Portfolio Analysis for Small Businesses

A major tool in determining the appropriate growth strategy for a business is portfolio analysis.  This is where a company assesses the position of its products or services in the market and develops appropriate strategies which maximise the opportunity for growth.

Experts in marketing strategy, often on behalf of major corporations, developed a number of analytical matrices for assessing a business’s product portfolio and to suggest strategies to improve market position, cash flow and other growth measures.  After all, business is about growth; whether it is growth in profits, cash flow, market share or other measures.

Probably the most widely recognised portfolio analysis tool is the Boston Consulting Group Matrix.  The BCG matrix, or Boston Box, compares market growth rate with relative market share (a ratio of a product’s market share when compared to its largest competitor).  The matrix resolves products into four groups:

  • Stars – These are products with a high market growth rate and high relative market share.  They are market leading products.  Despite being in a market leading position, these products can have only a modest cash flow position.  They can be losing money.  The reason for this is that Stars need to be defended to maintain their market share and this can impact cash generation.
  • Cash Cows – Everyone has heard of a cash cow and they wrongly assumed that this is a product used to generate excessive profit.  In truth, a cash cow is a product in the maturity phase of its product lifecycle.  Relative market share is still high but the market growth rate has slowed.  These products do generate a large positive cash flow but this may be used to defend star products or to develop the next category;
  • Problem Child or Question Mark – Many now see the term problem child as not politically correct and use the name question mark for product where the market growth rate is high but relative market share is low.  These are often new products which have just been introduced to the market and due to development and promotional costs have a large negative cash flow.
  • Dogs – these are products with low relative market share and a low growth rate.  They can have a modest positive or negative cash flow.  For many years the mantra was “Divest in Dogs”.

For many large businesses using the Boston Box is a useful tool to manage a portfolio of products but for small companies or new start ups, the BCG matrix can be a very poor tool.

For most small businesses, relative market share is always going to be low when they compare themselves to their largest competitors.  Many small businesses are niche marketers. These two positions when placed into the BCG matrix automatically places the company’s portfolio in the position of a problem child or a dog.  Small companies may not have developed a wide range of products or have mature cash cows.  Some small companies may have dog products which are necessary additions to their main production e.g. if you make a necessary spare part for an appliance.

The BCG matrix provides four basic strategies for products in a portfolio:

  1. Build – Increase market share for long-term returns (for Question Marks or Stars)
  2. Hold – Maintain market position (for Cash Cows)
  3. Harvest – aim to maximise short-term cash flows at the expense of a long-term market position
  4. Divest – get rid of the product.

Admittedly, recent amendments to the matrix have improved things slightly  There is an option to niche market dogs; or to develop a ‘cash dog’ which can be harvested for income; but the model can be a bad fit in the small business sector.

An alternative is to use a tool such as the general Electric (yes, another large corporation) multifactor portfolio model.  This model analyses business strengths against segment attractiveness and it allows business managers to select and weight various factors of each in the analysis.

The model offers three strategies:

  • Where industry attractiveness and business strengths are strong, to manage a product for growth
  • Where there is moderate business strengths and industry attractiveness, to manage products selectively for earnings
  • Where there is low business strength and industry attractiveness to harvest the product for cash or to leave the marketplace.

A major weakness in this model is the ability to choose from a wide range of factors.  Different results can be achieved by the decisions of managers as to the appropriate factors and how they are weighted.

A third option is to use a directional policy matrix such as that developed by Professor Malcom McDonald or by Shell Oil (yes, another large corporation).  The Shell Directional Policy Matrix analyses the prospects of a market segment being profitable when compared to an organisation’s competitive capabilities.  This matrix provides the following possible strategy options:

  • Weak Competitive Capability and Attractive Profitability – Double or Quit i.e. gamble that this is a major segment for development and either invest heavily or abandon to competitors if you feel you do not have appropriate resources to do so.
  • Weak Competitive Capability and Average Profitability – Carry out a phased withdrawal from the market
  • Weak Competitive Capability and Unattractive Profitability – Divest from the market segment
  • Average Competitive Capability and Attractive Profitability – Try Harder i.e. increase your efforts, improve your skills in that segment
  • Average Competitive Capability and Average Profitability – Custodial growth, i.e. use as a cash cow, generate cash but do not over invest.
  • Average Competitive Capability and Unattractive Profitability – carry out a phased withdrawal from the segment
  • High Competitive Capability and Attractive Profitability – Develop product as a market leader e.g. a BCG matrix star
  • High Competitive Capability and Average Profitability – Growth Leader, apply resources to grow the market segment
  • High Competitive Capability and low Profitability – Use to generate cash.

The Arthur D. Little Strategic Condition Matrix analyses a product or segments competitive position against the position of the product in its lifecycle.  It offers a wide range of strategic options.

Probably the best answer is not to rely on one particular portfolio analysis or directional policy matrix and to develop a corporate position based on a range of these models.  Philmus Consulting Ltd can help your business to apply portfolio modelling or directional policy strategies to ensure long-term success.