Portfolio Techniques

Table of Contents:

1.  Introduction  2

2.  Classification of portfolio analysis in the bag of tools of the strategic planning  2

3.  The portfolio method  4

3.1.  Source of the portfolio method and general description  4

3.2.  Foundations and premises  5

3.3.  Gist and meaning  6

3.4.  Matrix representation and raster technique  8

4.  Types of portfolio techniques  9

4.1.1.  Boston Consulting matrix (four-fields matrix)  9

4.1.2.  Strategies of norms of the four-field matrix  10

5.  McKinsey portfolio (nine-fields matrix)  13

5.1.1.  Strategy of norms of nine-field matrix  14

5.2.  Comparison of four-fields matrix and nine-fields matrix  15

5.3.  Latter portfolio techniques  16

5.3.1.  Ecology-portfolio  16

5.3.2.  Technology-portfolio  17

5.3.3.  Human-Resource Portfolio  18

6.  Conclusions  20

7.  Bibliography  21

8.  Vocabulary List  22

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1. Introduction

In times of economisation and increasing competition it is important for enterprises to know where their competitive position is on the market. In this case the strategic planning plays a decisive role. Companies have to know whether their products are profitable or not. To answer these questions the portfolio techniques are a good method to show up the enterprise in a clear and meaningful way. This evaluation will concentrate on the two most used techniques, the Boston Consulting Group portfolio and the McKinsey portfolio, but also latter portfolio methods, like the ecology-portfolio, the human-resource-portfolio and the technology-portfolio.

2. Classification of portfolio analysis in the bag of tools of the strategic planning

In the process of strategic planning on the enterprise level it is important, to modulate the chances and risks of the surroundings with the strengths and weaknesses of the complete enterprise. These strengths and weaknesses relate to various strategic business units. ¹ Criterion for strategic business units is their own purpose on the market, the strategical business area, and it is possible for them, to act independent of other line actions on the market. ² An enterprises strategy determines its future development and its prosperity.

The qualitative items like potentials of success and product-market-strategies are getting more important for the strategical area. Therefore it is not easy, to apply only quantitative models. Nevertheless it is possible to show variables of activity and connections to get cognitions about important interdependences and the effects of targets of relevant substitutes.

¹ Cp. Baum, Coenenberg, Günther, Strategisches Controlling, 2.Auflage, Stuttgart, Schäffer-Poeschel,

1999, page 179

² Cp. Michel, Taschenbuch Strategiecontrolling, 1. Auflage, Heidelberg, Sauer-Verlag, 1995, page 76

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Besides other portfolio methods are some of the important instruments of the strategic planning. By using these methods strategic business units of an enterprise can be analyzed and strategies can be build up to strengthen the strategic business units. It is pointless to focus on only one single business unit, rather than it is important to have several business units and build up a combination out of them to get an achievement of objectives and of adequate results in different future environments. Portfolio-models are instruments to co-ordinate the several strategic business units of an enterprise. ³ Enterprises use them, to analyze whether there is an opportune or an optimal combination of several business units in their own enterprise. If not, the enterprise has to adjust its strategy, create new business units or to enlarge respective to close existing business units, to get an optimal combination. Another coordinating task of the strategic planning is to get and to co-ordinate substitutes to reach the target-portfolio. This instrument exists to lookup the substitutes and basic conditions in a global way. The planning period has a look at the future, but the models are not quantitative models. They are for the use of qualitative analyzes of the combinations of the business units and to have an effect on them. 4

³ Cp. Küpper, Controlling, 4.Auflage, Stuttgart, Schäffer-Poeschel, 2005, page 104

⁴ Cp. Küpper, Controlling, 4.Auflage, Stuttgart, Schäffer-Poeschel, 2005, page 105

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3. The portfolio method

3.1. Source of the portfolio method and general description

The item portfolio is out of the branch of banker and financial branches. In these branches, portfolios are inventory of several bonds or investments that an investor owns at a certain moment. According to modern economic sciences, which are incorporated in models like the CAPM, the investors are not successful, if they hold always the same bonds and investments. The quality attribute could be the return on invest.

In enterprises it is the same, besides that they do not have bonds but products. And the enterprises should do the same that the investors do. Analyze their products and part with those products, which will not get prosperity. Because every product should get profits now and for the future, because this will be the reason to ensure the enterprise and strengthen it in the competition. 5 6

The amount of all strategic business units is the portfolio of an enterprise. 7

The basic concept of the portfolio method is to provide an overview to the management of an enterprise about their strategic business units. Consequently it should be possible for enterprises, to modulate enough product groups or products to have enough financial means to back up the other products or to build up new products that will soon have high returns.

Otherwise portfolios are an instrument to analyze and appraise the strategic general situation of an enterprise. With the help of portfolios it is possible to find out development potentials and the necessity to develop new products, consequently put more effort on research and development. Alongside it is possible to create mediumterm and long-term developments. 8

⁵ Cp. Baum, Coenenberg, Günther, Strategisches Controlling, 2.Auflage, Stuttgart, Schäffer-Poeschel,

1999, page 179

⁶ Cp. http://de.wikipedia.org/wiki/Portfolio-Analyse

⁷ Cp. Becker, Strategisches Controlling, 1.Auflage, Neuwied, Luchterhand Verlag, 1996, page 63

⁸ Cp. Schneider, Unternehmensführung und strategisches Controlling, 2.Auflage, Darmstadt, Hanser Verlag, 2000, page 72

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3.2. Foundations and premises

There are some assumptions in reference to the portfolio analysis. One of them is that several strategic business units have a product life cycle. It means that products that are discontinued must be replaced by new-generation products. In the ideal case all products rotate and move one raster along. If this premise would not exist there were effects on the strategies of norms. Every business unit has its own strategy of norm and its part to get the enterprising success. The stadium in the lifecycle shows the function of every business unit.

In the beginning of the life cycle the target of increasing sales is most important; later in the phase of maturation the target of maximum profit is most important. At the end of the life cycle it is crucial to discharge funds. 9 10

The learning curve of costs is a hypothesis based on empiric knowledge. It clarifies that there is coherence between the costs per unit of a product and the number of produced units of that product. The learning curve of costs tells that the costs per unit will decline

⁹ Cp. Baum, Coenenberg, Schriften für Führungskräfte: Strategisches Controlling, 1.Auflage, Stuttgart, Schäffer, 1987, page 85

¹⁰ Cp. Fickert, Weilenmann, Strategie-Controlling in Theorie und Praxis, 1. Auflage, Bern, Stuttgart, Verlag Paul Haupt, 1992, page 25

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