The Businees Portfolio Analysis

Business Portfolio Analysis

The business portfolio is the collection of businesses and products that make up the company. The best business portfolio is one that fits the company's strengths and helps exploit the most attractive opportunities.

Therefore the company must:

(1) Analyse its current business portfolio and decide which businesses should receive more or less investment, and

(2) Develop growth strategies for adding new products and businesses to the portfolio, whilst at the same time deciding when products and businesses should no longer be retained.

(1) Evaluating Current Portfolio

The major task in strategic planning is the business portfolio analysis. This is a tool by which managers identify and evaluate the various businesses of the company.

Management’s first step is to identify the key business making up the company. These may be referred to as strategic business units An SBU is a unit of the company that has a separate mission and objectives and that can be planned independently from the other businesses. An SBU can be a company division, a product line or even individual brands - it all depends on how the company is organised.

The second step is to assess the attractiveness of its various SBU’s and decide how much support each deserves. This can be done;

1) Informally: Management takes a look at the company’s portfolio of business and products and decides how much an SBU should contribution and receive

2) Formally: These methods evaluate SBU's on 2 dimensions; attractiveness and strengths. Two best-known portfolio planning methods are the Boston Consulting Group Portfolio Matrix and the General Electric Matrix

The BCG Matrix

Using this approach a company must classify its SBU’s according to the Growth share matrix.

This is a portfolio planning tool which evaluated a company’s SBU in terms of their market growth rate (attractiveness) in relation to its market share (strength) By dividing the matrix into four areas, four types of SBU can be distinguished:

Stars - Stars are high growth businesses or products. Often they need heavy investment for their rapid growth. Eventually their growth will slow and, assuming they maintain their relative market share, will become cash cows.

Cash Cows - Cash cows are low-growth businesses or products. These established and successful businesses need less investment to hold their market share. Thus they produced strong cash flows that the company needs to pay its bills and support the other SBU’s that need investment.

Question marks вЂ" These are low growth business units in high growth markets. They require substantial investment in order to hold their current position let alone grow market share. Management have to think hard about "question marks" - which ones should they invest in to turn in stars and which ones should they allow to fail.

Dogs - Refers to businesses or products that have low relative share, low-growth markets. Dogs may generate enough cash to maintain themselves, but they are rarely, if ever, worth investing in.

Once a company has classified its SBU's, it must decide what to do with them. Conventional strategic thinking suggests there are four possible strategies for each SBU:

(1) Build Share: here the company can invest to increase market share (for example turning a "question mark" into a star)

(2) Hold: here the company invests just enough to keep the SBU in its present position

(3) Harvest: here the company reduces the amount of investment in order to maximise the short-term cash flows and profits from the SBU. This may have the effect of turning Stars into Cash Cows.

(4) Divest: the company can divest the SBU by phasing it out or selling it - in order to use the resources elsewhere (e.g. investing in the more promising "question marks").

General Electric Strategic Business Planning Grid

The GE Matrix overcomes a number of the disadvantages of the BCG. Firstly, market attractiveness replaces market growth as the dimension of industry attractiveness, and includes a broader range of factors other than just the market growth rate. Secondly, competitive strength replaces market share as the dimension by which the competitive position of each SBU is assessed.

Factors that Affect Market Attractiveness

Attractiveness (rated low, medium, high) includes - Market Size, Market growth, Market profitability, Pricing trends, Rivalry, Risk of returns in the industry, (etc Porter’s 5 forces model)

Factors that Affect Competitive Strength

Strengths index (strong, average, weak) includes: Strength of assets and competencies, Relative brand strength, Market share, Customer loyalty, Relative cost position, Distribution strength, technological etc

Often, Strategic Business Units are portrayed as a circle plotted in the GE Matrix, whereby:

- The size of the circles represent the Market Size

- The size of the pies represent the Market Share of the SBU's

- Arrows represent the direction and the movement of the SBU's in

the future

Strong Average Weak

High

Medium

Low