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Portfolio Planning 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
1. Capon, Farley, & Hulbert (1987), Corporate Strategic Planning. New York; Columbia
University Press.
2. 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.
1. No economic theory to support use
2. Psychological theory says it will be detrimental
3. Firms that use it earn less
4. Firms whose decisions were consistent with BCG
lost value
5. 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)