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Portfolio Management For New Products
Portfolio Management For New Products
New Products
Portfolio Management
• Portfolio Management for product
innovation has surfaced as one of the
most important management
function.
The reasons being
• Shorter PLC
• Heightened Global Competition
Portfolio Management is the manifestation of
the business strategy---- it dictates where and
how you will invest for the future
Pitfalls of Poor Portfolio
management
• Strategic-
1. Projects not strategically alligned with the business
strategy
2. Many strategically unimportant products in the
portfolio
3. R&D spending that does not reflect strategic
priorities of the business
• Low Value Projects-
Deficient Go/kill and project selection decisions
• No Focus—
Strong reluctance to kill project
Technical Feasibility:
• Size of technical gap (large=low score)
• Technical complexity (barriers to overcome)
(many/high = low score)
• Degree of technical uncertainty (high=low
score)
Risk Vs. Return:
• Expected profitability (magnitude:
NPV)
• Return on investment (IRR)
• Payback period (years; many=low
score)
• Certainty of return/profit estimates
• Low cost & fast to do
Portfolio Methods
• Financial Methods
• BCG Matrix
• GE Matrix
Portfolio Analysis
• Strategic Business Unit (SBU) Definition
– Single independent operation of a company
– Has its own competitors
– One manager responsible for performance
• Allocation of resources over all SBUs
• Goals
– Set benchmarks
– Create generalized descriptions of strategic
situations
Basis of the BCG Portfolio Matrix
Cow”
Introductory Phase
“?”
Time
BCG Matrix Construction
• Internal measure: Relative market share
– Firm’s sales of the SBU .
Total market’s average sales
– Firm’s Sales of the SBU .
Strongest Competitor’s Sales
High
Product
Sales
Growth
Rate
Low
Strategy Recommendations
• Investment
– Further Growth
– Maintain Market Position
• Cash flow
– Self-sustaining: Fund their own growth
– Require funds from other SBUs (Cash Cows)
• Assure the future of the company
• Grow into Cash Cows
Strategy Recommendations
• Investment
– Increase market share
– Selectively develop into Stars
• Cash Flow
– Require funds from other SBUs (Cash
Cows)
• Unrealized future opportunities
Strategy Recommendations
• Investment
– Maintain market share
– Maintain capacity
• Cash Flow
– Positive cash flow
– Provides funding to support Stars and “?”
• No potential for profit growth
Strategy Recommendations
• Investment
– Divestiture strategy
– Reduce capacity to free up resources
• Cash Flow
– Goal of Positive Cash Flow
– Negative Cash Flow = Divestment
• No real growth opportunities
Evaluation of BCG Matrix: Cons
Medium
Low
Market Attractiveness
Annual market growth rate
Overall market size
Historical profit margin
Current size of market
Market structure
Market rivalry
Demand variability
Global opportunities
Business Strength
Current market share
Brand image
Brand equity
Production capacity
Corporate image
Profit margins relative to competitors
R & D performance
Managerial personal
Promotional effectiveness
Factors Underlying Market
Attractiveness
Factors Weight Rating Value =
(1 –5) (Weight * Rating)
Resource availability 0.20 2.5 0.5
Overall market size 0.15 3 0.45
Invest to Build
• Challenge for leadership
• Build selectively on strength
Build Selectively
• Invest in most attractive segment
• Build up ability to counter competition
• Emphasize profitability by raising productivity
Strategies
Protect & Refocus
• Manage for current earning
• Defend strength
Selectivity for Earning
• Protect existing program
• Investments in profitable segments
Build Selectively
• Specialize around limited strength
• Seek ways to overcome weaknesses
• Withdraw if indication of sustainable
growth are lacking
Strategies
Limited Expansion for Harvest
• Look for ways to expand
withoutfor
Manage high risk
Earnings
• Protect position in profitable segment
• Upgrade product line
• Minimize investment
Harvest
• Sell at time that will maximize cash value
• Cut fixed costs and avoid investment
meanwhile