Why do we need business portfolio analysis?

 

Business Portfolio Analysis is an organizational strategy formulation process based on the philosophy that organizations should make strategy much as they handle investment portfolios. Portfolio analysis is a structured way to analyze the products and services of an association's business portfolio. In the way sound financial investments should be supported and unsound ones discarded, useful organizational activities should be emphasized, and unsound ones deemphasized.

 

Purpose of Portfolio Analysis: 

A viable strategy needs product-market scopes in deciding how strategic objectives will be attained. In a diversified company, one well-received concept of product-market scope is the portfolio approach to an organization's overall strategy. The optimal business portfolio fits the company's strengths perfectly and helps to utilize the most attractive industries or markets. An SBU can either be an entire mid-size company or a division of a big corporation. It typically formulates its business-level strategy and often has separate objectives from the parent company.

 

The aim of portfolio analysis is: 

1) To Analyse: Analyse its present business portfolio and determine which SBUs should receive more or less investment. 

2) To Develop Growth Strategies: Develop a growth strategies for including new products and business in the portfolio. 

3) To Take Decisions Regarding Product Retention: Decide which business or products should no longer be retained.  

 

Advantages of Portfolio Analysis: 

1) Encourages Management for Evaluation: It encourages management to analyze each of the organization's businesses individually and to set objectives and allocate resources for each. 

2) Stimulates Use of Externally Oriented Data: It stimulates externally oriented data to supplement management's intuitive judgment. 

3) Key Areas: These models highlight certain aspects of business that are considered essential to success or failure.

4) Cash Flows: They focus on cash flow requirements of the SBU's and help identify the different cash flow implications and requirements of different business activities. It helps management to carry out its resource allocation function. 

5) Balance Portfolio: They help identify strengths and weaknesses in the portfolio, the gaps to be filled, when a new SBU needs to be added, or when one needs to be removed, and the duplicative businesses in the portfolio. 

6) Diverse Perspective: A multi-business company's diverse activities are analyzed systematically, highlighting enterprise diversity. 

7) Flexible Comparisons: Some matrices are highly flexible in selecting different factors for different industries. This kind of analysis can provide coverage of a vast number of strategically relevant variables.