OUTLINE

1. Define portfolio planning.
2. Objective of portfolio management.
3. Portfolio Management Techniques.
4. Identifying strategic business units.
5. Boston Consulting Group growth/share matrixes
6. Lifecycle of SBUs
7. Benefits

DEFINITION

 Portfolio planning is a method of analysis used by corporations with a number of distinct businesses to help them decide which of these businesses they need to build, maintain, phase down or phase out.

OBJECTIVE 

The objective of portfolio management is to help managements to view their companies as portfolios of businesses to be managed strategically in order to create shareholder value, maximize return on investment and achieve sustainable competitive advantage.  

PORTFOLIO MANAGEMENT TECHNIQUES

Portfolio management involves the analysis of each business to assess:

1. Its unique competitive opportunity and
2. Problems and
3. Its future capacity for contributing to organizational objectives.

Resources are then allocated or withdrawn from the business as appropriate.

Portfolio management is conducted by:

• Identifying the distinctive businesses or 'strategic business units' (SBUs); and
• Analysing the growth and market share profile of each SBU

(Using the Boston Consulting Group portfolio matrix, and taking appropriate action.)

 Identifying strategic business units

 The distinctive businesses of the corporation are classified as strategic business units (SBUs).

 An SBU should exhibit the following characteristics:

It is a single business or collection of related businesses.
It has a distinct mission.
It has its own competitors.
It has a fully accountable chief executive.
It can benefit from strategic planning.
It can be planned independently of the other businesses.

 The identification of SBUs should not be done at the expense of detracting from any synergy that can be achieved, i.e. linking activities so that the results achieved by the whole are greater than the sum of the parts.

 Boston Consulting Group growth/share matrix

 The Boston Consulting Group/share matrix analyses each business according to its: 

q       Market growth rate: the annual growth rate of the market in which the business operates; and
q       Relative market share: the SBU's market share relative to its largest competitors.

 The growth/share matrix is divided into four cells, each indicating a different type of business:

1. Stars - market leaders in high-growth markets. Stars may require considerable cash support to maintain their competitive position.
2. Question marks - businesses operate in high-growth markets where there is already a market leader. Question marks require a great deal of cash for investment in plant, equipment and personnel to keep up with the fast-growing market. Question marks can become stars but may have to be phased out if they fail to perform.
3. Cash cows  – businesses with a low growth rate but a large relative market share which produce a great deal of cash for the company and do not need much support in the shape of investment as long as they maintain market share. But it may be decided that they should be phased down, even out, if it is thought that the return investment is likely to decline.
4. Dogs - businesses, which have weak market shares in low-growth markets. They typically generate low profits or losses. Dog businesses often take up more management time than they are worth and need to be phased down further or phased out.

Decisions made on the strategies for each SBU. There are four choices: 

1. Build. Increase the SBU's market share, even forgoing short-term earnings to achieve this goal. Building is appropriate for question marks where shares have to grow if they are to become stars.
2. Hold. Preserve the SBU's marks share. This strategy is appropriate for strong cash cows if they are to continue to yield positive cash flow.
3. Harvest. Increase the SBU's short-term cash flow irrespective of the long-term effect. This strategy is appropriate for weak cash cows with an uncertain future. Harvesting can also be used for question marks and dogs.
4. Divest. Sell or liquidate the business because resources can be better used elsewhere. This strategy is appropriate for dogs and question marks which are acting as a drag on the company's profits.

 Portfolio planning requires companies

1.   To analyse trends and
2.    Project possible future trajectories of the SBU

Strategies can then be developed to prolong the stay of SBU's in a profitable part of their life cycle.

Tips for SBU’s to stay in the market

 The aim may be to make them stay in their role as stars or cash cows permanently - all businesses do not inevitably proceed through their life cycle to become dogs.

 But there are two dangers to be avoided:

v    First, that of being complacent and neglecting competition, falling demand or obsolescence; and
v   Second, that of investing too much in a business, which is in terminal, decline.

 BENEFITS 

Portfolio planning enables a company to consider and develop strategies for each of their SBUs on the basis of an analysis of their relative position in the growth/share matrix.

Portfolio planning is an instrument for converting analysis into action.

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