A key aspect of understanding an organization’s resources is to undertake a portfolio analysis of the various offerings it has available on the market. It is clear that different businesses within the company are operating in different markets, with different opportunities and threats, and utilizing different corporate skills and resources. It is therefore important to ensure that appropriate objectives and strategies are formulated for each business unit and that these support each other to ensure the sustainability of the corporate entity. The process of balancing activities across this variety of business units involves portfolio planning.
One of the founding fathers of management theory Peter Drucker identified seven types of businesses that still have resonance today:
Today’s breadwinners – the products and services that are earning healthy profits and contributing positively to both cash flow and profits.
Tomorrow’s breadwinners – investments in the company’s future. These are the products and services that may not yet be making a strong financial contribution to the company, but that are in growth or otherwise attractive markets and are expected to take over the breadwinning role in the future when today’s breadwinners eventually fade.
Yesterday’s breadwinners – the products and services that have supported the company in the past, but are not now contributing significantly to cash flow or to profits. Many companies have a predominance of businesses of this type, indicating that they have been slow to invest in future developments.
Developments – the products and services recently developed that may have some future, but where greater investment is needed to achieve that future.
Sleepers – the products and services that have been around for some time, but have so far failed to establish themselves in their markets or, indeed, their expected markets have failed to materialize. These are allowed to remain in the portfolio, in the hope that one day they will take off.
Ego trips – the products and services that have strong product champions among influential managers, but for which there is little proven demand in the marketplace. The company, because of the involvement of powerful managers, continues to put resources into these products in the hope of their eventually coming good.
Failures – the products and services that have failed to play a significant role in the company’s portfolio and have no realistic chance of doing so. These are kept on the company’s books largely through inertia. It is easier to do so than admit defeat and withdraw or divest them.
As they stand, developments, sleepers or ego trips contribute little to the company, but it is hoped that they may one day do so. The markets they are in may be highly attractive but, because of underinvestment, the company has little ability to serve them. If left alone as they are, with no extra investment, these businesses will follow the death cycle and become failures.
Strategically, a company faces a dilemma with these businesses. If left alone they are unlikely to succeed, so a choice has to be made between investing in them, or getting out.
In even the largest companies it is impossible to pursue all attractive markets, so the first portfolio decision is one of double or quits.
If the choice is to invest, then the aim is to build the business until it is strong enough to become one of tomorrow’s breadwinners. This usually means achieving some degree of market dominance in a growth sector.
If successfully managed, the product will mature to become one of today’s breadwinners and, as it ages, one of yesterday’s.
As with all things, the difficulty in the portfolio is not starting ventures, but knowing when to kill them and when to concentrate resources where success can be achieved.