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Portfolio Management

Management

Portfolio Management
Management

z
z It is top management responsibility that
requires the assessment of strengths and
weaknesses of the current portfolio of
businesses, in order to define the priorities
for resource allocation among businesses,
and the identification of opportunities for
diversification and divestment.
z
z Portfolio analysis requires an analysis of
each business in terms of
- External factors to determine industry
opportunities and threats
-- Internal factors to determine internal strengths
and weaknesses

Overall industry Sources of competitive Business Strength Matrix attractiveness advantage • Critical structural factors • Critical success factors • Five-forces model • Value chain Life-Cycle Matrix Industry maturity Overall measurement of business position Profitability Matrix Market growth potential Profitability Cost of capital Cash generation .Basic Tools for Portfolio Management Management Tools External Factors Internal Factors Growth-Share Matrix Market growth potential Relative market share Industry Attractiveness.

5 0. The Growth-Share Matrix Matrix A typical Product Portfolio Chart (Growth-Share Matrix) of a Comparative Strong and Diversified Company 25% Market Growth Rate 10% 4.0 0. profitability and cash flow potentials. .0 1.25 Relative Market Share Recognizing the firm as composed by largely independent SBUs.0 2. with different growth.

Implications for Strategic Positioning Positioning Emerging from the Growth-Share Matrix Matrix Business Market Share Business Investment Net Cash Flow Category Thrust Profitability Required Around zero or Stars Hold/Increase High High slightly negative Cash Cows Hold High Low Highly positive Increase None or Negative Very High Highly Negative Question Marks Harvest/Divest Low or Negative Disinvest Positive Dogs Harvest/Divest Low or Negative Disinvest Positive .

Negative Cash Flow Cash Flow Cash Use Large Modest Positive + or - Low Cash Flow Cash Flow Cash Cow Dog High Low Cash Generation (Relative Market Share) . Cash-Flow Characteristics of Business Business Categories in the Growth-Share Matrix Matrix Star Question Mark Market Large (Market Growth Rate) High + or .

The Industry Attractiveness-Business Business Strength Matrix Matrix Industry Attractiveness ** High Medium Low Investment Selective High and Growth Selectivity Growth Business Strength* Harvest/ Medium Selective Selectivity Growth Divest ** External Factors Market size * Internal Factors Market growth rate Market Share Cyclicality Sales Force Competitive structure Marketing Barriers to entry Customer service Industry profitability Technolog R&D Harvest/ Harvest/ y Low Manufacturing Selectivity Inflation Distribution Financial resource Divest Divest Regulation Manpower availability Image Social issues Breadth of product line Environmental issues Quality/Reliability Political issues Managerial Competence Legal issues .

Kearney Kearney Industry Attractiveness High Medium Low • Grow • Identify growth segments • Maintain overall position • Seek dominance • Invest strongly • Seek cash flow High • Maximize investment • Maintain position • Invest at maintenance elsewhere level Business Strengths • Evaluate potential for • Identify growth segments • Prune lines leadership via • Specialize • Minimize investment Medium segmentation • Invest selectively • Position to divest • Identify weaknesses • Build strengths • Specialize • Specialize • Trust leader’s • Seek niches • Seek niches statesmanship Low • Consider acquisitions • Consider exit • Sic on competitor’s cash generates • Time exit and divest . T. Strategic Implications from the Industry Industry Attractiveness-Business Strength Matrix -- Suggested by A.

The Life-Cycle Portfolio Matrix Matrix MATURITY Embryonic Growth Mature Aging Dominant Strong COMPETITIVE POSITION Favorable Tenable Weak Nonviable Caution. divert or selective strategic options liquidate development . withdraw to Wide range of market niche. Danger.

Strategic Positioning in Terms of Market Share Share Suggested by the Life-Cycle Portfolio Matrix Matrix Embryonic Growth Mature Aging All Out Push for Hold Position Hold Position Dominant Share Hold Position Hold Share Grow with Industry Hold Position Attempt to Improve Hold Position Attempt to Improve Strong Position Hold Position Position or All Out Push for Growth with Industry Push for Share Harvest Share Selective or All Out Attempt to Improve Custodial or Harvest Push for Share Position Maintenance Favorable or Selectively Attempt to Selective Push for Find Niche and Improve Position Share Attempt to Protect Phased Withdrawal Find Niche and Hang Phased Withdrawal Selectively Push for Find Niche and on or Position Protect It Or Abandon Tenable Phased Withdrawal Up Turnaround Turnaround Weak Or Or or Abandon Out Abandon Phased Withdrawal .

.Strategic Positioning in Terms of Investment Requirements Requirements Suggested by the Life-Cycle Portfolio Matrix Matrix Embryonic Growth Mature Aging Invest to Sustain Invest Slightly Faster Growth Rate (and Reinvest as Reinvest as Dominant Than Market Dictates Preempt New (?) Necessary Necessary Competitors) Invest to Increases Minimum Strong Invest as Fast as Growth Rate (and Reinvest as Reinvestment or Market Dictates Necessary Improve Position) Maintenance Minimum Minimum and/or Selective Investment Maintenance Favorable Invest Selectively to Improve Position Selective Investment or Reinvestment Disinvest Minimum Invest (Very Tenable Selective Investment Reinvestment or Disinvest or Divest Selectively) Disinvest Invest Selectively or Weak Invest or Divest Invest or Divest Disinvest Divest The terms invest and divest are used in the broadest sense and are not restricted to property. plant & equipment.

Probably Net Cash Profitable Profitable Dominant But Not Necessary Producer (But Not Net Cash Producer Net Cash Producer Net Cash Borrower Necessary) Probably Profitable Strong May Be Unprofitable Profitable Profitable Probably Net Cash Net Cash Borrower Net Cash Producer Net Cash Producer Borrower Probably Unprofitable Marginally Profitable Moderately Profitable Moderately Profitable Favorable Net Cash Borrower Net Cash Borrower Net Cash Producer Cash Flow Balance Unprofitable Unprofitable Minimally Profitable Minimally Profitable Net Cash Borrower or Tenable Net Cash Borrower Cash Flow Balance Cash Flow Balance Cash Flow Balance Unprofitable Unprofitable Unprofitable Unprofitable (Write- Weak Net Cash Borrower or Possibly Net Cash Net Cash Borrower Borrower or Net Cash off) Cash Flow Balance Producer .Strategic Positioning in Terms of Profitability and Cash-- Flow Suggested by the Life-Cycle Portfolio Matrix Matrix Embryonic Growth Mature Aging Profitable Probably Profitable.

meaningful Industry volume cycles rate cannot be calculated Faster than GMP. Usually easy. out. small regional suppliers. but business Number of Increasing rapidly. primary Usually difficult to the industry volume. but Basic product line Product Lines product lines are little or no change in Shrinking. GNP. little incentive. Increasing to peak. Declines. extended. growth. Industry Maturity Guide Guide DEVELOPMENT STAGE DESCRIPTORS EMBRYONIC GROWTH MATURE AGING Accelerating. . and growth Difficult. is offset by vigorous apparent. are established. A few firms have major Concentration increases shares. Industry Potential determine. the Usually easy. number of Customer Loyalty Little or none. breadth. volume. new product Technology Role is minimal. established. ranking can as marginal firms drop change. competitors are presence of competitors Entry opportunity may not be entrenched. but those with Firms with major shares Share Distribution Volatile. Suppliers are well- Some. shares. followed by shakeout Stable. dispersed along small unlikely to gain major local firms. but Difficult. but Equal to or slower than Growth Rate but declines over long because the base is too constant or decelerating. Rapid proliferation as Product turnover. known. alternatives decreases. is slowing. Substantially exceeds Well-known. may break up into many Participants and consolidation. buying patterns aggressive. Process and materials Concept development Product line refinement refinement. is subject to unforeseen saturation industry no potential remains. buyers are Strong. or shares are minor shares are are entrenched. and product engineering and extension line development to renew growth. developments. cyclical term small. but markets approach Saturation is reached.

the leaders tend to be in a favorable position. 2. Weak: Weak competitors can be intrinsically too small to survive independently and profitable in the long term. 2. This can be a geographical specialization or a project specialization. 4. 3. Dominance often results from a quasi-monopoly or from a strongly protected technological leadership. given the competitive economics of their industry. 5. Dominant: Dominant competitors are very rare. 5.Criteria for Classification of Competitive Position Position 1. or they can be larger and potentially stronger competitors. irrespective of their competitors’ moves. 3. with no competitors clearly standing out. but suffering from costly past mistakes or from a critical weakness. Strong: Not all industries have dominant or strong competitors. Strong competitors can usually follow strategies of their choice. Tenable: A tenable position can usually be maintained profitable through specialization in a narrow or protected market niche. . 4. 1. Favorable: When industries are fragmented.

Inc. Little. . Natural Strategic Thrusts Thrusts Stages of Industry Maturity Embryonic Growth Aging Mature Competitive Position Dominant Strong Natural Development Favorable ive t ect n Sel opme ve l De Tenable ve Pro ility b Vi a Weak Out Source: Arthur D.

Natural Strategic Thrusts Thrusts STRATEGIES A B C D E F G H I J K L M N O P Q R S T U V W X THRUSTS NATURAL DEVELOPMENT Startup E I L Growth with A B C F G J N P T U industry Gain position G L T gradually Gain position B C E G L N O P T V aggressively Defend position A C N U V W Harvest D H K M Q R U W SELECTIVE DEVELOPMENT Find niche A G I L M R T Exploit niche B C E L N P U V Hold niche C D N Q U PROVE VIABILITY Catchup D E L M P Q R Renew D M O P Q R U Turnaround D L M N Q R V W Prolong existence A D F J K M N Q R S T W WITHDRAWAL Withdraw D M Q R W Divest D K Q R S Abandon X .

F Export/Same Product . but in a market with different characteristics.To prune back the distribution system to a more effective network. this may include cutting back to the highest volume distributors or shaping by geography or type. B Development of Overseas Business . these may or may not have the same competitors and market dynamics as the domestic market.To invest in marketing selected products of the domestic business unit in foreign markets. C Development of Overseas Facilities .To incorporate within the business organization the functions.To establish overseas a separate business unit in the same industry as the domestic business unit.To provide additional capacity or existing products beyond current needs . G Forward Integration .in order to meet anticipated future growth.To invest in offshore production plants for products to be sold in domestic markets by domestic business unit. operations. or products that were previously external and that served to supply and support existing business operations.Generic Strategies Strategies Strategy Code A Backward Integration . E Excess Capacity . .To incorporate within the business organization external functions between the current business and the ultimate consumer so that more effective distribution or increased control over the marketplace can be achieved. D Distribution Rationalization .not incremental capacity .

To increase market share through manipulating the marketing mix.To strip down a business to currently most profitable piece and reinvest the proceeds of divestments in the successful operations retained.To invest in creating a primary demand for a brand- new product. etc. .. often when that company has a clear technological edge.. belonging to the domestic business unit..To exploit through licensing in foreign countries the use of domestic technology.) d.To prune back the market served by the business unit to most profitable segments and/or higher volume segments. or market uncertainties. K Complete Rationalization . increased product and sales service. dangers of overextending management. J Licensing Abroad . in order to concentrate marketing focus. typically undertaken by the first company to develop a new market. e. lower price. M Market Rationalization . does not prohibit expense or capital investment for normal maintenance of the business. increased advertising. product line breadth. patents. know-how.) Strategy Code H Hesitation . because of capital limitations.Generic Strategies (cont’d. I Initial Market Development . or by particular type of geography. brand franchise.g. L Market Penetration .g. e.To slow down or establish a 1-year moratorium on new capital investment and new expenses.

To increase standardization of designs. etc. broaden. manufacturing.To develop. O New Products/New Markets . and marketing products related or unrelated to the present product line for new markets that are different in geography or by type from the present markets served by the business unit.To invest in developing. Q Production Rationalization . or replace products in the present product line.To invest in new ways of doing existing tasks by adding new “soft” technology . S Pure Survival ..To maintain existence of the business unit in periods of extremely adverse business conditions by eliminating functions.Generic Strategies (cont’d..so as to improve effectiveness or efficiency.e. and manufacturing processes and/or concentrating facilities and/or subcontracting out elements of production.To narrow the product line to the most profitable products. P New Products/Same Market . or by under-financing any activity.) d. . . new patterns of work flow. components.g. selling them into the existing market served. computer-aided production planning and inventory control. R Product Line Rationalization . products.) Strategy Code N Methods and Functions Efficiency .

W Traditional Cost Cutting Efficiency . equipment. U Same Products/Same Markets . X Unit Abandonment .To divest a business unit because of its inability to remain viable within the corporation or because the unit may be of greater value to someone else.To expand existing domestic market by geography or type for the existing product line. or processes. .) d.To reduce costs uniformly through management edicts.To improve operating efficiency through technological improvements in physical plant.Generic Strategies (cont’d.) Strategy Code T Same Products/New Markets .To execute those strategies required to maintain the present competitive position of the existing business unit … with the existing products in existing markets. V Technological Efficiency .

The Use of the M/B Model at the Business Level Level An Alternative Profitability Matrix positive p = 60% p = 90% Spread (ROE = kE) B A 0% C negative p = 120% p = 75% D Losing share 1 gaining share Holding share Business growth Industry growth p = Reinvestment rate (g/G) .