Part II: Portfolio analysis Flashcards
What’s Portfolio analysis? Whats the fundamental concept? Tasks?
Mathematical formulation of the concept ofdiversificationin investing, with the aim of selecting a collection of investment assets that has collectively lower risk than any individual asset
Assetsin an investmentportfolioshould not be selected individually, each on their own merits. Rather, it is important to consider how each asset changes in price relative to how every other asset in the portfolio changes in price
challenge is to create corporate value
Tasks:
- Development of a value creating strategy for all business divisions
- Finding a balance of cash generating and cash consuming business units
Boston Consulting Group(BCG)’s growth-share matrix
Market oriented concepts:
2x2 matrix,
relative market share (Y)
Market growth (x)
. . . .Stars . . . . . . Cash cows . .
. . . . . . . . . . . . . . . . . . . . . . . .
Question marks . . . Poor dogs ..
Desirable path
Question marks -> Stars -> Cash cows
Undesired path:
Any ending at poor dog (get out now, etc)
Product and market life cycle:
Introduction -> grow -> maturity -> saturation
Market oriented:
BCG growth-share matrix:
Earning, Cash flow and strategy for Question marks, Starts, Cash cows and Poor dogs:
Question marks - Earnings: Low, unstable, growing - Cash Flow: Negative - Strategy: Analyze the business (grow to a star or disinvest)
Stars
- Earnings: High, stable, growing
- Cash Flow: Neutral
- Strategy: Invest into growth
Cash cows
- Earnings: High, stable
- Cash Flow: High, stable
- Strategy: Milk
Poor dogs
- Earnings: Low, unstable
- Cash Flow: Neutral or negative
- Strategy: Disinvest
Market oriented:
The McKinsey & Co. approach
Market attractiveness (Future)
x
strategic business units (SBU) strength (Current)
3x3 matrix
- Calculate Market attractiveness and SBU strenghts using several factors (kinda like COCOMO)
Shareholder value oriented:
Value contribution matrix: Boston Consulting Group
Growth in revenues represents an important leverage (value driver) to increase shareholder value
Growth can increase or decrease
The shareholder value only increases if those business areas grow where profitability is greater than costs of capital
2x2 Matrix
Axis:
- CFROI-spread: Cash Flow Return on Investment – Cost of capital
- Growth: Growth in revenues of individual SBU; Industry average serves as a benchmark
\+---------------------------+
| Growth | \+------------+---------------------------+ | | Type II | Type II | | CFROI +------------+-------------+ | | Type IV | Type III | \+------------+------------+-------------+
Competence oriented concepts
- Market related portfolio by Krüger/Homp
- Customer value oriented competence portfolio by Hinterhuber et al.
- Parenting advantage matrix by Campbell/Goold
- Object of analysis: Bundles of resources and competencies within the SBU
- Framework: Resource Based View
- Basic structure of portfolios: Internal/External dimension
Market related portfolios: Krüger/Homp
Market-competence portfolio:
3 matrices:
1) Market (3x3)
- Estimates present and future market attractiveness
- corresponding to the McKinsey & Co.
2) Competence (3x3)
- Resource
- Development efforts and outlook (future)
- Current competence Strength (current)
3) Market-competence (2x2)
- Merged
- Market attractiveness
- Like the BCG growth-share matrix, but:
- Outsource
- Develop
- Exploit
- Transfer
Customer value oriented competence portfolio: Hinterhuber et al.
Definition of core competencies from a customer value oriented perpective
2x2 matrix
Axis:
X) Relative competence strength
- Measures the level of difficulty to imitate competencies (calculated like McKinsey )
Y) Customer value
- Competence deployment – Multi-step process
Types of parenting
- Stand alone influence
- Linkage influence
- Functional and services influence
- Corporate development
- External relationships
Styles of parenting
- Financial control: Portfolio
- Strategic control: Linkages
- Strategic planning: Core competencies
Parenting advantage matrix?
Campbell/Goold
2x2 with a center one
Role in development process vs
Role in transfer process
- Stimulating the network - Promoting central developments - Coordinating common solutions - Imposing best practice - Creating a company way
Horizontal strategies for portfolio analysis
Synergy oriented management of existing SBU’s
Strategies that help to identify linkages and exploit synergies
Types of linkages (Horizontal strategies)
- Tangible linkages
- Intangible linkages
- Competitive linkages
Tangible linkages
Linkages in the value chains between business
Types of Type of joint activities that can be identified in a value chain analysis
I think these are just examples:
- Joint brand name
- Joint advertisement
- Joint sales promotion
- Combined product sales to customers of the other SBU
- Joint marketing function
- Joint distribution channel
- Joint sales force or sales office
- Joint customer service network
- Joint order processing
Intangible linkages
- Transfer of management know-how between two value chains
- No general linkage structure
- Resistance of middle and top management
Competitive linkages
- Competitive linkages exists if one or more business units are competing with a diversified competitor
- Multipoint competitors
- Independent reactions of competitors
- Linkages in several markets can lead to interdependencies (How do changes in market A influence market B?)
