portfolio analysis Meaning
When a company markets different kinds of products, its get essential for the company to analyse each product or service separately to understand their contribution towards the company’s profitability & income. Such analysing is referred to as portfolio analysing.
Portfolio analysing is mostly done on the bases of pre-defined bases of profitability, market share, life cycle etc. The main objective is to improve product & service performance to create a positive impact on the company.
Methods For Portfolio Analysis
Portfolio analysis has various methods which depend upon the purpose and product. One of the things which influence the market analysis is the strategy opted by the company: stability strategy, expansion Here are different methods for portfolio analysis in strategic management:
- Technological portfolio
- BCG Growth-Share Matrix
- Hofer’s Product-Market Evolution Matrix
- GE Multifactor Portfolio Matrix
- Market Life Cycle-Competitive Strength Matrix
- Ansoff’s Product-Market Growth Matrix
- Arthur D. Little Portfolio Matrix
- In portfolio analysis one of the methods is a technological portfolio which is used to analyze the development opportunities of the company.
- This method became so popular due to the continuous development of products, high competition, and rapid technology changes.
- However, a quick change in technology contributes to the fact that not every product has the time and ability to generate an excess financial surplus.
- Technological portfolio analysis in strategic management is based on the position of the product on the product life cycle.
- In this method, measurement is done on the possibility of development of technology, the dissemination of technology, level of standardization, possible uses of technology in a different field and the versatility of the time, technology and cost needed for the implementation and development.
Another method of portfolio analysis in strategic management is the BCG matrix in which there are 4 segments which explain the following:
- The segment with low market share and low market growth is called the dogs because they have a minimal market share and growth rate.
- These products are called cash traps, as these products’ ROI is not sufficient to generate profits.
- For these reasons, they come first in the list of divestiture.
- For example: Let’s take the beverage industry, here Minute Maid and Diet Coke which are consumed rarely come in the category of “dogs”.
- Products in this region have a large market share, but these products’ growth rate is very low.
- Because being in a strong position in the market product can generate colossal cash;
- So, the company should generate cow milk for as long as possible, as the growth perspective is very low.
- Cash flow patterns are highly predictable.
- For example, Limca and COCA-COLA are part of cash cows with a low growth rate and high market share.
- In case of a question mark, the product has a low market share, but the growth rate is high.
- These products consume huge amounts of resources, and its growth rate is equally high, but the company cannot increase its market share.
- These products require regular analysis to check whether the product is worth maintaining.
- For example, Fanta and Sprite come in the category of question marks where growth rate is high and market share is low.
- Firstly, products in this segment have a high market share and the market is growing strongly.
- Products that are called the star products require high cash resources.
- But, after some time, all growth gets slow, and the star products come under the cash cows to keep their market share.
- If they are not able to keep their market share, these products will become dogs.
- For example, Thumbs Up forms a part of “stars” with continuous growth rate and high market share.
Based on the BCG matrix in portfolio analysis in strategic management and above described product-market matrix, the company has to decide what objective, strategy, and budget should be assigned to each SBU.
Several investment techniques may be recommended.
- Growth strategy is, however, appropriate for products in the question mark segment, and the cash cow products can finance it.
- Extensive revenue from cash cows can be used in the question mark to strengthen and make sustainable development in the question mark segment.
- Maintain strategy is used in the Stars and the Cash Cows to maintain a strong position.
- This Strategy is used to generate the cash flow in the short run despite the long term consequences.
- This is most suitable for the products in cash cows and question marks.
- It is also used in the case of dogs but to remove them from the market.
- It should consider whether to harvest or divest its business units.
- In addition, it allows the decision of liquidation to reinvest its resources in a more prosperous business.
- This strategy is mostly applicable for Dogs.
Hofer’s Product-Market Evolution Matrix
Hofer theory is a kind of portfolio analysis in strategic management which is based on two variables i.e competitive position and stage of production-market development.
Hofer’s product-market evolution model is a 15 cell matrix of a firm’s business.
Charles W. Hoffer framed this model which is also called ‘life-cycle portfolio matrix’.
An elaborative table has been shown below which explains different units of the matrix.
However, in this matrix, the horizontal axis explains the SBU’s competitive position and the vertical axis shows the stages of product-market evolution.
Hofer’s matrix describes the units of development of the product or market.
Now, there are three stages of competitive position in this portfolio analysis in strategic management which is represented on the horizontal axis namely;
However, vertical axis on this portfolio analysis in strategic management represents firms state in the evolutionary life cycle namely;
- Initial development
- Competitive shakeout
Hofer’s matrices are useful to develop tactics that are used at different stages of the product life cycle. Here each cell describes a situation in which the firm is and suggests an option which is best respectively.
Let’s say the SBU is in cell A with a development stage and average competitive position. In such a situation a firm must use its opportunities and financial resources efficiently for further progress.
Now, the SBU in cell B holds a weak competitive position but still forms a part of the growth stage.
Moreover, in such a case the firm must pay attention to marketing strategies and tactics to get more competitive in the industry.
In the case of SBU placed in cell C with maturity stage of the life cycle and strong competitive position needs a harvest, retrenchment strategies and stability.
There should be no funds invested shortly. The SBU requires constant market position.
GE Multifactor Portfolio Matrix
GE Matrix is a kind of portfolio analysis in strategic management which is also known as GE Nine-cell Matrix / GEs Stoplight Matrix /GE Business Screen Matrix / Industry Attractiveness – Business Strength Matrix / Business Planning Matrix / General Electric-Mckinsey Portfolio Matrix/ GE matrix .
The matrix is a 3 x 3 grid developed with help of Mckinsey consulting firm by General Electric Company in the 1970s.
Helping in resource allocation, this matrix is described in two factors i.e industry attractiveness on the Y-axis and business strength on X-axis.
Factors Affecting The Industry Effectiveness Of Portfolio Analysis In Strategic Management Are As Follows (Y-Axis)
- Economies of scale
- Market growth rate
- Size of market
- Industry profitability
- Opportunity for differentiation of products and services
- Technological requirements
- Social environment, legal and human impacts
- Pricing trends
- Demand variability
- Competitive intensity
- The overall risk of returns
Factors affecting the business strength portfolio analysis in strategic management are as below (x-axis)
- Profit margin
- Market share
- Brand image
- Customer loyalty
- Production capacity
- Distribution efficiency
- Access to financial resources
- The market share growth rate
- Knowledge of customer
- Ability to compete on quality and price
- Technological capability
- Management calibre etc.
In GE matrix of the portfolio analysis in strategic management, market (industry) attractiveness replaces market growth.
Now, as discussed above McKinsey Matrix is a 9 cells matrix with different alternatives available for the SBU’s to develop strategies and make a decision respectively. Also, there are 3 significant segments :
- Best segment- Segment 1
- Middle segment- Segment 2
- Worst segment- Segment 3
- Firstly, in segment 1 the market is attractive and the business position is strong.
- Such situations are where the company should use its resources efficiently and aim at growing the business along with market share.
- In segment 2, there is a vice-versa situation where either of the two is strong i.e. business is powerful and the market is nor in a good position or the market is strong but the business does not perform well.
- So the solution lies in either strengthening strategies or allocating of resources properly for further growth.
- Segment 3 holds a situation where both market attractiveness and business growth is weak.
- Now the outcome here is either repositioning into market segments or cost-effective techniques.
- The other way is to shut down the SBU’s and invest the resources into more productive places.
Market Life Cycle-Competitive Strength Matrix
Market life cycle-competitive strength is a kind of portfolio analysis in strategic management which holds a 16 cell structure with competitive strength displayed on the vertical axis as :
Whereas, the horizontal axis is distributed in four stages of the product life cycle as :
The market life competitive strength matrix is a subjective distribution of competitive strength depending on various factors of favourable maintaining and gaining of advantage.
The matrix design recognises potential losers along with developing winners.
Apart from the above distributions, the matrix is segmented into 3 zones namely;- push zone, caution zone and the danger zone.
For the SBUs coming in the sector of ‘Push zone’, there are potential winners with adequate cash flow.
Also, the company adapts different growth marketing strategies and invests rapidly. The Push zone resembles the cash cows and the stars.
For the SBUs coming in the sector of ‘Caution zone’, the company adopts stability techniques and cautious decision-making investment.
This area showcases the question marks.
For the SBUs coming in the sector of ‘Danger zone’, should go for strategies like divesting, liquidation and harvest along with the reduction in further investment.
They further denote dogs with a falling structure.
Arthur D Little Portfolio Matrix
The Arthur D. Little portfolio matrix is a kind of portfolio matrix in strategic management which is proposed by Arthur D. Little (ADL) formed of 20 cell matrices.
There are mainly two dimensions i.e. stages of industry maturity and competitive position.
Forming a part of the vertical line in this portfolio analysis in strategic management, the competitive position has five classes namely;
However, for the horizontal part in portfolio analysis in strategic management the stages of industry maturity get categorized into 4 stages which are as follows ;
There are eight external factors in this type of portfolio analysis in strategic management that affect the position of the life cycle and distinctive stages of the industry which are as follows :
- Number of competitors
- Growth potential
- Market growth rate
- The breadth of product line
- The spread of market share among the other players in the industry
- Entry barriers
- Customer loyalty
Defining each cell the situation of the SBU’s is stated according to the competitive position and industry life cycle stage.
The company chooses the respective strategy to be applied whether to choose for growth by marketing or internal tactics or to backout.
Stating next, the SBU’s with different competitive position or the product line can be segregated along with respective behaviour in this type of portfolio analysis in strategic management which is as follows :
Ansoff’s Product-Market Growth Matrix
The Ansoff product market growth matrix is portfolio analysis in strategic management which is also known as ‘product-market components’ is distributed into four segments with two dimensions i.e. existing and new markets & new and existing products.
The matrix focuses on development and growth, but firms in declining positions can scale down their work in existing products and markets.
Introduced by H Igor Ansoff, it explains risks inheritance in the development of the business.
Market penetration is a situation where the firm increases the existing products into existing markets. Moreover, this sector aims at adding up to the same product or production and takes into low-risk consideration.
This segment or strategy aims at the slow game or just to hold the position in the market.
Furthermore, market penetration exists with stagnant markets and might involve share at the expenditure of the other firms in the market.
For example, Pepsi recently introduced a 1.25 ml bottle with the same product and increased its sale volume within existing customers.
There can be different ways in this portfolio analysis in strategic management by which a firm can do market penetration which is as follows :
- Competitive pricing
- Sales promotion
- Increasing product usage
- Finding new application for current users
- Increasing the frequency of usage
- Spending more on distribution
- Competitive pricing
- Increasing market share
- Increasing the quantity used
- Help restructure a mature market by driving out competitors
- Secure dominance of growth market
- Increase usage of existing products by the current customers.
Market development is a segment where the firm sells existing products to new markets. This structure aims at targeting the untapped markets which may include exporting if a firm was initially restricted to domestic markets.
Moving or widening the distribution channels, however, also leads to market development due to which sales volume might increase.
For example, Nike and Adidas recently entered into the Chinese market for expansion
This strategy of portfolio analysis in strategic management can be achieved in the following ways:
- Different packing sizes
- Offering to a different set of customers
- Creating new market segments
- New geographical markets
- Different pricing to different customers
- New distribution channels
- Different quality levels
Therefore, the main advantage of this strategy is in increased economies of scale, high sales volume and putting competition off, utilizing resources effectively.
Product development describes a situation where the market is the same and the product is new or in the short existing market and new products prevailing in the market. Furthermore, here, the existing markets sell new products.
For example, the Automobile industry introduces different cars with new features to meet the demands of existing customers
This strategy of portfolio analysis in strategic management can be implemented by:
- Firstly, introducing a new generation product
- Secondly, adding product features, product refinement
- Thirdly, developing a new product for the same market
One ready for an expensive distribution network in this portfolio analysis in strategic management might choose this strategy :
- Discouragement of the newcomers to the market
- Product development forces competitors to innovate
- A firm might lose out if its existing products fall in price.
Although this structure might include the risk of failure with new products since customer preferences are not the same with product development.
Diversification includes the case for new markets along with new products. This situation is the riskiest one since the firm needs to sell unknown products in unknown markets.
As a result, the matrix suggests that diversification should be the last stage strategy.
Also, there should be a clear plan of targets and gains from this strategy.
For example, JIO introduced sim without any baseline before into new markets
The benefits of this strategy of portfolio analysis in strategic management are:
- Providing a more comprehensive service to customers
- Offers prospects for growth
- Achieving greater profitability
- Investment of surplus funds, not required for other expansions
Also, the Ansoff matrix of portfolio analysis in strategic management is a framework for product-market strategies.
However, ignorance of the new technology and manufacturing techniques results in the drawback of the matrix, which can change the situation of the market.
The matrix does not take into account the role of profit and change in every product-market segment
what is portfolio analysis?
Portfolio Analysis is the process of reviewing or assessing all the products & services for analysis of business profitability & returns.
What are the 7 steps of portfolio process?
- Identification of Objective
- Estimating the market
- A decision about the resource allocation
- Formulating suitable portfolio strategies
- Implementing portfolio strategies
- Reviewing portfolio strategies
- Revising portfolio strategies