Page 2 - Portfolio Analysis

PORTFOLIO PLANNING SYSTEMS The portfolio planning approach is designed to help managers decide on the allocation of scarce resources among competing business opportunities. Its aim is to attain that mix of activities which best serves the long term interests of the organisation. It may be used when determining strategies for multi-division businesses or multi-product businesses. The approach can guide decisions on growth, disposal or retention. Under Portfolio Planning three related areas will be examined. The first two of these areas, the Experience Curve and the Product Life Cycle, provide the underpinning for the third, the Boston Consulting Group (BCG) Matrix. THE EXPERIENCE CURVE THE PRODUCT LIFE CYCLE BCG MATRIX THE EXPERIENCE CURVE EFFECT The best known of the portfolio planning systems is that of the Boston Consulting Group (BCG) who developed their system - BCG Matrix - in the 1970’s. The Group conducted studies of company performance throughout the world. Its findings have shown a direct and consistent relationship between the aggregate growth in volume of production and declining costs of production. This is, in essence, a statement of the experience curve effect, a concept which must be understood before the workings of the BCG Matrix can be fully appreciated. It should also be made clear that the premises underlying the BCG approach are: a) that in any market segment of an industry, price levels tend to be very similar for similar products; b) and therefore what makes one company more profitable than the next must be lower costs.