Resource deployment is the most important job of the corporate level strategist. Burning cash quickly through related and unrelated diversification moves does not provide the answer. There is the entry and exit problem with regard to resource commitments. Businesses are not liquid investments and it is difficult to redeploy assets. Second, relatedness is difficult to realize quickly and at the most takes time to develop. Third, investing in high return business is always not easy.
Moreover, diversification upsets established power bases within a firm. Redeployment in a way is nothing but relocation of power. Those who have commanded the resources of a unit do not like to part with them without a bitter fight. Power and resources often go hand in glove. Such power struggles compel strategists to pour disproportionate resources into the old businesses and unconsciously restrict investment in new ventures. Inappropriate resources development thus, guarantees failure on every front.
Portfolio strategy pertains to the mix of business units and product lines that fit together in a logical manner to offer synergy and an individual trying to balance his investment portfolio by picking up some high risk stocks, some low-risk stocks and perhaps a few income bonds. In much the same way, diversified corporations like to have a balanced mix of business divisions called Strategic Business Units (SBUs).
An SBU is a division of the organization that has a unique business mission product line competitors and markets relative to other SBUs in the same corporation. It can be a single business or a collection of related businesses. Many companies set up SBUs as separate profit centres, sometimes giving them virtual autonomy other companies have tight control over their SBUs, enforcing corporate policies and standards down to the very low levels in the organization.
Corporate Portfolio analysis is an analytical approach which asks managers to view corporations as portfolios of business to be managed for the best possible return. Linking industry characteristics, the company’s competitive strengths and resource deployment patterns, portfolio analysis gives managers an opportunity to see their companies from a different point of view and think about the future implications of their current resource commitments.
Portfolio models present the various alternatives taking a holistic view of several internal and external factors impacting a portfolio of businesses. They present a comprehensive view of a firm’s competitive position in relation to its competitors and provoked questions about the contribution of the firm’s current resource allocations to its long run vitality. The models help management see how its resources are being put to use and offer achievable objectives for each business. This, in turn, enables the management to treat its businesses as profit centres while achieving corporate objectives. In short, portfolio analysis takes the view that a corporation is a portfolio of investments to be managed to produce the total best returns.
The Portfolio Matrix compares various businesses in an organization’s portfolio on the basis of relative market share and market growth rate. Relative market share is determined by the ratio of a business’s market share (in terms of unit volume) compared to the market share of its largest rival. Market growth rate is the growth in the market during the previous year relative to growth in the economy as a whole.
SBU that are stars have a high share of a high growth market and typically require large amounts of cash to support their rapid and significant growth. They have additional growth potential and so profits should be ploughed back into this business for future growth and profits. For example, software entertainment, electronics and telecommunication are some of the industries which have a very high growth rate. The appropriate strategy for stars is to maintain the market share through large doses of investment both internal as well as external.
SBUs that are cash cows (provide lot of cash for the firm) have a high market share in a slowly growing market. As a result, they tend to generate more cash than is necessary to maintain their market position. Cash Cows are often former stars and can be valuable in a portfolio because they can be milked to provide cash for other struggling businesses.
SBUs that are question marks have a small share of a high growth market. The question mark business is risky, since there is already a leader in that business. As such it requires lot of funds to invest in plant, equipment and personnel in order to keep pace with the fast growing market. The terms’ question mark is well conceived, because at every stage the organization has to think hard about whether to keep investing funds in the business or to get out.
SBUs that are dogs have a relatively small share of a low growth market. They may barely support themselves or they may even drain cash resources that other SBUs have generated. Usually dogs are harvested divested or liquidated if turnaround is not possible.
After the SBUs of an organization are plotted on the growth share matrix the next steps is to evaluate whether the portfolio is healthy and well balanced. A balanced portfolio obviously has a number of stars and cash cows and not too many question marks or dogs. Depending on the position of each SBU, four basic strategies can be formulated while building a balanced portfolio:
–Heavily invest in Stars. High market share and high industry growth means higher portability of future success.
–Maintain cash cows because they provide resources for future growth investment in wild cats and stars.
–Use selective resource allocation for wildcats to convert them into stars.
— Liquidate or divest dogs that are not worth investing in to improve their positions.