Strategic portfolio management

Strategic portfolio management decides on starting, stopping, reducing, growing, and regrouping activities.

Portfolio management may also apply to the management of sets of projects set up to implement key initiatives of the overall business strategy.

In this section, I will be using strategic portfolio management in the first sense.

Project Portfolio Management is not just running multiple projects. It includes assessing projects for business value and alignment with the corporate strategy.
Project portfolio management organizes a series of projects into a single set of reports that capture project objectives and other critical factors. This enables the top team to keep track of the strategy execution.

Analyzing business portfolios

Strategic portfolio analysis can classifies the firms’ products and services by their relative competitive position and projected growth rate. This analysis can guide strategic resource allocation.

Larger firms generally use these portfolio analysis methods. In principle, there is no barrier to a smaller business using the approach to classify products in this way. In practice, these methods may not be cost effective for the smaller enterprise.

The business positions each activity on a two by two matrix. Market share or competitive position is on one axis. Some market characteristic such as relative profitability or growth prospects is on the other axis.

The aim of this exercise is to pick which areas of the business to allocate capital into, which to sell off, and which to shut down.

I will illustrate with one approach based on the Boston Consulting Group scheme. See also BCG matrix.

A well-known version of
strategic portfolio management

BCG among others like McKinsey, Shell and General Electric, have developed formal techniques to help in decision making about the portfolio of businesses or products.

To draw up a portfolio matrix, one plots the percentage market growth rate up the vertical or ‘y-axis’, and the relative competitive position along the horizontal, or ‘x-axis’. Then we depict each business area by a circle proportional to its size, in say sales revenue.

The following diagram illustrates a fairly well balanced group of businesses: a number of large ‘cash cows’ and a small number of stars, dogs, or wildcats.

You should not target across the board standard percentage cost cuts, or equal levels of capital allocation. Treat each business individually, as well as in the context of expected contribution to the success of the whole. To set all subsidiaries the same return on capital employed, or turnover or growth target would be crazy.

In the case above, a more realistic strategy would be more discriminating. For example, the top executives may insist on Business Area C maintaining its market share even at the expense of some current profits, because it has only just scraped into the ‘star’ category and, if they lose share, they might slip to dog status if the market declines. ‘Milk the cows’ for profit today; the dogs must yield cash; each wildcat requires a special target depending on its detailed situation. For example, Business Area F may well achieve star status with some careful management of capital and cost levels.

Such portfolio management tools can be very useful.

However, such tools aid in the design a portfolio of activities. They do not point to strategies for other things like people, information technology, tax management, or other elements in a group of businesses.

For an overview of other portfolio management methods see GE/McKinsey Matrix.

Return from Strategic Portfolio Management to Business Strategy.

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Portfolio management - assets, brands, products

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