In: Accounting
A company typically conducts a portfolio analysis by adopting a systematic approach to analyze its products and services that it sells and provides to its customers. Most of the organizations (except for small business entities) have more than one type of business and hence they offer different products and services. A company like Unilever is into the business of selling personal care products like soaps and shampoos and also sells food items like ketchups, instant noodles, coffee, ready to make soups etc.
Companies like Unilever uses portfolio analysis to help them decide which products and services they should emphasize and focus on and which products and services should be phased out and no longer be sold by them.
The method that companies usually use to do portfolio analysis is to subject each of its product and service through scrutiny and through examination. What happens is that many products and services are not essential in terms of their low sales and during recessionary times when resources are scarce and when expenses have to be cut down it is important for a company to screen out such products and services.
Portfolio analysis is just like the process of asset allocation. It involves the following steps – Firstly the lines of business have to be identified. This step involves defining different SBUs (strategic business units) that are part of the portfolio of the business. The second step is to identify and define the group lines of business. For a business, generally, there are three lines of business that they engage in. The first line is the core business. This is the most important line and generates most of the revenues and profits for the business. The second line is the support line and consists of support functions. The support functions enable a company to deliver its core business. Lastly the third line is money makers. This line is low on priority but supports the core business.
The next step in portfolio analysis is to compare the core business with the mission statement. The business has to support the strategic plan and if a line of business does not support the strategic plan then it will become a possible candidate for discontinuation. Companies often use ‘Program Evaluation Matrix’. This matrix is a graphic tool and this tool enables companies to simplify the entire process of analyzing its products and services. The company uses the matrix to determine product fit, ease of funding and implementation. Availability of alternatives is next considered products that are kept in the portfolio are products that have dominant market share, better quality than competitors, and cost effective delivery structure.
Different techniques being used for portfolio analysis are – BCG matrix and GE nine cell matrix.
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