Last week we outlined the process you should use to accomplish your objectives and goals. The next step is to convert the goals and objectives in that plan to a work plan and budget. But how can this be done? Every product or service of a company has a claim on resources. How then can we weigh the allocation of scarce resources to ensure that the objectives of the plan are attained and customer needs are served?
Portfolio planning has been devised to help your company bridge the gap between strategy formulation and strategy implementation. In other words, it helps you make the hard choices of where to put your money.
Technically, Strategic Portfolio Planning is the business process by which your company determines the set of innovation and new product development investments you will fund—and those which you won’t—to achieve your business objectives. Portfolio optimization helps you strategically manage your product portfolio to make the right investment decisions, optimize the value of your portfolio and allocate the most profitable use of resources.
All companies (except the simplest and the smallest) are involved in more than one business. Each of these is one of the company’s ‘strategic business units’ (SBUs). Each business unit consists of a ‘portfolio of products and services’. For example, a company importing and distributing high-quality bathroomware might include five brands specializing in tapware, sanitaryware, bath accessories, water heaters and bath cleaning powder. In addition, it may include technical services division, customer care division, website and social networking sites and other office.
Portfolio analysis helps you decide which of these products, divisions and services should be emphasized and which should be phased out, based on objective criteria. Portfolio analysis consists of subjecting each of the company’s products and services through a progression of finer screens. During a time of cutbacks and scarce resources, it is essential to screen out products and services that are not essential to most customers. Those that appeal to a more limited segment can be funded by those desiring the product or service rather than by dues.
We indicate below a logical progression, based on the strategic direction, objectives and goals and growth strategies outlined in the last three weeks.
Step 1: Identify lines of business
The first step in portfolio analysis is to identify your lines of businesses (SBUs) that make up your company’s portfolio. The guideline to keep in mind is this: if we were to be conscious that we expect the highest productivity per person, which groups of people would be logical candidates to be grouped together as independent business units?
Step 2: Group lines of business
There are three lines of businesses a company typically engages in. The first is ‘core businesses’ that are of vital importance to your company. These are the businesses that directly support the objectives in the strategic plan and have a priority claim on resources.
The second line of business is ‘support functions’ that make it possible to deliver the core business benefits to customers. Examples of support functions are administrative, accounting, legal, HR support, etc. These do not have a priority claim on resources. Rather, the objective is to minimize the cost of these functions and transfer resources to support the core business.
The third line of business is ‘money-makers’ that provide low-priority customer benefits but are the source of revenues that support the company’s core businesses. Ideally, the company’s core businesses should be self-supporting and perhaps even contribute to reserves. Often, this is not the case and activities must be subsidized with other income. Money-makers provide this income. Examples of money-makers are loyalty cards, credit card discounts, etc.
Step 3: Compare core businesses with mission statement
Once you have separated out your core businesses, compare them with your company’s mission statement. To pass this screen, a business must directly support the goals that are defined in the mission statement. Support should be direct and not peripheral. If a line of business does not support the strategic plan, it should be discontinued or phased out and its resources transferred to support the company’s other core businesses.
Step 4: Evaluate the importance of each product/service
Assume: Since the need for resources is competitive, the company must view the problem of securing resources in a competitive context. It is preferable to provide good service to a focused market than to provide mediocre or poor service to too large a market. It is pragmatic to surrender mediocre programmes to better competitors and wrest away promising programmes from weaker competitors.
Answer the following questions about each product or service in its portfolio:
(1) Is it a ‘good fit’ with your other programmes?
(2) Is it ‘easy’ to market?
(3) Is there ‘poor alternative coverage’ in the marketplace? Is your ‘competitive’ position strong?
For a product or service to survive the competition for the company’s resources, there should be a positive response to all these questions. If it is not, it should be classified as being in a weak position.
The effect of these generic strategies is to serve the client base with a small number of strong, excellent products and services rather than with a larger number of fragmented ones competing for limited rupees and cents.
Step 5: Determine product fit
Determine whether the product or service under review fits the company’s mission and priorities. The screens for good product fit are: (1) Suitable and appropriate with mission of the company, (2) Focus on core concerns that are of vital interest to the company’s customers.
Step 6: Determine ease of funding and marketing (Is this an easy business?)
The criteria for determining whether a product or service has the prospect of relatively easy funding and implementation are:
(1) High appeal to groups of customers capable of providing current and future support,
2) Stable source of funding,
(3) Market demand from a large, concentrated, growing customer base,
4) Appeals to good leadership,
(5) Measurable, reportable programme results.
Step 7: Determine availability of alternative coverage
All companies operate in a competitive environment, which has a strong impact on the ability to successfully deliver products and services to customers. Alternative coverage means is anyone else offering similar products and services. It should be classified according to two alternatives:
(1) Low coverage: If there are a few comparable products/services offered elsewhere,
(2) High coverage: If many similar products/services are offered elsewhere.
Step 8: Assess competitive position of product or service
The following criteria should be considered in determining whether your company’s products or services are in a strong competitive position. Criteria for a strong competitive position are:
Dominant market share or strong prospects for achieving market dominance
Better quality/value/service than competitors
Superior ability to market the products/services
Cost-effective delivery procedure
Strong match between the existing products and the future needs of customers
Applying these steps will reveal the company’s current portfolio situation. The ideal would be to have a portfolio that has primarily winners and contains enough winners and profit producers to finance the growth of potential winners. In reality, however, there will probably be a few question marks and even perhaps a small loser. Then, of course, there are those untouchable products that, although marginal or even losers, are considered to be of fundamental importance to customers and must be subsidized.
(Lionel Wijesiri, a corporate director with over 25 years’ senior managerial experience, can be contacted at firstname.lastname@example.org)