Portfolio Analysis
R. karthik, I yr. MBA, Dept. of mgmt. Studies,
University of Madras, Chepauk-600005.

To succeed in a competitive environment the firms must create and sustain a competitive advantage. The ability to develop new products and to launch it successfully is a major determinant in the competitive advantage. Most of the firms develop new products and face the dilemma of how it is going to contribute to their profit and market share?.

Portfolio analysis is not a new jargon we can see banks investing in new areas and also individuals (whether to invest money in stocks or deposit). In this article we can see the various models through which we can develop marketing plans and how one model is superior to another.

The BCG Model



Figure 1: The Boston Consulting Group (BCG) portfolio model

The BCG is based on the assumption that profitability and cash flow will be closely related to the sales volume. Each of the products are called as strategic business units (SBU) and we have to find out what is the contribution of this products towards the organization growth.

The item’s given in the above model can be explained as follows:

1.  Stars: SBU’s with a high share of a high growth market. Because high growth market attracts 
     competition, the firms need to protect their market share.
2.  Cash Cows: Here, the markets don’t grow rapidly and the firms are generally leaders in the low
     growth market. They are the cash generators for the firm.
3.  Question Marks: Here, the firms have a low share in a high growth market and their tremendous 
     potential for growth but it requires large resources.
4.  Dogs: The firm’s have a low market share in a low growth market and they are generally not cash
     generators for the firm.

The General Electric (GE) Model

Figure 2: The General Electric (GE) portfolio model

One of the main drawbacks of the BCG model is that it assumes market share as the sole determinant of market share as a result the GE model evolved.

From the figure 2. we can observe the Industry Attractiveness vs. Business Strength is tabulated as a 3*3 matrix. The industry attractiveness might consist of various factors such as the market size, market growth, profitability etc. The business attractiveness might consist of factor’s such as market share, quality leadership, share compared with leading competitor.

Priority “A” SBU’s indicates that they are high in both industry attractiveness and business strength and the firm should build share. Priority “B” SBU’s are medium in both industry attractiveness and business strength. Priority “C” SBU’s are low
in both industry attractiveness and business strength.

Artificial Neural Network (ANN)-Decision Support Systems

The ANN can be used for portfolio analysis and ANN usually outperforms the traditional methods of analysis.

In the below table we can find an schematic representation of the ANN. The inputs to the ANN should be based on the resource allocation theory (since it provides an insight into the manager’s resource allocation decisions)

The ANN model is considered superior to other models and traditional methods of forecasting where the analysis is done by squared error (SE) and mean squared error (MSE).

Figure 3: Pictorial representation of Artificial Neural Network

Irrespective, of whether the analysis is done by GE, BCG or ANN model some analysis has to be made about the firms current portfolio.

References:

1. Marketing Management: Donnelly and Peter, Irwin series (’95)
2. Journal of marketing research, Nov (’00)

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