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Topic 13

Portfolio Theory

William Meaney MBA BSc. ACMA 1

Stakeholder

theory

Ethics

Governance

CSR

Introduction to strategy

Vision/Mission

Management By Objectives

Expectation and Power

External Analysis

Strategic Analysis

Internal Analysis

PESTEL Industry CompetitorGeneric

Strategy

Value

ChainFinancial

Analysis

Portfolio AnalysisScale and

experience

Position Audit/Situational Analysis

Strengths

ThreatsOpportunities

Weaknesses Critical

Success

Factors

Balanced

Scorecard

The Resource

Based View of

Strategy

R

E

A

D

I

N

G

S

D

I

S

C

U

S

S

I

O

N


Portfolio Theory

Learning Outcomes

After completing this lesson you should be able to

• Understand the concept of a portfolio

• Draw at least 2 of the models accurately – preferably the

Boston Box and the Ashridge or GE matrix

• Understand the link of portfolio theory to strategic choice

in the next section of the course


Portfolio Strategy

• Boston Consulting Group (BCG)

• GE Multifactor Product Portfolio Matrix

• Directional Policy matrix

• The Relatedness Matrix


Boston Consulting Group matrix BCG


6

Boston Consulting Group Matrix (BCG)

Stars

Industry

Growth

Rate

H

I

G

H

L

O

W

HIGH LOW

Relative Market Share

Question mark

or

Problem child

Cash Cow Dog

GF

B D

C

E

A< 10%

20%+

William Meaney MBA BSc. ACMA

7

BCG Product Characteristics

Industry

Growth

Rate

H

I

G

H

L

O

W

Stars

• Market leaders

• Fast growing

• Substantial

profits

• Cash user

Cash Cow

• Profitable• Generate more

cash than needed

Question mark

• Rapid growth

• Poor profit

margins

• Heavy user of

cash

Dog

• Few growth

opportunities

• Cost

disadvantages

• Sales low

HIGH LOW



8

BCG Product/SBU designations for action

Industry

growth

rate

H

I

G

H

L

O

W

HIGH LOW


Stars

Maintain or

increase

market

share

Cash cow

Use profits to

maintain growth

Maintain

position

Question mark

Intensify

marketing effort

or leave

market

Dog

Reduce marketing

effort or divest


9

BCG Marketing Strategies

Industry

Growth

Rate

H

I

G

H

L

O

W

Stars

• Protect existing

share

• Reinvest £

• Attract new

users

Cash Cow

• Maintain share

• Use £ for R&D

• Invest in

Technology

and process dev.

Question mark

• Invest for

market share

• Buy share

• Become

niche

dominant

Dog

• Focus on niche

• Harvest

• Divest

• Abandon

• Drop

HIGH LOW

Relative Market ShareWilliam Meaney MBA BSc. ACMA

Industry

Growth

Rate

H

I

G

H

L

O

W

HIGH LOW


Cash Cow Dog

BD

CA< 10%

20%+

10

Boston Consulting Group Matrix (BCG)

Stars Question mark

or

Problem childGF E


Funding Strategies in Different Circumstances

Source: Adapted from K. Ward, Corporate Financial Strategy, Butterworth/Heinemann,1993, Chapter 2.


GE Multifactor Portfolio Matrix



General Electric matrix

• Portfolio analysis used for classifying

product lines and strategic business

units within a large company

• Developed by McKinsey consulting for

GE

• It assesses the area of the business in

term of two criteria– Industry attractiveness

– The strength of the business


Shell directional policy matrix


Shell Directional Policy Matrix


Ashridge Portfolio Display


Fit between

SBUs CSF

and parent

skills

High

Low

Low HighFit between SBUs parenting

opportunities and parents skills

Ballast

Business

GSK want to buy

Pfizer

Alien

Business

GSK want to buy

Nintendo

Heartland

Business

GSK want to buy a

small Biotech

Company

Value Trap

Business

GSK want to buy a video

game company with a

good product but poor

marketing skills

The Ashridge Portfolio Display


Customer Analysis

Area Detail

Key Customer Indentify • Name of each key customer

• Location

• Status in market

• Products they make and sell

• Size of firm

Customer History • First purchase date

• Who makes the buying decision in the customer’s organisations?

• What is the average order size, by product?

• What is the trend in size of orders?

• How is the useful life of the product judged?

Relationship of customer to product • What does the customer use the product for?

• Do the products form part of the customer’s own service/product

Relationship of customer to potential

market

• What is the size of the customer in relation to the total end-market


Customer Profitability Analysis (CPA)

Customer A Customer B

No of Tubes 6,500 @ £21.25 10,000@ £20

Revenue (after discount) 138,125 200,000

Transport (22,750)

Admin (2,600) (2,000)

Profit 112,775 198,000

Margin 81.6% 99.0%


How will this be useful in your exam?

• The examiner may provide sufficient information to do such an

analysis.

• However with new IT applications such as Customer

Profitability Analysis (CPA) and Product Profitability Analysis

(PPA) the portfolio models usefulness is questionable but

examiners do test the theory.


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