Business portfolio analysis
It’s type of strategic business analysis that gives strategic recommendations (ie. Output analysis) for strategic business unit (SBU, below is explanation of SBU) based on two key business attributes competitive position and attractiveness (market segment / or attractiveness of SBU) at present and at a certain period of time in the future.
It is a synthesizing analysis ie. it combines the outputs of several strategic analyzes. Among the most commonly used models of business portfolio analysis include models BCG and GE matrix.
– Note 1: terminology, the term strategic management, strategic business unit (SBU Strategic Business Unit) refers to the legal department of the company (subsidiary company), or it may be a different type of output (divisions) provided within a single company (eg. products division, a division for custom development, ..).
– Note 2: GE / BCG is in principle similar to the very popular SWOT analysis, because the opportunities / threats are reflected in the attractiveness of the segment and the strengths / weaknesses in the competitive position. The main disadvantage of SWOT is generality(e.g. don’t recommend specific atributes, and particular generic strategies). Generality on the other hand is also a benefit because it is universal (it can be used not only in business but also a personal search direction i.e. self-management).
Business portfolio analysis can be done on two levels, namely the SBU level and at the level of the group of SBU, depending on that business portfolio analysis can be divided into two groups:
1. portfolio segment analysis:
Strategic Analysis at SBU, which compares analyzed attributes (competitive position, the attractiveness of the market segment) against competitors on selected market.
The process of portfolio segment analysis
1. get relevant informations needed for assessing analysed attributes of the business portfolio analysis. It is advisable to use objective informations(not subjective) supported by real data (the analysis rule: trash in trash out). It is appropriate to obtain such informations from the relevant analyzes of internal and external environment.
-creation portfolio matrix (weighted) multi-criteria evaluation of informations at different time, plotting them into tables and create portfolio matrix.
-financial information: current and estimated future cash flow and profitability
3. recommendation generic strategies
2.portfólio analysis of company businesses:
Portfolio analysis at the level group of SBU, which compares analyzed attributes (competitive position, attractiveness) selected SBU among other SBU(ie. to another divisions or subsidiaries) in the portfolio company. This analysis uses the outcomes of the previous realized portfolio segment analysis.
The process for portfolio analysis of businesses
1. get informations from the portfolio segment analysis
– Creation of portfolio matrices (weighted) multi-criteria evaluation of information gained at the time plotting them into tables and model portfolio matrix.
– Brainstorming and analysis of the relations between SBU
3. recommendation generic strategies
generic strategies of BUSINESS PORTFOLIO ANALYSIS
Growth is possible through entry into the new segments / markets or increase current share on the market segments and it can be realized by internal resources or in cooperation / conjunction with external (through alliances, acquisitions, joint venture).
-Connections (mostly regards the acquisition) with the competitors, for various reasons such. acquisition of know-how, increase marketshare, profits, and others.
-Increase share through optimization: acquisition, cross / up / deep selling, Winback. There are several analytical models to support these strategies. e.g. business analyst in CRM Marketing, RFM analysis (appropriate mainly for the retail B2C).
VERTICAL Integration: the extension of business in upstream(B2B customers) or downstream(B2B supplier) areas of company. The reason for the increase marketshare, profits, increase flexibility.
Maintenance / Stabilisation strategy
The aim is to get the most profit but not investing in business development respectively only to the extent that ensures operations. This strategy often use businesses in mature industries, or for the state regulated institutions..
implemented if management make fundamental failures or unforeseen development. The remedy is usually realized through optimization, reducing diversification, portfolio restructuring and other.
The exit strategy
if the segment/market lost attractiveness, or if the company no longer has no competitive advantage or their acquisition is ineffective, if the company has lost the trust of customers ..
BCG and GE matrix analyze attributes of competitive position and attractiveness. The exact description of the attributes is dependent on the chosen type of portfolio analysis ie. 1.Type between competitors of SBU (hereinafter will be presented two models for this 1.Type)
2.Type between SBUs in company portfolio.
GE matrix attributes
Each business has a specific attributes of competitive advantage, therefore there is no point placing some universal attributes common to the different types of business (because they don’t exist). Example Attributes may be e.g. Price with importance of 40%, quality 20% marketshare 30% ..
Note. It would be ideal to give 100% importance to all attributes, but we live (not just in the company, the general) in a world with limited resources and therefore it is necessary to prioritize the key factors leading to success.
List of key attributes, their order and assessment of surveyed firms against competition can be obtained from selected analytical models such as internal company environment. model of key success factors (CSF), which uses model of customer criteria (CPC).
market segment attractiveness
the attractiveness of the market segment depends on a number of attributes, typically it regards attributes such as:
-Size of market segment: indicates the number of buyers in the chosen market segment who are interested in buying the output (product / service) and have money to buy it.
size is expressed by the number of sold outputs(product / service) and by money(income, earnings = number of buyers * average price/unit). To calculate the size of the segment/market can be used top down or bottom up method.
-phase of market segment/sector: indicates at what stage (growth, saturation, sedation) is the market segment/sector. It may therefore be deduced how long will earn this market segment / sector. can be expressed as% of market segment which is already served in ratio to the size of the potential market segment / sector. (More on market analysis)
-growth rate of market segment
-required degree of risk: The company is looking for stability, or is willing to take more risky strategies
-scalability of business: scalable / nonscalable. The scalable business unlike nonscalable if sales growth only slightly(unproportionally) increase fixed costs.
-competition (more on the analytical model of competition)
with right combination of mentioned attributes is possible to estimate the most accurate sales, profitability, earnings (or rather cash flow).
recommended strategies for GE matrix
static strategies by the GE matrix don’t take into account time factor so that have only partial use.
recommended dynamic strategies (present -> future)
The lack of time is a significant disadvantage of classic GE matrix therefore I propose dynamic strategies that take into account time factor:
A-> A: maintainer stabilization strategy
B-> A: growth strategies (ie. Making significant investments to improve the competitive edge).
G-> H: exit strategy from the segment
C-> B: growth strategy of conditional growth
C-> E: growth strategy of conditional growth. Mostly it’s a blip in the market while it’s expected to return attractiveness after some time.
C-> F: expectant strategy
BCG matrix attributes
attractiveness expresses the growth rate of the market, and competitive position reflects the relative marketshare.
The calculation is made comparing the marketshare surveyed company in ratio to the company with the largest marketshare.
marketshare is selected as the main indicator of competitive position mainly due to:
learning-effect (ie. increasing the knowledge and experience leads to optimization thereby decreasing cost per unit of output) -> it increases profitability and helps to increase profits in (more in studies of Hax and Majluf; Buzzell & Gale; Doyle and Stern)
-economy of scale, brand awareness, bargaining power of suppliers and customers, empirical findings which show that marketshare is correlated with profitability (eg. see PIMS studies showing a correlation ROI by marketshare) .
the pace of market growth
The calculation is made by comparing the growth rate between periods (usually compare the past with the current period).
Static BCG Strategies
NOTE: The recommended static strategies are consistent with those set out in the above-GE matrix, with the difference that they are at an earlier stage of accuracy
– Question marks and stars: growth strategies: optimal portfolio allocations using profits from cows to finance the growth of selected stars and question marks (if they are not they should acquire because of portfolio balance). Only invest into the perspective question marks.
– Stars: maintenance strategy: Situation if a company has a good position however on the unattractive market. Do not invest, respectively, only slightly invest ensuring the operation of the stars.
– Dogs: exit strategies: situation where the company has a weak position on unattractive market.
They are the same as dynamic strategies of GE matrix, mostly differ in precision.
Final comparison BCG and GE
The main difference between these matrices are
1.interpretation of attractiveness and competitive position: BCG matrix attributes chose simplicity (one key attribute reflecting the attractiveness and competitive position) and GE matrix complexity (complex multiple attributes reflecting the attractiveness and competitive position). The simplicity / complexity determines the (causal) their respective advantages and disadvantages.
The main problem of classic BCG is excessive simplicity of attributes, and this choosen attributes don’t satisfy in currently to express attractiveness and competitive position. especially in the case of competitive position relative marketshare is unsatisfactory (it also says the company that created the BCG .. ‘market share is no longer a direct predictor of sustained performance “..). This lack of excessive simplicity is designed in Optimal business portfolio analysis (more below).
2. The accuracy of the recommended strategy: while BCG divides analysed attributes with 2 values high low so GE matrix divides them into groups 3ch (High Medium Low). And this results in a higher number of strategies (BCG matrix 2×2 = 4strategies vs GE matrix = 3×3 = 9 strategies).
the difficulty of obtaining data
speed of execution
relationship with the strategies of other SBU
optimal business portfolio analysis
Based on the advantages and disadvantages of both analyzes I recommend to use a compromise when model remains simple (as BCG) and at the same time there is a slight increase in the model’s accuracy (inspire from GE matrix) by selecting the 2 or 3 key attributes best reflecting the attractiveness and competitive position.
More on the optimal business portfolio analysis and specific types for its implementation I point out in the pro version of the article (see left).