10.

MANAGEMENT AND ASSESSEMENT OF

CORPORATE PORTFOLIO

1. Characteristics of corporate strategy

2. Portfolio analysis technique
2.1 BCG matrix and its modifications
2.2 GEC matrix
2.3 Life cycle industry matrix
2.4 Parenting matrix
3. Balanced portfolio
4. Evaluation of strategic parameters of business units
5. Formulation of corporate strategy
6. Management of corporation
6.1 Functions of corporation management
6.2 Methods of corporation management
 1. Characteristics of corporate strategy

Identification of contemporary corporate strategy gives a base for thorough strategic

analysis and formulation of new or correction of original strategy. Description of
corporate strategy:
1. Degree of diversification or vertical integration – extent of diversification or
integration, e. g. a share of every BU on the profit and sale of the whole corporation.
2. Nature of corporate portfolio – relation between related or unrelated diversification,
integration lines.
3. Rate of strategic fit between related businesses and using related diversification for
competitive advantage establishing.
4. Territorial dividing of corporate activities.
5. Measures for enhancing and strengthening competitive position of main BUs in the
last time period.
6. Intents to incorporate new businesses/BU into portfolio and build positions in new
industries.
7. Measures to divest weak or unattractive businesses.
8. Relation of capital investment among BUs.
 2. Portfolio analysis technique
2.1 BCG matrix and its modifications

Stars (*) Ouestion marks (?)

High

Industry
Growth Cash cows ($) Dogs (x)
Rate

Low

10 1.0 0.1

High Low
Relative Market Share

Portfolio techniques depict businesses/business units, not products or services!

Present versus future positions in the portfolio matrix

High

Industry
Growth
Rate

Low

10 1,0 0,1
High Low
Relative Market Share

Present Future
position position
BCG matrix with multiple coordinate systems

Stars (*) Question

marks (?)
High
increasing of
demandingness
Industry I
II
Rate
III decreasing of
Growth Low demandingness

Cash cows ($) Dogs (x)

10 1 ,0 0,8-0,75 0,1
High Low

Relative Market Share

Industry growth rate variants:
I. double increase of GNP + inflation
II. aritmetic average of growth of industries ín portfolio
III. increase of GNP
 2.2 General Electric’s Matrix

* * ?
High

Long-Term * Φ x
Industry Medium
Attractiveness

$ x x

Low

Strong Medium Weak

Business Strength/
Competitive position

Symbols: ? - q. marks, * - winners, $- - profit producers, Φ – average business, x - loosers

-
 2.3 The Life-Cycle Porfolio Matrix

?
Early Development

Industry Takeoff A

?*

Rapid Growth B
C
The Industry’s Stage *
in the Evolutionary
Life-Cycle Competitive Shake-out
D

$
Maturity E

Market Saturation F

x
G

Stagnation/Industry Decline

Strong Average Weak

The Business Unit’s Competitive Position

 2.4 Parenting matrix: Ashridge Portfolio Display

Corporation should seek to build portfolio that fit well with their corporate
parenting skills and the corporate centre should in turn build parenting skills that
are appropriate for its portfolio.

Greater fit in terms of two dimensions:

The corporate parent has sufficient professional knowledge of the businesses in
the portfolio. The headquarters understands the businesses (market, customer,
product, technology).
The corporate parent provides the businesses with capabilities. It delivers the
parenting benefits (managerial skills, operation experiences, business contacts,
money).

Ex.:
A tobacco company acquired a financial services company. There was low critical
success factor fit. Critical success factors (CSFs) of insurance did not fit well with
capabilities of tobacco managers.
 2.4 Parenting matrix: Ashridge Portfolio Display

High
Ballast Heartland businesses
businesses

Professional
knowledge of the
bussiness
(feel, understanding)

Alien businesses Value trap

businesses
Low

Low High
Capability to provide with added value and utility
(benefit, offer of resources)
 2.4 Parenting matrix: Ashridge Portfolio Display
Heartland business units are ones to which the parent can add value without
danger of doing harm.
They should be the core of the future strategy.

Ballast business units are ones the parent understands well but can do little for.
They would probably be just as successful as independent companies.
If they are part of a future corporate strategy, they need to be managed with light
touch and little cost.

Value trap business units are dangerous, because there is a high danger that the
parent’s attention will result in more harm than good. They should be included in the
scope of heartland businesses, if the headquarter improves its expertness, otherwise
exit.

Alien business units are clear misfits. They offer little opportunity to add value and
they rub awkwardly with the normal behaviour of the parent.
Exit is the best strategy.
 3. Balanced portfolio
Extent (size of portfolio):
1. The least span is a such one, which ensures required growth and profitability of
corporation.
2. The greatest span is a such one, which is manageable by headquarters due to complexity
of managerial tasks.
Economic limit is the intersection of marginal value added and marginal bureaucratic
costs.

Number and share of businesses in portfolio:

Questions marks: the greatest number, the least share, the first pillar for the distant future.
Stars (winners): less number and greater share than questions marks, the second pillar for
closer future.
Cash cows (profit producers): the least number and the greatest share, the third pillar for
the present time.
Dogs (losers): none, they are acceptable for synergetic relations in related diversification
only or as a necessary phase of vertical integration.
 4. Evaluation of strategic parameters of business units
Evaluation/comparison of industry attractiveness:
1. The attractiveness of each industry represented in the portfolio: „Is this a good industry for
the company to be in?“ An individual attractiveness.
2. Each industry’s attractiveness relative to the others: Which industries in the portfolio are
the most attractive and which are the least attractive?“ A sequence of attractivenesses.
3. The attractiveness of all the industries as a group: „How appealing is the mix of
industries?“ Attractiveness of the whole.
Evaluation of business unit strength:
The task here is to evaluate whether the business is well-positioned in its industry and the
extent to which it already is or can become a strong market contender. Dilemma: investing in
a business with a strong position in a moderately attractive industry or in a weak business in
an glamour industry?
Evaluation of business-unit performance:
Sales growth, profit growth, contribution to company earnings, return on capital invested;
sometimes, cash flow generation is a big consideration, especially for cash cows or
businesses with potential for harvesting.
Strategic fit:
To determine how well each business unit fits into the company’s overall business picture. A
business is more attractive strategically or more valuable financially.
 4. Evaluation of strategic parameters of business units
Ranking the business units according to investment priority:
Corporate strategists can rank business units in terms of priority for new capital
investment and develop strategic direction for each business unit.
The task is to decide where the corporation should be investing its financial
resources.
Which business units should have top priority for new capital investment and financial
support?
Which business units should carry the lowest priority for new investment?

Business units are ranked according to those ones which will:

- grow and build (aggressive expansion),
- fortify and defend (protect current position with new investments as needed),
- overhaul and reposition (try to move the business into a more desirable industry
position and a better spot in the business portfolio matrix),
- harvest or divest.
 5. Formulation of corporate strategy

Formulation of corporate strategy means to assess a performance of corporate

portfolio and propose strategic measures for its increase.
Assessment of portfolio:
- number (share) of businesses in attractive industries,
- number (share) of businesses in marginal and question mark industries,
- number (share) of mature and declining industries,
- number and performance of profit producers necessary for financing the stars
and future winners,
- size and reliability of profit and cash flow of core businesses,
- number (share) of average and unnoticeable businesses,
- sensitivity of portfolio to recession and seasonality,
- perspective of contemporary structure of portfolio.
 5. Formulation of corporate strategy
Strategic measures for closing a gap between a plan and suggested reality:
1. To change strategic plans of some or every business. To enhance a performance of
existing businesses.
2. To associate new business units. To enhance a performance of whole company by
acquisition or building new business from the start.
3. To divest low performance or losing businesses. Divestiture revenue can be used for
purchase of new acquisition.
4. To establish alliances for overcoming conditions causing lower performance.
5. To decrease corporate goals. The last possibility is reduction of goals and matching
them to reality.

Strategic measures for increasing the corporate portfolio performance:

- acquisitions, establishing new businesses, divestiture of marginal business,
- consolidating long-term competitive position of core businesses,
- using opportunities for shaping strategic fit and its change in competitive advantage,
- transfer of corporate resources from low attractive industries into highly attractive
industries.
 6. Management of corporation
6.1 Functions of corporation management

What to manage (object of managerial effort)?

Managing the corporate portfolio is primarily reflected in decisions concerning its

composition and balance. These include acquisition and divestment (major, but
infrequent decision) and allocation (the primary, ongoing responsibility).

Business strategy formulation. Extent of the influence of corporate headquarters on

divisional strategies depends upon divisional performance and divisional relatedness.

Coordination consists of budgetary process, foresight of macro environment, company-

wide issues of cost reduction, innovation and marketing, economies of scope and
transferable skills.

Monitoring and controlling performance. The corporate head office determines and
evaluates targets for the individual divisions: financial and strategic targets, incentives
and sanctions, appropriate choice of quantitative and qualitative goals.
 6.2 Methods of corporation management
How to manage (managerial instruments)?

Portfolio management provides business units with more independence (less

interventions). It deals with identifying acquisition candidates and purchasing them,
reducing the cost of the acquired companies, increasing the efficiency of them,
monitoring of business-unit financial performance.

Restructuring provides business units with less independence (more interventions). It

deals with post-acquisition management, changing the management, increasing efficiency
and disposing of underutilized assets.

Transferring skills, e. g. corporate management can add value to its business units by
transferring capabilities of marketing, distribution or informatics.

Sharing activities, creating conditions for joint using R&D activities, advertisement
campaign, distribution systems and service networks through a strong sense of corporate
identity, a clear corporate mission, an incentive system, inter-business task forces and
vehicles for cooperation.