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Manager’s essential power-toolbox Taking firm grasp of diversified business firm

27 Jan 2014 - {{hitsCtrl.values.hits}}

Product Portfolio Analysis (PPA) is a process where managers study the profitability of the various products and services a business offers. It is designed to help optimize the allocation of resources between those products and services. While portfolio analysis can be a useful tool for thinking about how to optimize return on investment, it does have a few limitations.

One limitation relates to how to define the industry in which the business operates. But it is not always easy to define and categorize products. This can lead to subjective decisions about how to categorise products and services.

Take for example, a book publishing industry. Many book publishers tend to specialize. One might be in fiction, another in non-fiction and someone in technical book publishing. Clearly the numbers estimating the industry growth or the market share held by a business can vary dramatically depending on the choice of industry definition.

Further limitation relates to the use of only four quadrants. Again, it is an arbitrary choice. And, why use only market share and industry growth rate? A subsequent version of the model developed by Mckinsey used 10 factors, providing a rating for “industry attractiveness” along one side of the matrix and “business strength” along the other side. This enables much greater accuracy in positioning a business.

Another criticism relates to the assumption that the business must always adapt itself to the market conditions that apply at any given time. This is only an assumption. It is the opposite of believing that a business can change the environment and thus succeed. There are hosts of examples of companies that have adapted the market to their organisations, or at least affected the market to their own benefit.

Take for example, Kellogg. The ready-to-eat cereal market was supposed to mature and decline in 90s as the population aged in European countries. Kellogg decided to go against the perceived wisdom and invested in market to make it grow. They developed their product range to include young and old both.

Their ads concentrated on three points: (1) Their fortified cereal ranks as one of the best breakfast choices available because it is typically a low-fat, low saturated fat food; (2) their cereal offers variety. So everyone in the family has the chance to eat whatever each loves; (3) their cereal is also a good value.

The family can get all of the benefits of a nutritious breakfast for just a fraction of the cost of other breakfast foods. Today, Kellogg is number one in market share with just under 34 percent of the US $ 9 billion cereal market.

By rejecting the environmental determination, many companies have turned dogs into stars and cash cows.

Seven steps
Considering both its advantages and disadvantages, portfolio analysis should be regarded as a disciplined and organised way of thinking about asset allocation. It is only a subjective tool, however, and is not a substitute for the ultimate professional judgment of the responsible decision-makers.

Step 1: Identify lines of business
The first step in PPA is to identify the lines of businesses (SBUs) that make up the organisation’s portfolio. Ask yourself: which groups of programmes would be logical candidates to be grouped together as independent businesses?

Step 2: Group lines of business
There are three lines of businesses an organisation typically engages in. The first is core businesses. These are the businesses that directly support the objectives in the strategic plan and have a priority claim on resources. The second line of business is support functions that make it possible to deliver the core business. Examples are administrative, accounting, legal, governance support, etc. These do not have a priority claim on resources.

The third line of business is money-makers, which are the source of revenues that support the organisation’s core businesses. Ideally, the organisation’s core businesses should be self-supporting and perhaps even contribute to reserves. Often, this is not the case and activities must be subsidized with other income. Money-makers provide this income.

Step 3: Compare core businesses with mission statement
Once you have separated out your core businesses, compare them with the organisation’s mission statement. To pass this test, a business must directly support the goals that are defined in the mission statement. If a line of business does not support the strategic plan, it should be discontinued or phased out and its resources transferred to support the organisation’s other core businesses.

Step 4: Define products and services in each line of business
Once lines of business have been tested for relevance to the mission statement, the next step is to subdivide those that are relevant into their component products and services. For example, the total sales and expenses of a product would be subdivided into retail sales, corporate sales and dealer sales. Each segment or service would then be compared to the Programme Evaluation Matrix.

Step 5: Apply the Programme Evaluation Matrix
The Programme Evaluation Matrix is a graphic device that simplifies the process of analysing all the products and services in the organisation’s portfolio of products and services. In running its programmes through the Programme Evaluation Matrix, the organisation makes several assumptions:

It is preferable to provide good service to a focused market than to provide mediocre or poor service to too large a market.
Since the need for resources is competitive, the organisation must view the problem of securing resources in a competitive context.
It is pragmatic to surrender mediocre programmes to better competitors and wrest away promising programmes from weaker competitors.

The Programme Evaluation Matrix helps an organisation determine the answers to the following questions about each product or service in its portfolio:

Is it easy to implement?
Is it a good fit with our other programmes?
Is there poor alternative coverage in the marketplace?
Is our competitive position strong?

For a programme to survive the competition for the organisation’s resources there should be a positive response to all these questions. If it is not, it should be classified as being in a weak position.

Step 6: Determine product fit
Using the Programme Evaluation Matrix, the first step is to determine whether the product or service under review fits the organisation’s mission and priorities. The screens for good product fit are:

Congruence with mission and purpose of the organisation.
Focus on core concerns that are of vital interest to the organisation’s members/customers.

Step 7: Determine ease of funding and implementation
The criteria for determining whether a programme or service has the prospect of relatively easy funding and implementation are:

Market demand from a large, concentrated, growing client base.
High appeal to groups capable of providing current and future support.
Stable source of funding.
Appeals to volunteer leadership.
Measurable, reportable programme results.

Summing up
Portfolio analysis is an important aid in the organisation’s quest to identify its specific competitive role. This role should be so well suited to the organisation’s external and internal environments that other organisations are unlikely to challenge or dislodge it.
The organisation then has a distinctive competence that enables it to take advantage of specific environmental opportunities. To accomplish this, the organisation must be on the constant lookout for strategic windows or market opportunities.
(Lionel Wijesiri, a corporate director with over 25 years’
senior managerial experience, can be contacted at [email protected])

Features

Manager’s essential power-toolbox Taking firm grasp of diversified business firm

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