Portfolio Analysis: Igniting a long-term spirit in a short-term world (XXVII). Comparison between 4 portfolio analysis models.
Today´s subject is about the comparative example of using the BCG, the GE-McKinsey, the Shell Directional Policy, and the ADL Matrixes. This post is based on a paper written by Wind, Mahajan, and Swire about an empirical comparison of standardized portfolio models (1). Find it in the bibliography below.
Before starting I would like to share a new aquarelle that was selected to participate at the International Watercolor Society Third Biennale India. This composition was finished around 6 weeks ago. It is about masks, masks hanging in the middle of the COVID-19 season. I am blessed and so grateful for the jury’s selection. The event will be handled in New Delhi, next February 2022.
So let´s start:
Building 4 matrixes for one company.
As mentioned previously this study was elaborated by the researchers Wind, Mahajan, and Swire using a company from the list of Fortune Magazine 500, this company had 15 SBUs (strategic business units), and these SBUs involved several industrial components and commodity type businesses. To build the matrixes, the analysis considered different definitions of key variables, particularly when defining market share, and market growth; when defining the rules for dividing the X-axis and Y-axis into low or high categories; and when weighting the variables of the Shell International Type Matrix.
Let´s start with the BCG Matrix and the rest of the matrixes (see the slides below)
The period analyzed using PIMS Data: 4 years (from years 06 to year 09). After explaining to you about PIMS, I am sure that you know by now, the importance of a PIMS database in your country, and why is it so crucial to make it, in your own group of industries.
Definitions of Market Growth: 4 different definitions are described as follows,
- Market growth defined as real market growth: an average annual growth of served market, from year 06 to 09, adjusted for selling prices.
- Market growth defined as market growth: average annual growth of served market, from year 06 to 09, in current dollars.
- Market growth defined as Forecast Real Market Growth: the company´s forecast of average annual real market growth over the next 4 years.
- Market growth defined as Forecast Real Short- and Long-Term Market Growth: average of company´s forecast for next 4 years, and 6 years after that (i.e., approximately a 10-year average growth outlook).
Definitions of Market Share:
- Market share defined as company´s sales divided by total sales to served market.
- Market share defined as company´s sales divided by total sales of big 3 competitors.
- Market share defined as company´s sales divided by the sales of largest competitor.
- Market share defined as normalized market share plus normalized relative market share vs 3 leaders.
The authors cited above were respectful of the different definitions of variables because the data they were using was coming from the PIMS Database. In the case of the first matrix (the BCG) which has two dimensions: relative market share (cash generation) and market growth (cash use), they offered us 16 BCG share/growth matrixes for each SBU, an incredible example of the ample range of combinations. The authors displayed 15 SBUs x 16 share/growth matrixes, a total of 240 different combinations of positions to plot. In addition, the authors explain the case of defining the internal cut-off point for the X-axis (using the mean or average) and how different we can define the external cut-off point for the Y-axis (using the mean of PIMS data). Please see the set of slides below.
This is just for the first matrix (the BCG one). We chose this example, and believe us because we wanted you to see how complicated it is to do portfolio analysis when we don´t know what definition to use. How consistent or inconsistent could be to draw one single matrix, depending on the definition of the variables. That is why is so significant to be aware not just of the quality of the data input, but also of the definitions used in portfolio analysis.
Definition of variables when calculating critical factors (internal or external).
The reason why we fell when using Artificial Intelligence or super-powered software that is waiting for us to fill data… is because we usually define variables with short (closed figures) or unreasonable strategic assumptions; that have no correlation with a dynamic reality. Can you imagine the impact of defining market share with 4 different designations? Can you imagine the impact of defining market growth with other 4 different designations? And by mixing each of the definitions of market share and market growth, we end up having 16 BCG matrixes for the company with 15 SBUs? Which one is the right one? Which one is the incorrect one? And this is just the beginning with the BCG matrix that is the most simple one of all!
Let´s explore this in detail. Please follow the next presentation. After the BCG Matrix, we continue with the GE-Mckinsey, then with the Shell Directional matrix, and we finalize with the ADL modified matrix.
If you wish to download the material in PDF, please click here:
The next publication will be about what, how, and why did we take all this effort to show you the last slides. Now let´s proceed with our effort to support true traditional music played with genuine instruments.
Why did we choose Canon´s Pachelbel last week? For those who do not feel interested in classical music, this song is utterly to explain the benefits of the classics for your mind. The solo piano from George Winston is so charming and delightful. The Ensemble Arpabaleno is quite unique, kind of a peculiar treasure to watch because it is rare to listen to a group of harpists nowadays. And the orchestra version under Adrian Leaper (born 1953) who is an English conductor and Director of classical music at Spain’s RTVE Symphony Orchestra. Leaper also offers a compelling version of the same song under a different setup of multiple instruments. Of course, Pachelbel´s piece has more than 400 years of existence. Nevertheless, trust me, that classical music helps us to concentrate. Those of you who are working from a laptop or computer station and spend at a minimum between 10 to 14 hours per day serving a machine (which is insane, and I say it because I have been there too); will benefit your brain if you listen to classical intellectual music. Usually, Mozart and baroque classical music are the most helpful because of the decibels that are beneficial for the brain. The capacity of concentration, and genius energy raises up when you work with a soft background of classical music.
Song of today. Today we will jump to the year 2017, as when reading Cortazar´s book Rayuela. With Ed Sheran. “Perfect” beneath his original video. And “Perfect”, arranged and performed live on cello, violin, and piano by a group called Allegretto. Just stunning.
See you next Friday, with a new episode of this lovely saga that is almost finished. Next year we will begin a new saga that we have baptized with the name “Bees at work”. More information to come. Stay tuned!.
Sources of reference utilized today:
- Wind, Yoram; Mahajan, V.; Swire, D. An empirical Comparison of Standardized Portfolio Models.
Disclaimer: Illustrations in Watercolor are painted by Eleonora Escalante. Other types of illustrations or videos (which are not mine) are used for educational purposes ONLY. Nevertheless, the majority of the pictures, images, or videos shown on this blog are not mine. I do not own any of the lovely photos or images posted unless otherwise stated.
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