FREE online courses on Corporate Strategies - Corporate Strategy - Usefulness of Portfolio Analysis

 

Portfolio approaches have made important contributions to the improvement of strategic management.  Some of the most significant among them are.

 

They represent simple and effective ways to facilitate the decomposition of the firm's activities into a set of well-defined businesses.  Moreover, while conducting the necessary analysis to position the businesses in the two-dimensional matrix, ample opportunities exist to reassess the merits of the proposed segmentation. By permitting a clear differentiation of the nature of each business in terms of industry attractiveness and competitive position, portfolio approaches allow top managers to set appropriate and distinct strategies for each business in accordance with its inherent potential and developmental needs.

Portfolio approaches represent a pragmatic way to capture the essence of strategic analysis.  By means of a simple visual display of the portfolio of businesses, they provide a useful device to understand and communicate important characteristics of the strategic opinions confronted by the firm.

The application of portfolio approaches at the corporate level provides useful guidelines for top managers to address the question of business strategy evaluation and resource allocation.

It allows the establishment of an orderly set of priorities for investment depending on the business potential for growth and profitability derived from its position in the portfolio matrix.

It provides a mechanism for checking the consistency between business requests of financial and human resources and their inherent needs obtained from their position in the portfolio matrix.

It facilitates the proper balancing of cash requirements and cash supplies among businesses of the corporation.

It permits the establishment of management control mechanisms suitable for monitoring the performance of each business using key variables consistent with their current and future potential.

Portfolio approaches can also be applied in the process of strategy formulation at the business level, but the focus of attention changes from the entire business to the more detailed collection of product-market segments.

By representing the complete collection of businesses of the firm, portfolio approaches provide a useful mechanism to consider potential acquisitions and divestitures.

Portfolio approaches were most significant in raising the strategic alertness of most managers.  To a great extent, the use of portfolio matrices was responsible for accelerating the adoption of formal competitive analysis and for increasing the competitive awareness in American firms.  This was accomplished because the implementation of the portfolio approach requires the formal collection and processing of some information regarding competitors. This constitutes a useful first step in improving competitive intelligence. Also, portfolio matrices can be constructed for major competitors, generating valuable insights with regard to their overall strengths and ability to anticipate their potential responses and moves.  At the very least, this judgmental call would put in evidence the need to improve the first's understanding of its major competitors.

 

In spite of the legitimate contributions attached to the methodology introduced by portfolio matrices, they are not without criticism. The most common complaints have been that matrices tend to trivialize strategic thinking by converting it into simplistic and mechanistic exercises, whose final message is dubious at best.  Also, the matrix methodology has tended to take strategic analysis and, subsequently, strategic thinking, away from managers and into the realm of corporate planning departments.

 

There is a clear element of truth in these criticisms, but what they fail to capture is that matrices are simple tools and not the final output of a properly designed strategic management process.  As with any tool, its final value depends on the craftsmanship of its users. Portfolio matrices assist in bringing intelligent and appropriate communicational opportunities to the hard issue of portfolio management.  Every single one of the matrices is a grossly oversimplified model of a complex problem.  As is the case with any model, portfolio matrices are simple abstractions that attempt to capture a partial but critical element pertaining to resource allocation in a portfolio setting.  Since each one of them adopts a single biased orientation, individually they could be judged as being too narrow in scope, ignoring important additional perspectives.  However, collectively, they can produce, from various angles, a combined picture that begins to capture in a much more forceful way the broader complexities of the resource allocation problem. 

 

Despite these difficulties, the corporate managers surveyed want to press ahead with portfolio planning, largely because the approach:

• Promotes substantial improvement in the quality of strategies developed at both the business and the corporate level.
• Produces selective resource allocation.
• Provides a framework for adapting their overall management process to the needs of each business.
• Furnishes companies with a greatly improved capacity for strategic control when portfolio planning is applied intelligently and with attention to its pitfalls.

 

Research shows that capital-intensive process industries such as chemicals, petroleum, and paper – and technology-intensive (but industrially mature) industries such as appliances, abrasives, and industries equipment – are most likely to use some form of this planning process. 

 

Use of Portfolio Planning by Industry

 

 

Since they face the greatest challenges, the bigger and more diverse companies have introduced the technique.  But, among diversified industries, conglomerates rarely use portfolio planning, while diversified industrials often do.