The Business Portfolio

The business portfolio is the collection of businesses and products that make up the company. It is a link between the overall strategy of a company and those of its parts. The best business portfolio is the one that fits the company's strengths and weaknesses to opportunities in the environment. The company must (]) analyze its current business portfolio and decide which businesses should receive more, less or no investment, and (2) develop growth strategies for adding IKW products or businesses to the portfolio.

Analysing the Current Easiness Portfolio

Portfolio analysis helps managers evaluate the businesses making up the company. The company will want to put strong resources into its more profitable businesses and phase down or drop its weaker ones. Recently, Sweden's Volvo has started disposing of its non-core businesses to strengthen its portfolio. It plans to sell its interests in consumer products (holdings in BCP), Pharmaceuticals (28 per cent of Pharmacia), stock brokering, property and investment. The tighter portfolio will allow Volvo to concentrate on revitalizing its passenger car, truck and bus operations.

Nestle Bcg Matrix
Figure 3.3

The BCG growth-share matrix

Management's first step is to identity the key businesses making up the company. These are strategic business units. A strategic business unit (SBC) is a unit of the company that has a separate mission and objectives, and which can be planned independently from other company businesses. An SBU can be a company division, a product line within a division, or sometimes a single product or brand.

The next step in business portfolio analysis calls for management to assess the attractiveness of its various SBUs and decide how much support each deserves. In some companies, this occurs informally. Management looks at the company's collection of businesses or products and uses judgement to decide how much each SBU should contribute and receive. Other companies use formal portfolio-planning methods.

The purpose of strategic planning is to find ways in which the company can best use its strengths to cake advantage of attractive opportunities in the environment. So most standard portfolio-analysis methods evaluate SBUs on two important dimensions: the attractiveness of the SBU's market or industry; and the strength of the SBU's position in that market or industry. The best-known portfolio-planning methods are from the Boston Consulting Group, a leading management consulting firm, and by General Electric and Shell.

Tl-IE BOSTON CONSULTING GROUP BOX. Using the Boston Consulting Group (BCG) approach, a company classifies all its SBUs according to the growth-share matrix shown in Figure 3.3. On the vertical axis,.market growth rate provides a measure of market attractiveness. On the horizontal axis, relative market share serves as a measure of company strength in the market. By dividing the growth-share matrix as indicated, four types of SBU can be distinguished:

1. Stars. Stars are high-growth, high-share businesses or products. They often need heavy investment to finance their rapid growth. Eventually their growth will slow down, and they will turn into cash cows,

2. Cash eows. Cash cows are low-growth, high-share businesses or products. These established and successful SBUs need less investment to hold their market share. Thus they produce cash that the company uses to pay its bills and to support other SBUs that need investment.

strategic business unit (SBU)

A unit of the company chat has a, separate miss ton and objectives and than can be planned independently fro m other company businesses. An SBU can be a company division, a product line -within a division, or sometimes a single product or brand.

growth-share matrix A port/olio-planning method that evaluates a company's strategic business units (SBUs) in terms of their market growth rate and relative market share. SMU& are classified as stars, cash cotes, question marks or dogs.

stars

High-growth, high-share businesses or products that often require heavy investment to finance their rapid growth.

cash oows

Lois-growth, high-share businesses or products; established ami successful units that generate c>c<s/i that the company uses to pay Us billx and support other business units thai need investment.

question marks Low-share business unite in high-growth markets that require a lot of cash in order to hold their nhare or become stars.

dogs

Low-growth, low-share businesses and products thai inny generate enough cash to maintain themselves, but do not promise to he large sources of cash.

J. Question marks. Question marks are low-share business unite in high-growth markets. They require cash to hold their share, let alone increase it. Management has to think hard about question marks - which ones they should buikl into stars and which ones they should phase out. 4. Dogs. Dogs are low-growth, low-share businesses and products. They may generate enough cash to maintain themselves, but do not promise to be large sources of cash.

The ten circles in the growth-share matrix represent a company's ten current SBl's. The company has two stars, two cash cows, three question marks and three dogs. The areas of die circles are proportional to the SBUs' sales value. This company is in fair shape, although not in good shape. It wants to invest in the more promising question marks to make them stars, and to maintain the stars so that they will become cash cows as their markets mature. Fortunately, it has two good-sized eash cows whose income helps finance the company's question marks, stars and dogs. The company should take some decisive action concerning its dogs and its question marks. The picture would be worse if the company had no stars, or had too many dogs, or had only one weak cash cow.

Once it has classified its SBUs, the company must determine what role each will play in the future. There are four alternative strategies for eaeh SBU. The company can invest more in the business unit to build its share. It can invest just enough to hold the SBU's share at the current level. It can harvest the SBU, milking its short-term cash flow regardless of the long-term effect. Finally, the company can divest the SBU by selling it or phasing it out and using the resources elsewhere.

As time passes, SBUs change their positions in the growth-share matrix. Each SBU has a life cycle. Many SBUs start out as question marks and move into the star category if they succeed. They later become cash cows as market growth falls, then finally die off or turn into dogs towards the end of their life cycle. The company needs to add new products and units continuously, so that some of them will become stars and, eventually, cash cows that will help finance other SBUs.

business-planning grid A portfolio planning method chat evaluates a company's strategic business units using indices of industry attractiveness and the company's strength in the industry1.

THE GENERAL ELECTRIC GRID. General Electric introduced a comprehensive portfolio planning tool called a strategic business-planning grid (see Figure 3.4). It is similar to Shell's directional policy matrix. Like the BCG approach, it uses a matrix with two dimensions - one representing industry attractiveness (the vertical axis) and one representing company strength in the industry (the horizontal axis). The best businesses are those located in highly attractive industries where the company has high business strength.

The GE approach considers many factors besides market growth rate as part of industry attretctifBeness, It uses an industry attractiveness index made up of market size, market growth rate, industry profit margin, amount of competition, seasonally and cycle of demand, and industry cost structure. Each of these factors is rated and combined in an index of industry attractiveness. For our purposes, an industry's attractiveness is high, medium or low. As an example, the Kraft subsidiary of Philip Morris has identified numerous highly attractive industries - natural foods, speciality frozen foods, physical fitness products and others. It has withdrawn from less attractive industries, such as bulk oils and cardboard packaging. The Dutch chemical giant Akzo Nobel has identified speciality chemicals, coatings and Pharmaceuticals as attractive. Its less attractive bulk chemical and fibre businesses are being sold.

For business strength, the GE approach again uses an index rather than a simple measure of relative market share. The business strength index includes factors such as the company's relative market share, price competitiveness,

Business strength

Strong Average Weak

t"

Business strength

Strong Average Weak

t"

RIV \

1

B

GE's strategic business-planning grid product quality, customer and market knowledge, sales effectiveness and geographic advantages. These factors are rated and combined in an index of business strengths described as strong, average or weak. Thus, Kraft has substantia! business strength in food and related industries, but is relatively weak in the home appliances industry.

The grid has three zones. The green cells at the upper left include the strong SBUs in which the company should invest and grow. The beige diagonal cells contain SRUs that are medium in overall attractiveness. The company should maintain its level of investment in these SRUs. The three mauve cells at the lower right indicate SBUs that are low in overall attractiveness. The company should give serious thought to harvesting or divesting these SRUs.

The circles represent t'oxir company SBUs; the areas of the circles are proportional to the relative sizes of the industries in which these SRUs compete. The pie slices within the circles represent each SBU's market share. Thus circle A represents a company SRU with a 75 per cent market share in a good-sized, highly attractive industry in which the company has strong business strength. Circle B represents an SRU that has a 50 per cent market share, but the industry is not very attractive. (Circles C and D represent two other company SBUs in industries where the company has small market shares and not much business strength. Altogether, the company should build A, maintain B and make some hard decisions on what to do with G and D.

Management would also plot the projected positions of the SBUs with and without changes in strategies. By comparing current and projected business grids, management can identify the primary strategic issues and opportunities it faces. One of the aims of portfolio analysis is to direct firms away from investing in markets that look attractive, but where they have no strength:

In their rush away from the declining steel market, four of Japan's 'famous five' big steel makers (Nippon. NKK, Kawasaki, Sumitomo and Kobe) diversified into the microchip business. They had the misplaced belief that chips would be to the 1980s what steel had been to the 1950s and that they, naturally, had to be part of it. The market was attractive but it did not fit their strengths. So fer, none have made money from chips. The misadventure also distracted them from attending to their core business. In 1987 they said they would reduce fixed costs by 30 per cent but their 'salary-men' stayed in place. By 1993, their costs were up by 3.6 per cent and their losses huge.

Back to the Basics

Marketing

During the 19711s and early 1980s, strategic planners caught expansion fever. Big was beautiful and it seemed that everyone wanted to get bigger and grow faster by broadening their business portfolios. Companies milked their stodgy but profitable core businesses to get the cash needed to acquire glamorous businesses in more attractive industries. It did not seem to matter that many of the acquired businesses fitted poorly with old ones, or that they operated in markets unfamiliar to company management.

Thus many firms exploded into huge conglomerates, sometimes containing hundreds of unrelated products and businesses. Extreme cases involved French bank and Japanese electronics companies buying Hollywood film studios. Managing these 'smorgasbord' portfolios often proved difficult. Managers learned that it was tough to run businesses they knew little about. Many newly acquired businesses were bogged down under added layers of corporate management and increased administrative costs. Meanwhile, the profitable core businesses that had financed the acquisitions withered from lack of investment and management attention.

By the mid-1980s, as attempt after attempt at scattergun diversification foundered, acquisition fever gave way to a new philosophy - getting back to the basics. The new trend had many names: 'narrowing the focus', 'sticking to your knitting and 'the urge to purge'. They all mean narrowing the company's market focus and returning to the idea of serving one or a few core industries that the firm knows. The company sheds businesses that do not fit its narrowed focus and rebuilds by concentrating resources on other businesses that do. The result is a smaller, but more focused company; a stronger firm serving fewer markets, but serving them much better.

Since the mid-1980s, companies in all indus tries have worked at getting back in focus and shedding unrelated operations. For example, during the 1970s Gulf & Western acquired businesses in dozens of diverse sectors: from auto

Paramount Gulf Western Company 1980s

industrial equipment and cement to cigars and racetracks. Then, in 1983 and 1984, to regain focus and direction, the company purged itself of over 50 business units that made up nearly half of its S8 billion in sales. In 1989 the company changed its name to Paramount Communications, to reflect better its narrower focus on entertainment and communications. It now concentrates its operations on a leaner, tighter portfolio of entertainment and publishing units: Paramount Pictures, Simon & Schuster/Prentice Hall publishers, USA Cable Network, Pocket Books, Cinamerica Theatres and other related companies.

Food companies are building strength by going back to their bread-and-butter baM.cs. Quaker Oats sold its speciality retailing businesses - Jos. A. Bank (clothing), Brookstone (tools) and Eye lab (optical). It used the proceeds to strengthen current food brands and to acquire the Golden Grain Macaroni Company (Riee-a-Roni and Noodle-Roni) and Gaines Foods {pet foods), whose products strongly complement Quaker's. Some food companies are still growing by acquisitions and mergers, but the new expansion fever differs notably from that of the last decade. The growth is not through broad diversification into attractive but unrelated new businesses. Instead, most are acquiring or merging with related companies, often competitors, in an attempt to build market power 'within their core businesses. Philip Morris has acquired General Foods and Kraft, and Nestle has acquired Rowntree, Perrier, Carnation, Cereal Partners and others.

In the mid-1980s Lloyds Bank, along with many other banks, almost went bust in Latin America's debt crisis. Many hard-up hanks went back to their shareholders to ask for more money and continued on the financial and international adventures. Expect some of that to be lost in south-east Asia's debt crisis, Lloyds behaved differently. The bank's chief executive, Sir Brian Pitman, 'was the first to realise that planting flags around the world was not always the best way to make money'. It sold its loss-making foreign subsidiaries, pulled out of investment banking, and wound down international lending to concentrate on selling financial services to consumers. Now known as Lloyds TSB, the bank is only the no. 33 in the world based on assets, but it is number the world's no, 1 in terms of market capitalization -ahead of Bank of Tokyo-Mitsubishi, HSBO, Citicorp, etc. Earning too much money is the bank's problem now!

These and other companies have concluded that fast-growing businesses in attractive industries are not good investments if they spread the company's resources too thinly, or if the company's managers cannot run them properly. They have learned that a company without market focus - one that tries to serve too many diverse markets - might end up serving few markets well.

SOURCES: Sec Thomas Moore, 'Old-line industry shapes up', Fortune (27 April 1987), pp. 23-32; Walter Kiechel III, 'Corporate strategy for the 1990s', Fortune (29 February 1988), pp. 34-42; 'G & W plans to expand in entertainment anil publishing', press release, Paramount Communications (9 April 1990); Brian Bremncr, 'The age of consolidation.', business Week (14 Octoher 1991), pp. 86-94; Christopher Lorenz, 'Sugar daddy'. Financial Times (20 April 1994). p. 19; Ian Veix-hore, 'Nestle told EO sell stake in L'Oreal', 'Che European (22-8 April 1994). p. 17; 'The Lloyds money machine', 'J'/ie Rtxnxnmst (17 January 1998), pp. 81-2.

The 'famous five's' failure contrasts with Erainet, a focused French company who arc the world's biggest producer of Ferro-riiekel and high speed steels. They owe their number one position to their decision to invest their profits in a 'second leg' that would be a logical industrial and geographical diversification for them. They bought French Commentryene and Swedish Kloster Speedsteel. They quickly integrated them and, according to Yves Rambert, their chairman and chief executive, 'found that the French and the Swedes can work together'. The unified international marketing team is doing better than when the companies were separate. Eramct are now looking for a 'third industrial leg' that will have customers and technologies with which the group's management are familiar but does not compete for their present customers.7

• Problems with Matrix Approaches

The BCG, GE, Shell and other formal methods revolutionized strategic planning. However, such approaches have limitations. They can be difficult, time consuming and costly to implement. Management may find it difficult to define SBUs and measure market share and growth. In addition, these approaches focus on classifying currenf businesses, but provide little advice for future planning. Management must still rely on its judgement to set the business objectives for each SBU, to determine what resources to give to each and to work out which new businesses to add.

Formal planning approaches can also lead the company to place too much emphasis on market-share growth or growth through entry into attractive new markets. Using these approaches, many companies plunged into unrelated and new high-growth businesses that they did not know how to manage - with very bad results. At the same time, these companies were often too quick to abandon, sell or milk to death their healthy, mature businesses. As a result, many companies that diversified in the past are now narrowing their focus and getting back to the industries that they know best (see Marketing Highlight 3.3).

Despite these and other problems, and although many companies have dropped formal matrix methods in favour of customized approaches better suited to their situations, most companies remain firmly committed to strategic planning. Roughly 75 per cent of the Fortune 500 companies practise some form of portfolio planning.6

Such analysis is no cure-all for finding the best strategy. Conversely, it can help management to understand the company's overall situation, to see how each business or product contributes, to assign resources to its businesses, and to orient the company for future success. When used properly, strategic planning is just one important aspect of overall strategic management, a way of thinking about how to manage a business.'

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