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Portfolio approach to MNCs strategy creation

8. Portfolio approach to MNCs strategy creation. The essence of the portfolio approach is to present the firm in terms of a portfolio of businesses (product groups) not just as a single monolithic entity (Hax, Majluf, p. 127)

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Portfolio approach to MNCs strategy creation

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  1. 8 Robert Uberman, Multinational Corporations (MNCs)

  2. Portfolio approach to MNCs strategy creation • The essence of the portfolio approach is to present the firm in terms of a portfolio of businesses (product groups) not just as a single monolithic entity (Hax, Majluf, p. 127) • MNCs need an independent tool to judge each business’ prospects and challenges • H. Markowitz and his (unintended) contribution Robert Uberman, Multinational Corporations (MNCs)

  3. Portfolio models (matrixes) - „the great three” • BCG Growth - Share matrix • Model General Electric/ McKinsey Industry attractiveness – Business strength matrix • ADL matrix – the Life-cycle approach Robert Uberman, Multinational Corporations (MNCs)

  4. The portfolio approach – BCG matrix • The first applications recorded in late 60s, the methodology itself was published first time in 1973 • At peak of it’s popularity, in late 70s,more than a 100 out of US Fortune 500 MNCs claimed to use BCG matrix • (Obłój, pp. 273-277) Robert Uberman, Multinational Corporations (MNCs)

  5. BCG model - „experience curve” • Experience curve is base on an intuitive believe that by repeating any process one improves it’s efficiency. • Scientific „discovery” of the experience curve is often credited to A.A. Alchian, who in 1963 published his famous work – „Reliability of Progress Curves in Airframe Production” (the book origins from II WW researches – before treated as classified material) Source: Ian C. Runge, „Mining Economics and Strategy”, SME, Littleton, 1998 r. Robert Uberman, Multinational Corporations (MNCs)

  6. BCG matrix- the experience curve Source: Hax, Majluf, ”Strategic Management”, p. 111 Robert Uberman, Multinational Corporations (MNCs)

  7. Model BCG - postać modelu • Market Growth Rate: (Current year sales – previous year sales)/ previous year sales • Relative Market Share: Business Sales/Leading Competitor’s Sale (or Leader’s Sale) Robert Uberman, Multinational Corporations (MNCs)

  8. BCG matrix – strategic recommendations Source: Hax, Majluf, ”Strategic Management”, p. 135 Robert Uberman, Multinational Corporations (MNCs)

  9. Portfolio (matrix) models – critics of the BCG model • Growth and profitability are not correlated – frequently profitable projects cover areas of costs and processes – a good strategy shall not assume restraining from profitable projects • The learning curve is not applicable in every business area: • mature and resource based industries, • industries based on narrow specialisation. Robert Uberman, Korporacje międzynarodowe

  10. BCG Model - experience curve in natural resources (Extraction of brown coal) (Cost – USD/t) (Accumulated extraction) Source: Author’s estimates Robert Uberman, Korporacje międzynarodowe

  11. Portfolio models – further developments • Market share – possible definitions: • Absolute market share (value based) • Absolute market share (volume based) • Position in a ranking • Relative market share to a leader • Relative market share to three biggest competitors • Relative market share to the average one (the latter measured by Herfindahl’s index) • (Roberts Keith, PIMS, „Getting the right business metrics”, non published material) Robert Uberman, Multinational Corporations (MNCs)

  12. Portfolio approach to a strategy formulation – conclusions – critics • Critic of the balanced portfolio approach: • MNCs shall not be treated as a dynamic set of diversified businesses – there must be an unifying factor • preposition of maintaining a balanced portfolio lead to a wave of unjustified mergers and acquisitions • preposition of maintaining a balanced portfolio lead to disregarding potentially profitable projects Robert Uberman, Multinational Corporations (MNCs)

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