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Portfolio Analysis: An Essential Overview

Portfolio analysis featured image
Portfolio analysis is an important framework for prioritising resources. Image credit: Tyler Franta

The importance of business portfolio analysis is the categorization of the essential services provided according to their market competitiveness potential and the rate at which sales are incremented and developed.

It is critical to help the growth of a business’s portfolio, which is the sum of all the products and services they provide to the market. When you want to use a certain business strategy, you have to transform your target to a business oriented strategy including budget calculations.

Every business entity is centered around its resources to generate its main source of revenue, so a specified business plan has to be put in motion to meet the needs of the association’s members and targets, this plan is called portfolio analysis.

Portfolio analysis helps in the connection of the process of devising a strategy and its execution, aiding the process of budget allocation. Portfolio analysis is the product of Dr. Ian MacMillan of the University of Pennsylvania’s Wharton School.

How Exactly Can Business Portfolio Analysis be Executed?

Most associations have more than one operational business, like publishing, research and development, these branches are called SBUs, short for Strategic Business Units.

Every business has its own products and services. If publishing is taken as an example, the different business verticals could include a journal, specific newsletters targeting different layers of audience segments, a social approach using the internet, and more.

Portfolio analysis helps you to allocate resources more effectively.

For example, you might direct your marketing efforts towards more profitable audience segments.

Benefits of Portfolio Analysis

There are a number of reasons to conduct a portfolio analysis. Key benefits include:

  • Prioritising different business verticals.
  • Implementing a data-based backbone to the management’s initial plan.
  • Budget allocation issues are addressed in terms of the associations goals for growth.

However, if portfolio analysis isn’t done correctly, there are some potential drawbacks and risks, such as:

  • It becomes harder to highlight the market’s sections or layers.
  • The subjectivity of the judgment may end up providing a fake scientific impression.
  • Weighing the advantages and the disadvantages, portfolio analysis can be considered a systematic approach to the issues of budget and resources allocation.
Portfolio analysis diagram
Portfolio analysis helps you to determine which areas of your business offer the most return. Image credit: SmartSheet.com

Recognising the Different Types of Businesses

The first step is recognising the strategic business units that affect the association. To know which groups of business that could become independent.

Typically, there are three different paths that could be taken by the association. The first is core businesses, or the key verticals which have the greatest overall impact.

The second one is support functions, such as legal advice and administrative functions. Vital as these are, they still are not prioritized. Rather the cost of these operations is usually minimised, giving the core businesses some budget leeway.

The third one is any other profitable vertical outside of the core offering.

On paper, core businesses should support themselves financially while also helping with reserves, but that is usually different and it is usually supported with other income that the money making businesses provide, such as insurance and discounts.

Aligning Core Businesses with Objectives

After core business are identified, compare them with your overall mission. A business should work towards the objectives in the mission statement.

If a business vertical doesn’t directly aid the strategic plan, it should be stopped and have its funding and resources go to other core activities.

Portfolio Analysis smart objectives
Setting SMART goals for your portfolio analysis helps to keep it aligned with your business objectives. Image credit: Hitachi Capital

After the value of the businesses is measured relative to the mission statement, the next step is dividing the business into core products and services. These are then entered into the Program Evaluation Matrix.

What is the Program Evaluation Matrix?

It is a visual device that eases the analysis of the products and services in the main portfolio. While the products and services are tested using the Program Evaluation Matrix, a few assumptions have to be made though:

  • The allocation of resources is usually competitive, so it is viewed in a competitive environment in the Program Evaluation Matrix.
  • The priority is providing optimum service to a small or focused market than a bad one to a bigger market.
  • It is only logical economically to leave the bad programs to strong competition and focus on getting the potentially good programs from easier competition.

Assessment of the Business Properties

Program Evaluation Matrix is a very helpful tool in portfolio analysis for providing answers to certain questions about some valid questions regarding the products and services in a portfolio:

  • Does it align well with the other services?
  • Is the implementation process complex or rather simple?
  • What is the status of the alternative coverage in the market?
  • Do we have a competitive advantage over the market?

The answer should be yes to all these questions for a program or a service to be prioritised in the allocation of the resources.

The criteria for the best service is dependent on it being relevant to the objectives of the business, and highlighting the main concerns that are of high interest to stakeholders and customers.

Funding and Integration

There are some extra criteria for deciding if a product or service deserves more funding, for instance, if it:

  • Creates a base of customers that can provide potential support on the short term and long term.
  • Provides a constant stream of income.
  • Generates demand from a big customer base.
  • Attracts a willing and capable leadership.
  • Delivers results that can be tracked and measured.

In competitive portfolio analysis, it is found that even organizations that are not profitable are forced to operate in a highly competitive setting, affecting the success of the delivery of core products and services.

The definition of alternative coverage is the availability of a similar product or service with other competitors. The products and services are categorized into two different categories:

  • Low coverage: Fewer similar products and services are provided by competitors.
  • High coverage: A lot of similar products are provided by competitors.

SEE ALSO: Product Management: What It Is and How It’s Done

Program Competitiveness Test

In portfolio analysis some conditions should be applied to determine if a business vertical is competitive.

All organisations operate in a competitive environment of some kind. They might compete for

  • A bigger slice of market share to make sure the market is saturated with the association’s products and services,
  • Higher caliber, value and quality than the competing associations,
  • Better productions and marketing for the program,
  • Maintaining a low cost delivery of products and services,
  • Synchronization of products and services with the potential requirements of the association’s members and customers.

Data Driven and Scientific Portfolio Analysis

In the past portfolio analysis used to be limited to the space of the corporate Research and Development, and is now being studied in different academic and agency environments.

Choices based on portfolios are not that easy to make in a scientific system, due to the ill-definition and understanding of the actual choices. Some things are simply difficult to quantify. Portfolio options are usually controlled by the assessment of supply and demand.

Supply and demand can actually be of value to the research of portfolio analysis scientifically. Precise definition of the used terms is of high importance because it is easy for them to be defined in different manners.

An Overview on Portfolio Analysis

Portfolio analysis basically is the breaking down a business into different processes and verticals, and analysing the risks, costs and returns of these.

If it is used at regular intervals, portfolio analysis can help businesses make better decisions and adapt to changing market conditions.

This is essential in the process of resource allocation to different component elements in the portfolio.

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