Page 169 - DCOM506_DMGT502_STRATEGIC_MANAGEMENT

Unit 9: Strategic Analysis and Choice

As already stated, key purpose of portfolio models is to assist in achieving a balanced portfolio Notes
of businesses. This means that portfolio should consist of those businesses whose profitability,
growth, cash flow and risk elements would complement each other, and add up to a satisfactory
overall corporate performance. Imbalance in portfolio, for example, could be caused either by
excessive cash generation with too few growth opportunities or by insufficient cash generation
to fund the growth requirements of other businesses in the portfolio.

9.4.2 Balancing the Portfolio

Balancing the portfolio means that the different products or businesses in the portfolio have to
be balanced with respect to four basic aspects:
1. Profitability: The main aim of the portfolio analysis is to maintain the overall profitability
of the corporation, even though some of the businesses are loss making. This is ensured
through balancing investments.
2. Cash flow: A growing firm may be profitable, but it will also require additional cash
outflows for investment requirements. Mature businesses, though less profitable, do not
require much of investments though they may not be net cash generators. Thus, portfolio
analysis must balance different businesses, which together must give a comfortable overall
cash flow position in harmony with the desired strategy of the company.
3. Growth: All businesses or products go through the life cycle of introduction, growth,
maturity and decline stages. If a company depends on one product alone, it would face
problems in the declining stage of the product. It may be too late to start a new product at
this stage because of the time lag involved in waiting till it achieves its growth rate. It is
therefore better to match different businesses at different stages in their life cycles, to
achieve stability which is sometimes called “extended corporate immortality”. Thus the
balancing of the portfolio implies that though individual businesses grow, mature and
decline, yet the company continues to grow.
4. Risk: Another major objective of portfolio analysis is to reduce the risk due to economic
trends and market forces in a country. The aim is to put together diverse businesses with
different or even opposite market forces to ensure a stable and smoother financial
performance of the overall corporation.

Example: One solution could be to diversify internationally, since markets in different
countries are subject to different economic forces. Similarly, in the context of domestic markets,
businesses with different seasonal cycles could be combined to ensure a more stable and smooth
performance of the overall corporation.

9.4.3 Portfolio and other Analytical Models

Innumerable analytical models have been developed by several leading consulting firms. Some
of the best-known models are:
1. BCG matrix
2. GE Nine-cell Matrix
3. Hofer’s Product/Market Evolution Matrix

4. Directional Policy Matrix
5. Arthur D Little’s Portfolio Matrix
6. Profit Impact of Market Strategy (PIMS) Matrix

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