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Portfolio Management

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Portfolio Management

  1. 1. Portfolio Management for New Products
  2. 2. Portfolio Management <ul><li>Portfolio Management for product innovation has surfaced as one of the most important management function. </li></ul><ul><li>The reasons being </li></ul><ul><li>Shorter PLC </li></ul><ul><li>Heightened Global Competition </li></ul><ul><li>Portfolio Management is the manifestation of the business strategy---- it dictates where and how you will invest for the future </li></ul>
  3. 3. Pitfalls of Poor Portfolio management <ul><li>Strategic- </li></ul><ul><li>Projects not strategically alligned with the business strategy </li></ul><ul><li>Many strategically unimportant products in the portfolio </li></ul><ul><li>R&D spending that does not reflect strategic priorities of the business </li></ul><ul><li>Low Value Projects- </li></ul><ul><li>Deficient Go/kill and project selection decisions </li></ul><ul><li>No Focus — </li></ul><ul><li>Strong reluctance to kill project </li></ul><ul><li>The wrong projects </li></ul>
  4. 4. Importance of Portfolio Management <ul><li>Financial-to maximise returns, to maximise R&D productivity, to achieve financial goals </li></ul><ul><li>To maintain the competitive position of the business </li></ul><ul><li>To properly and efficiently allocate scarce resources </li></ul><ul><li>To forge a link between project selection and business strategy </li></ul><ul><li>To achieve focus </li></ul><ul><li>To achieve balance </li></ul><ul><li>Better communicate priorities within the organization </li></ul><ul><li>To provide better objectivity to project selection </li></ul>
  5. 5. A typical Scoring Model For Project Prioritization <ul><li>Strategic Alignment: </li></ul><ul><li>• Degree to which project aligns with our strategy </li></ul><ul><li>• Strategic importance </li></ul><ul><li>Product/Competitive Advantage : </li></ul><ul><li>• Offers customers/users unique benefits </li></ul><ul><li>• Meets customer needs better </li></ul><ul><li>• Provides value for money for the customer/user </li></ul><ul><li>Market Attractiveness: </li></ul><ul><li>• Market size </li></ul><ul><li>• Market growth rate </li></ul><ul><li>• Competitive intensity in the market (high=low score) </li></ul>
  6. 6. <ul><li>Synergies (Leverages Our Core Competencies): </li></ul><ul><li>• Marketing synergies </li></ul><ul><li>• Technological synergies </li></ul><ul><li>• Operations/manufacturing synergies </li></ul><ul><li>Technical Feasibility: </li></ul><ul><li>• Size of technical gap (large=low score) </li></ul><ul><li>• Technical complexity (barriers to overcome) </li></ul><ul><li>(many/high = low score) </li></ul><ul><li>• Degree of technical uncertainty (high=low score) </li></ul>
  7. 7. <ul><li>Risk Vs. Return: </li></ul><ul><li>• Expected profitability (magnitude: NPV) </li></ul><ul><li>• Return on investment (IRR) </li></ul><ul><li>• Payback period (years; many=low score) </li></ul><ul><li>• Certainty of return/profit estimates </li></ul><ul><li>• Low cost & fast to do </li></ul>
  8. 8. Portfolio Methods <ul><li>Financial Methods </li></ul><ul><li>BCG Matrix </li></ul><ul><li>GE Matrix </li></ul>
  9. 10. Portfolio Analysis <ul><li>Strategic Business Unit (SBU) Definition </li></ul><ul><ul><li>Single independent operation of a company </li></ul></ul><ul><ul><li>Has its own competitors </li></ul></ul><ul><ul><li>One manager responsible for performance </li></ul></ul><ul><li>Allocation of resources over all SBUs </li></ul><ul><li>Goals </li></ul><ul><ul><li>Set benchmarks </li></ul></ul><ul><ul><li>Create generalized descriptions of strategic situations </li></ul></ul>
  10. 11. Basis of the BCG Portfolio Matrix Time Introductory Phase “?” Growth Phase “Star” Sales Volume Mature Phase “Cash Cow” Decline Phase “Dog” Source: Das Boston-Consulting-Group-Portfolio Dipl.-Ing. Holger Blumhof
  11. 12. BCG Matrix Construction <ul><li>Internal measure: Relative market share </li></ul><ul><ul><li>Firm’s sales of the SBU . Total market’s average sales </li></ul></ul><ul><ul><li>Firm’s Sales of the SBU . Strongest Competitor’s Sales </li></ul></ul><ul><li>External measure: Market growth </li></ul><ul><ul><li>Match strategy with market stage </li></ul></ul>
  12. 13. The BCG Matrix High Low High Low Product Sales Growth Rate Relative Market Share
  13. 14. Strategy Recommendations <ul><li>Investment </li></ul><ul><ul><li>Further Growth </li></ul></ul><ul><ul><li>Maintain Market Position </li></ul></ul><ul><li>Cash flow </li></ul><ul><ul><li>Self-sustaining: Fund their own growth </li></ul></ul><ul><ul><li>Require funds from other SBUs (Cash Cows) </li></ul></ul><ul><li>Assure the future of the company </li></ul><ul><li>Grow into Cash Cows </li></ul>
  14. 15. Strategy Recommendations <ul><li>Investment </li></ul><ul><ul><li>Increase market share </li></ul></ul><ul><ul><li>Selectively develop into Stars </li></ul></ul><ul><li>Cash Flow </li></ul><ul><ul><li>Require funds from other SBUs (Cash Cows) </li></ul></ul><ul><li>Unrealized future opportunities </li></ul>
  15. 16. Strategy Recommendations <ul><li>Investment </li></ul><ul><ul><li>Maintain market share </li></ul></ul><ul><ul><li>Maintain capacity </li></ul></ul><ul><li>Cash Flow </li></ul><ul><ul><li>Positive cash flow </li></ul></ul><ul><ul><li>Provides funding to support Stars and “?” </li></ul></ul><ul><li>No potential for profit growth </li></ul>
  16. 17. Strategy Recommendations <ul><li>Investment </li></ul><ul><ul><li>Divestiture strategy </li></ul></ul><ul><ul><li>Reduce capacity to free up resources </li></ul></ul><ul><li>Cash Flow </li></ul><ul><ul><li>Goal of Positive Cash Flow </li></ul></ul><ul><ul><li>Negative Cash Flow = Divestment </li></ul></ul><ul><li>No real growth opportunities </li></ul>
  17. 18. Evaluation of BCG Matrix: Cons <ul><li>Oversimplifies complex decisions </li></ul><ul><li>Only 2 factors considered = creates risk </li></ul><ul><li>Uncertainty in market and SBU definition </li></ul><ul><li>Only considers current businesses  no dynamics </li></ul><ul><li>Does not recognize possible synergies between SBUs </li></ul>
  18. 19. Evaluation of BCG Matrix: Pros <ul><li>Simple and rapid </li></ul><ul><li>Solid basis for decision-making </li></ul><ul><li>Good measurability of market share and growth </li></ul><ul><li>Provides information about efficient resource allocation within the organization </li></ul><ul><li>Generator for strategic options </li></ul>
  19. 20. Conclusion <ul><li>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 </li></ul>

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