Technique 2.54 Product Portfolio Analysis
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Introduction
. This is one of the techniques developed to help make decisions concerning the portfolio of businesses or activities an organisation undertakes, so that a balanced growth strategy of diverse businesses is developed
. Some reasons to diversify include
- economies of scale
- industry dominance
- strong cash flow
- poor cash flow
- industry changes
- strategy changes
- opportunism
- ownership/management changes
. Most diversification means acquisition. They are 2 types of diversification - related and unrelated
i. Related diversification, ie the acquisition of a business/activity that overlaps with the current core businesses of the organisation
Acquisitions carry many risks with most acquisitions and mergers being ultimately unsuccessful mostly due to limited business fit, ie the core and acquired businesses are not closely related. Relatedness can be seen by
- customer use
- customer groups
- technology used
Furthermore, many managers tend to overestimate their capacity to judge what is a good fit and what is not
It is usually hoped that an acquisition will create synergies that will result in lowering operational costs
ii. Unrelated diversification, ie acquiring unrelated businesses/activities
Advantages of this are
- risk is spread
- counter-cyclical protection
- financial matching
- buying value
Matrix
. Business acquisition analysis involves a matrix with 4 quadrants, ie cash cows, dogs, rising stars and question marks. The matrix contrasts relative market share for a given business or activity with the growth rate for the industry in which the business/activity competes. Consequently,
- if a business goes into the quadrant that represents high market share and high-growth rate, then it is considered a Star and should be nurtured. Sometimes the profits are ploughed back into the business to fund expansion
- businesses that fall into the low market share and low industry growth quadrant are Dogs and should be divested
- businesses that have a low growth rate but high market share generate lots of cash and should be protected; they are Cash Cows. Usually they require little investment to keep them going
- businesses with low market share but in industries that have high-growth rates have an uncertain future as they may or may not turn into stars; they are Question Marks. They have enormous potential but usually require much finance to keep them going
NB the circles represent businesses, with the size of the circle indicating relative cash flow
Sometimes the cash flow of a Cash Cow can be used to finance the investment required in Stars and/or Question Marks
(source: Harry Onsman, 2004d)