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Opinions about BCG

Opinions about BCG. 95% “Some knowledge or extensive …” Help in Decisions? 66% Yes (only 5% poorer) [sample 175 MBA’s in early 1990’s]. No Prior Evidence to Support “Portfolio Planning” – Instead, Evidence is Negative. Inputs Difficult to measure market share and market growth Outputs

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Opinions about BCG

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  1. Opinions about BCG 95% “Some knowledge or extensive …” Help in Decisions? 66% Yes (only 5% poorer) [sample 175 MBA’s in early 1990’s] Portfolio Planning

  2. No Prior Evidence to Support“Portfolio Planning” –Instead, Evidence is Negative • Inputs • Difficult to measure market share and market growth • Outputs • Firms that use BCG had a lower return on capital1 • Firms whose decisions were consistent with portfolio planning methods lost market value2 Capon, Farley, & Hulbert (1987), Corporate Strategic Planning. New York; Columbia University Press. Slater and Zwirlein (1992), Shareholder value and investment strategy using the general portfolio model,” Journal of Management, 18, 717-732. Portfolio Planning

  3. Why BCG Portfolio Matrix Was Expected to Harm Decision Making • Mental accounts mislead • Theater ticket problem • BCG assumes that market share causes profits Portfolio Planning

  4. Task Used in Laboratory Experiments • You are in charge of investments: • “Digits” – invention in production that produces 100% gain over 10 years • “Sunbars” – advertising campaign that loses 50% over ten years • You attended: • No course (control group) • BCG course • NPV course Portfolio Planning

  5. Many Laboratory Experiments Conducted • Subjects • 1,015 from ten countries • Administration • by 6 faculty • on 27 occasions • over six years Portfolio Planning

  6. Method Used Treatment (n) BCG NPV ? BCG (104) 55 30 15 Profit (70) 6 60 34 Other (70) 4 59 37 Method Actually Used by Percent Portfolio Planning

  7. Selection of Unprofitable Project* BCG 63 (296) Control** 46 (228) NPV 37 (232) Payback 35 (112) Percent by Treatment (Sample Size) * Sunbars (the star) ** The Conglomerate, inc. exercise was the control group. Portfolio Planning

  8. Selection of Unprofitable Project* BCG 87 (219) Proft 15 (432) Other 70 (246) Percent by Method (Sample Size) * Sunbars (the star) Portfolio Planning

  9. Conclusion Do not use portfolio planning methods. • No economic theory to support use • Psychological theory says it will be detrimental • Firms that use it earn less • Firms whose decisions were consistent with BCG lost value • Experimental evidence shows managers are misled For further details, see Armstrong and Brodie (1994), “Effects of portfolio planning methods on decision making,” International Journal of Forecasting, 11, 73-84. (In full text on jscottarmstrong.com) Portfolio Planning

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