1 = Unattractive; 10 = Very attractive


The General Electric Model
(GE):
The General Electric Model
(GE):
Strategy Implications
The position on the matrix (determined according to
the weight, rating and value) will indicate the
appropriate strategy (as in the BCG matrix).
Green cells define the businesses that will receive
the resources to grow; the so called green light
businesses. The market is high or medium in
attractiveness and the organization has high or
enough skills and resources to take advantage of
the market.

Red cells define the businesses that lack


opportunity in terms of market and or company
capabilities; the so called red light businesses.
They are managed to harvest their resources or are
just divested.
Yellow cells define businesses that are to receive
Limitations of BS/IA Matrix
Although richer and more broadly applicable
than the BCG growth-share matrix, it can be
more subjective in the selection and
weighting of the factors.
Different business units may involve different
factors which makes the analysis ambiguous.
As it is the case with the BCG growth-share
matrix, the results are very sensitive to the
definition of the product market. E.g. luxury
cars, all cars?
End of Our Presentation:

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