TOPIC 4

PORTFOLIO
MANAGEMENT

Kilumile J.W, BBA (MU),MSc (UoN)

Introduction to Portfolio
Management
 The meaning of Portfolio:
 Portfolio is a set of investments or

strategic Business Units (SBUs).

 A portfolio also can be a set of the

Company’s products or Business

divisions/Branches.
 The Major challenge to strategic

managers is how to manage

multiple businesses or Strategic
Business Units
Introduction to Portfolio
Management
 Think of MOTISUN Group. MOTISUN
Group of companies has the following
Strategic Business Units ( SBUs):
 Cement
 Hotel
 Food and Beverage
 Steel
 Real Estate etc
How does Motison Group manage such multiple
businesses or Strategic Business Units?
Introduction to Portfolio
Management
NOTE: Each SBU has its own:
i. Customer
ii. Competitors
iii. Suppliers
iv. Distributors
v. …. business stakeholders

Therefore, We have to understand the status of each

SBUs, So that we can MAKE strategic decisions.
 How much resources are to be reallocated to each
SBUs
 Is the SBU to be divested or maintained
Introduction to Portfolio
Management
 Also, strategic managers are
interested to know the following:
1. The contribution of each SBU in the
achievement of overall Corporate
objectives
2. The performance of each SBU
3. The competitive position of each SBU
4. The social responsibility of each SBU
Introduction to Portfolio
Management

Strategic Portfolio Management

 Strategic Portfolio Management is
about deciding where best to focus
the organization's finite resources
in order to meet strategic
objectives, considering the
business as a portfolio of
activities and making trade-offs
across the portfolio.
Introduction to Portfolio
Management

For example : Key Managers for MOTSON

Group have to decide:
 which Business should take more resources
 which business has to be given more

emphasis
 Portfolio Management Frameworks

 There are different types of Strategic

Portfolio Management tools/Frameworks
for Managing such multiple businesses
or Strategic Business Units or SBUs.
 Includes the following:

i. The Product Life Cycle (PLC)

ii. The Boston Consulting Group
(BCG)
iii. The General Electric (GE)
Portfolio Management Frameworks

Why Do we need these frameworks in SPM:

 Help to evaluate the performance of each

of their business units.
 Help in making strategic decisions for
each unit whether to divest or reinvest.
 Help to make decision on reallocation of
resources from one business unit to
another
 Help to understand the Contribution of
each SBU in terms of returns.
PRODUCT LIFE CYCLE
PRODUCT LIFE CYCLE
 PLC Is among the Strategic Planning
Tools
 Explains how products pass through four
stages: Introduction, Growth,
Maturity and Decline.
 Sales will vary with each phase of the life
cycle.
PRODUCT LIFE CYCLE: CHARACTERISTICS
CHARACT Introduct Growth Maturity Decline
ERISTICS ion stage Stage Stage Stage

Sales Low Sales Rapidly Peak sales Declining

rising sales
sales
Cost High cost Average Low cost Low cost
per cost per per per
customer customer customer customer
Profits Negative Rising High profits Declining
profits profits
Customers Innovator Early Middle Laggards
s adopters majority
stable
Competitor Few Growing Number Declining
s number beginning number
to decline
 PRODUCT LIFE CYCLE---
Create Maximize Maximize Reduce
OBJECTIVE product market share profit while expenditure
awareness defending and milk the
and trial market share brand

STRATEGIES

Product Offer a basic Offer Extra Diversity Phase out

product Service, Warranty weak models

Price Charge cost- Price to penetrate Price to match Cut price

plus market or best
competitors’
Distribution Build selective Build intensive Build more Go selective:
distribution distribution intensive phase out
distribution unprofitable
outlets Reduce
to level
PRODUCT LIFE CYCLE---
Advertisi Build Build Stress Need to
ng product awarenes brand retain
awarenes s in mass difference hard-core
s among market s and loyal
early benefits
adopters
and
dealers
Sales Use heavy Reduce to Increase to Reduce
Promotion sales take encourage sales
promotion advantage brand promotion
to entice of heavy switching to minimal
trial consumer level
demand
Source: Kotler and Armstrong (2014)
BCG Matrix
1. Market or Industry attractiveness
2. Firm’s Competitive strength
3. Market Share
4. Relative Market share
5. Market Growth Rate
6. Strategic Business Unit (SBU)
1.Market or Industry
attractiveness
Industry/market attractiveness is assessed
on a range of criteria including:
 Market size
 Market growth rate

 Level of competition

 Social, political and legal factors

2. Firm’s Competitive strength.
Competitive strength is also assessed on a
range of criteria such as:
 Market share
 Relationship with government
 Opportunities to develop cost advantages
 Channel relationships
 Brand image and reputation
 Resource availability
 Financial Performance
3. Market Share
Is a portion or percentage of sales of a particular
product in a given market/industry that is
controlled by certain Company.
Eg In the fiscal year 2019, the total sales for Food
and Beverage industry reached Tsh900m . During
the same period, the revenues of JEWIKI company
were Tsh 9m.
The market share of JEWIKI company is calculated
as follows:
Market share = Tsh. 90m/ Tsh. 900= 0.1 ≈ 10%
4. Relative Market Share
 Is among the indicators of Firm’s Competitive
strength
 Relative market share is used to compare market share

of a company with that of its biggest competitor.

Having a relative Market share of ≥1 means you are the
market leader.
Relative Market Share= Product's Market Share /Largest
Competitor's Market Share
Eg JEWIKI Market share= 10%
Largest Competitor KATEKOM =30%
RMS= 10/30= 0.33
5. Market Growth Rate
Annual increase in product sales or population
within a given market
Market Growth Rate= (Change in market
size)/(Original market size)
NB, Change in market size =(Current market
size-Original market size).
 Current market size is the total sales (including competitors)
for a particular product in monetary terms in the current year.
 Original market size is the total sales (including competitors)
for a particular product in monetary terms in the base year.
6. Strategic Business Unit (SBU)
A unit of the company chat has a, separate
mission and objectives and than can be
planned independently from other company
businesses.
 An SBU can be a company division or Branch,
a product line -within a division, or
sometimes a single product or brand.
Portfolio Management Frameworks
BCG MATRIX
 The framework was developed in 1960s
by the Boston Consulting Group (BCG).

 A portfolio-planning method that

evaluates a company's strategic
business units (SBUs) in terms of their
market growth rate and relative
market share.
 SBUs are classified as stars, cash cows,
question marks or dogs.
BCG MATRIX
QUESTION MARKS
 Question marks are business units with low
market share and high market growth.

 Question marks are new businesses just entering

the market.

 If they are able to grow and become market

leaders, they evolve into stars, but if they are
unable eventually to command a significant
market share despite heavy financial support from
corporate they will usually be divested or
liquidated.
BCG MATRIX
STARS
 A star is a business unit that has a high

market share and high growth

market rate.
 Stars are profitable businesses,
however, they usually must consume
considerable cash to continue their
growth and fight off the numerous
competitors that are attracted to fast
growing markets.
BCG MATRIX
CASH COW
 A cash cow is a business unit that has a high
market share and slow market growth.
 Cash cows are highly profitable because they

dominate a market that does not attract many

new entrants.
 Cash cows are so well established, they need not

spend vast resources for advertising, product

promotion, or consumer rebates, the excess cash
that they generate can be used by the corporation
to support its stars, and question marks.
BCG MATRIX
Dogs
 dogs are business units that have

small market shares in Slow-

growth Market.

 Dogs are generally marginal

businesses that make either losses
or small profits.
BCG MATRIX
 Suggested Strategies
Build market share
 One of the portfolio strategies is to build market

share, to accomplish this end, managers must

identify promising business units that currently fall
into Question mark category.
 Management then attempts to transform these
businesses into STARS.
 This process of increasing market share may involve

significant price reductions, even if that means

incurring losses or marginal profitability in the short
run.
BCG MATRIX
 Suggested Strategies
Hold Market Share:
 Another strategy is to hold market share.
 In this situation, Cash Cows are managed so as
to maintain their market shares, rather than to
increase them.
 Holding a large market share generates more
cash than building market share does.
 Hence, the cash contributed by the Cash Cows
can be used to support starts and selected
Question marks.
BCG MATRIX
 Suggested Strategies
Harvest:
 Harvesting means milking as much short-term

cash from a business as possible, usually while

allowing its markets share to decline.
 The cash gained from this strategy is also used

to support STARS and selected question

marks
 The business harvested are usually DOGS,

QUESTION MARKS that show little promise of

growths, and perhaps some weak cash cows.
BCG MATRIX
 Suggested Strategies
Divest:
 Divesting refers to selling or liquidating a

business unit.
 It usually provides some cash to the
corporation (from the sale).
 As dogs and less promising question marks

are divested, the cash provided is

reallocated to Stars and to question marks
with the potential to become starts.
BCG MATRIX
Summary
Build: The objective here is to increase market share, even forgoing short-term earnings
to achieve this objective if necessary. Building is appropriate for question marks whose
market shares must grow if they are to become stars.
Hold: The objective in a hold strategy is to preserve market share, an appropriate
strategy for strong cash cows if they are to continue yielding a large positive cash flow.
Harvest: The objective here is to increase short-term cash flow regardless of long-term
effect. Harvesting involves a decision to withdraw from a business by implementing a
program of continuous cost retrenchment. The hope is to reduce costs faster than any
potential drop in sales, thus boosting cash flow. This strategy is appropriate for weak
cash cows whose future is dim and from which more cash flow is needed.
Harvesting can also be used with question marks and dogs.
Divest: The objective is to sell or liquidate the business because the resources can be
better used elsewhere. This is appropriate for dogs and question marks that are
dragging down company profits
BCG MATRIX
TASK 4

What are the weakness of BCG Matrix

GE Framework
 GE is a well known portfolio frame work,
this was developed by General Electric
with the help of McKinsey Company, a
consulting firm.
 Alterative
names: Nine Cells Matrix or
McKinsey Matrix
 GE Overcomes the weaknesses of BCG,
which relies on two single factors, i.e.
relative market share and market
growth.
GE Framework
 To overcome this difficulty, and to
provide a more flexible approach,
General Electric and McKinsey jointly
developed a multi-factor approach
using the same fundamental ideas as
the Boston Consulting Group.
 They used industry attractiveness
and business strengths as the two
main axes and built up these dimensions
from a number of variables.
The GE framework
 Using these variables, and some
scheme for weighting them
according to their importance,
GE MATRIX/McKinsey
The GE Framework: Strategies
THE END
Q&As