Portfolio Management for

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

• The wrong projects

Importance of Portfolio
Management
• Financial-to maximise returns, to maximise R&D
productivity, to achieve financial goals
• To maintain the competitive position of the business
• To properly and efficiently allocate scarce resources
• To forge a link between project selection and
business strategy
• To achieve focus
• To achieve balance
• Better communicate priorities within the organization
• To provide better objectivity to project selection
A typical Scoring Model For
Project Prioritization
Strategic Alignment:
• Degree to which project aligns with our strategy
• Strategic importance
Product/Competitive Advantage:
• Offers customers/users unique benefits
• Meets customer needs better
• Provides value for money for the customer/user
Market Attractiveness:
• Market size
• Market growth rate
• Competitive intensity in the market (high=low
score)
Synergies (Leverages Our Core
Competencies):
• Marketing synergies
• Technological synergies
• Operations/manufacturing synergies

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

Source: Das Boston-Consulting-Group-Portfolio Dipl.-Ing. Holger Blumhof

Mature Phase “Cash

Sales Volume

Cow”

Growth Phase Decline Phase

“Star” “Dog”

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

• External measure: Market growth

– Match strategy with market stage
The BCG Matrix

Relative Market Share

High Low

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

• Oversimplifies complex decisions

• Only 2 factors considered = creates risk
• Uncertainty in market and SBU definition
• Only considers current businesses no
dynamics
• Does not recognize possible synergies
between SBUs
Evaluation of BCG Matrix: Pros
• Simple and rapid
• Solid basis for decision-making
• Good measurability of market share
and growth
• Provides information about efficient
resource allocation within the
organization
• Generator for strategic options
Conclusion
• As long as management
understands that the BCG
Growth/Share Matrix generates
options which require further
analysis and validation, this tool
can greatly enhance strategic
decision making
About GE Matrix

 Developed by McKinsey & Company in

1970’s.
 GE is a model to perform business
portfolio analysis on the SBU’s.
 GE is rated in terms of ‘Market
Attractiveness & Business Strength’
 It is an Enlarged & Sophisticated
version of BCG.
 Classification
Business Strength
Strong Medium Weak
High
Market Attractiveness

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

Annual Market growth rate 0.20 3 0.6

Profitability 0.15 3 0.45

Competitive intensity 0.10 2.5 0.25

Technological requirements 0.20 2.5 0.5

Total 1.0 2.75

Factors Underlying Market
Strength
Factors Weight Rating Value =
(1 –5) (Weight * Rating)

Market share 0.15 5 0.75

New product development 0.10 3.5 0.35

Brand Image 0.10 4 0.40

Sales force 0.15 3 0.45
Pricing 0.15 3 0.45

Distribution capacity 0.10 4.5 0.45

Product quality 0.10 4.5 0.45
R&D Performance 0.15 3 0.45
Total 1.0 3.75
 Strategies
 Protect Position
• Invest to grow
• Effort on maintaining strength

 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