Portfolio analysis in practice - Strategic Management

Figure Shows an example of DPM completed for some hypothetical strategic business areas, and this may serve as an example of how all the other portfolio analysis techniques are applied. Three of the boxes are labelled with words suggesting that divestment is the approximate action to consider, because of weakness in market growth and position. Two boxes suggest cash generators. In both cases there may be need for some maintenance investment (‘Proceed with care’ suggests slightly more generous investment policies), but for both the aim should be to harvest as much cash flow as possible. Four boxes imply different approaches to growth strategies.

‘Leader’ and‘Growth’ both suggest investment is worth while, but carry the implication that the growth box should aim for a balanced cash flow, while the leader box may be both cash hungry and supported. ‘Double or Quit’ really says choose some of these, back them to grow, and get out if they fail. It is from this box that future ‘leaders’ should come. The remaining box is a reminder that a little more effort might bring that leadership position.

I do not use these labels when I apply the technique, because they are statements of tendency rather than fact, at least when applied outside of the chemicals industry. It is useful to know them, but the temptation to plan by recipe should be avoided. Now if an organisation could array all its activities on such a matrix it at least has a preliminary indication of what might be a sensible overall corporate strategy to each. And if each has been plotted using industry structure analysis, the positions in the matrix should be backed by carefully thought-out strategic business unit strategies. Put the risk analysis behind the matrix, in a series of categories of low risk, average and high risk, and a new dimension of thought is opened up.

Example-of-DPM

A number of observations should be made. First, the position on the matrix is not an eternal truth. Over time, in line with product life-cycle theories one might expect a decline in prospects, a drift towards the left of the matrix. Similarly, one might postulate an increasing tendency for a decline in each position. The overall effect suggests that today’s leaders may become tomorrow’s cash generators, and ultimately candidates for divestment. Understanding and managing the drift is an important aspect of strategic management. Second, the grids on the matrix are not finite barriers. Interpretation is very difficult when a strategic business unit falls near a boundary. A high degree of judgement in interpreting results is needed, and the techniques are certainly no black box. Third, the importance of the point made earlier about getting the strategic business area sensibly defined becomes very apparent from a glance at the matrix. A high position in a fast-growing segment might put the SBU into the leadership box if defined in segment terms. If looked at on a larger canvas this could translate to a slow-growing market in which the company has a poor position, which might indicate divestment. Getting the approach right requires much searching thought, and is unlikely to be the same answer for each organisation.

Fourth, it is easy to see that the different types of strategic positioning of the SBUs requires managers of different capabilities, personalities and skills. The entrepreneurial manager may fit the ‘double or quit’ business, and be quite incapable of running a cash generator effectively. Managing an operation for planned divestment also calls for a different degree of talent. Some work has already been done on matching people to opportunity 10,11 and it is a field wide open for significant academic study. No one should imagine that this, or any other portfolio analysis technique, can solve all strategic problems. If this simplistic view could be taken, strategy would be reduced to four or five groups of decisions and life is much more complex than this.

Thus, strategic decisions become well rounded and give attention to all the problems involved in implementation. Portfolio analysis will not work for everyone. Businesses where market share is unimportant for success (for example, agriculture) cannot sensibly be analysed, particularly if reasons for being in them are associated with capital appreciation and tax advantages. (Products requiring regional or local markets can usually be evaluated if the geographical scope of the market is sensibly defined.)It may also fail in an organisation with complex production interrelationships.

Risk matrix
Shell describes another method of looking at environmental risk, primarily on a broader front. The result is again to force consideration of the issues and to gain some awareness of danger areas for which special strategies might be necessary. There is no need to describe the axis it holds in common with the directional policy matrix. The remaining axis is a scored position based on an assessment of the specific environmental factors that appear to be of concern; the score is arrived at by considering both the probability of occurrence and the potential impact on the organisation. Figure provides an example of the worksheet and the scoring methods. An advantage of the risk matrix is, like the other two approaches, that it forces thought about the issues. This last point can be covered by plotting each position on both the DPM and risk matrix by drawing circles whose size is proportional to importance. Another approach is to redraw the matrices inserting total figures for profit contributions, sales, capital employed, cash flow, etc. for the activities which fall within each box.

Risk-matrix scoring

Combined-3-dimensional matrix portfolio analysis plus risk

Figure provides an example of the risk matrix. Figure shows this as the third dimension of the DPM: the use of perspex blocks as illustrated makes it easy to provide a visual representation and has much appeal as a desktop toy, although the same visual impact can be gained at lower cost by using different colours to show different levels of risk on a single plane. Despite their defects, the portfolio-analysis techniques have taken the practice of planning several steps forward, and have much to offer the complex organisation.


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Strategic Management Topics