Strategic portfolio analysis - Investment management

Strategic Portfolio Analysis

Currently, one of the widely used tools for assessing the company's economic performance is strategic portfolio analysis.

Strategic portfolio analysis is a tool through which the company's management studies and evaluates its business activities with the aim of investing in the most profitable and (or) strategically promising directions and cuts or completely stopping investments in unprofitable projects.

In the process of strategic portfolio analysis, the relative attractiveness of markets and the competitiveness of the company in each of these markets are assessed. It is assumed that the company's portfolio should be balanced, i.e. the correct combination of units or products that need capital in order to ensure sustainable development should be ensured, with economic units that have some surplus of capital.

The purpose of the methods of strategic portfolio analysis is to help managers create a clear picture of the formation of costs and profits in a diversified company. Portfolio analysis provides managers with a tool for analyzing and planning portfolio strategies to determine the reasonable diversification of the activities of a diversified company.

One of the most important ways to use the results of strategic portfolio analysis is to make decisions about the restructuring of the company to use

opening opportunities both within the organization itself and outside it.

Methods of strategic portfolio analysis were developed in the 1960s. to solve the tasks of strategic management at the corporate level and are one of the few specialized methods of strategic management. The theoretical basis of portfolio analysis is the concept of the product life cycle. At the same time, strategic portfolio analysis assumes that for the purposes of developing the strategy, each product of the company, its business units were considered independently. This allows you to compare them among themselves and with competitors.

The main method of portfolio analysis is the construction of two-dimensional matrices, with which business units or products can be compared against each other by such criteria as sales growth rates, relative competitive position, stage of the life cycle, market share, industry attractiveness, etc. At the same time, market segmentation principles are realized (highlighting the most significant criteria based on the analysis of the external environment, analysis of the enterprise's performance and comparison). It should be noted that although different sets of variables are used in different matrices, but they are still two-dimensional matrices, in which the evaluation of prospects for the development of the market is determined on one axis, and on the other - the assessment of the competitiveness of the business units of the enterprise.

It's important to remember

The main advantages of portfolio analysis are the possibility of logical structuring and visual reflection of the organization's strategic problems, the relative simplicity of the presentation of results, an emphasis on the qualitative aspects of the analysis.

Typically, the portfolio analysis process follows one pattern.

1. All activities of the enterprise (product range) are divided into strategic business units. The task of identifying or separating business units is quite complex, especially for large corporations. It is believed that the business unit must:

- independently serve the market, and not work for other divisions of the enterprise;

- have their customers and competitors;

- the management of the business unit must control the key factors that determine success in the market.

2. The relative competitiveness of these business units and the prospects for the development of relevant markets are determined. At the same time, various consulting firms offer various criteria for assessing the prospects for the development of the market and the activities of business units in these markets.

3. A strategy is developed for each business unit (business strategy) and business units with similar strategies are combined into homogeneous groups.

4. Management assesses the business strategies of all business units in terms of their compliance with corporate strategy, commensurating the profits and resources required by each unit. Based on such a comparative analysis, it is possible to make decisions on adjusting business strategies. This is the most difficult stage of strategic management, where the influence of managers' subjective experience, their ability to predict and anticipate the development of events of the external environment, a kind of "market sense" and other informal moments.

It's important to remember

The main disadvantage of portfolio analysis is the use of data on the current state of the business, which can not always be extrapolated for the future. It should also be remembered that in any portfolio matrix different types of business are evaluated only by two criteria, and many other factors (product quality, investments, etc.) are not taken into account.

The differences in the methods of portfolio analysis consist in approaches to assessing the competitive positions of strategic business units and the attractiveness of the market. The approaches proposed by the Boston Consulting Group (portfolio matrix B CG) and the consulting firm McKinsey ("business screen") are most well known.

At the heart of the matrix proposed by the Boston Consulting Group is the product life cycle model, according to which the product or business unit in its development goes through four stages: entering the market (commodity - the "problem"), growth (commodity - "star"), maturity (commodity - "cash cow") and recession (commodity - "dog"). At the same time, cash flows and profit of the enterprise also change: negative profit is replaced by its growth and then gradual decrease.

Product - problem - is a new product in the growing industry. Such products can be very promising, but they need substantial investment support. Main

A strategic issue of known complexity: "When do you stop financing these products and exclude them from the corporate portfolio?" This group of goods is a potential commodity - the "star". However, in the process of becoming, these products are associated with large negative financial flows, and there remains the danger that they will not be able to develop into goods - the "stars". The risk of financial investments in this group is greatest.

Product - star - this product is the market leader at the peak of its product cycle. He himself brings a high enough profit, but at the same time it requires significant financial expenses in order to maintain or expand the share of the dynamically developing market. Therefore, despite the strategically attractive position of this product, its net cash income is quite low.

In this sense, the future income of the goods - "stars", but not current ones - is important. When the pace of market growth slows down, the goods - the "stars" become dairy cows & quot ;.

Product - cash cow - is a product that occupies a leading position in the market with a low growth rate. Its attractiveness lies in the fact that it does not require large investments and provides significant positive cash flows based on an experienced curve. Such products not only pay for itself, but also provide funds for investing in new projects on which future growth of the enterprise depends.

Item - dog - is a product that has a low market share and does not have growth opportunities, as it is in unattractive industries (in particular, the industry may be unattractive due to the high level of competition). Net cash flows from such products are zero or negative. If there are no special circumstances (for example, this product is complementary to the "milk cow" or "star"), then these products should be disposed of.

The essence of the Boston matrix is ​​that it concentrates on positive and negative cash flows that are associated with different products of the enterprise or its business units. In the course of the analysis of the nomenclature of the output, the position of each type of product in the matrix is ​​determined. To this end, the products of the enterprise are classified according to the indicators of the relative market share and growth rates of the industrial market.

The indicator of relative market share (SDT) is defined as the market share of the business unit divided by the market share of the largest competitor. It is clear that this indicator for the market leader will be more than one. For example, the relative market share of two means that the market leader's market share is twice as large as that of the nearest competitor. However, if the relative market share is less than one, then this indicates a lag from the market leader. A high market share is seen as an indicator of a business that generates positive cash flows as an indicator of the expected revenue stream. This position is based on an experimental curve.

The second variable - the growth rate of the industrial market (TPP) - is based on forecasts of sales of the industry's products and is linked to the analysis of the life cycle of the industry. Of course, the actual curve of the life cycle of the industry can only be built retrospectively. However, the company's management can export the stage of the life cycle of the industry in which it works to determine (forecast) the need for finance.

Another version of the portfolio matrix, called "business screen", was developed by the McKincey with General Electric. It consists of nine parts and is based on an assessment of the long-term attractiveness of the industry and the "force" competitive position of a strategic business unit.

The McKincey matrix includes more factors than the Boston matrix. The growth factor of the market was transformed in this model into a multifactor concept

Fig. 5.1. Strategic portfolio analysis method business screen the McKinsey advisory group

"the attractiveness of the market (industry)", and the market share factor - in the strategic position (competitive position) of business units. And experts McKinsey believe that the factors that determine the attractiveness of the industry and the position of business in individual markets are different. Therefore, when analyzing each market, it is first necessary to identify the factors most relevant to the specifics of this market, and then try to objectively rank them using three levels: low, medium, high (Figure 5.1).

Thus, for the purposes of investment management, the method of strategic portfolio analysis "business screen" is more attractive, since it takes into account a greater number of factors and renders them in order of importance.

Also We Can Offer!

Other services that we offer

If you don’t see the necessary subject, paper type, or topic in our list of available services and examples, don’t worry! We have a number of other academic disciplines to suit the needs of anyone who visits this website looking for help.

How to ...

We made your life easier with putting together a big number of articles and guidelines on how to plan and write different types of assignments (Essay, Research Paper, Dissertation etc)