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Portfolio Analysis: Igniting a long-term spirit in a short-term world (XXV). Advantages of Portfolio Analysis.

Today´s subject is about initiating to provide the advantages of portfolio analysis and the limitations or disadvantages that the usage of this approach has shown during the past 40 years. We will first provide a designation of the advantages on a general basis, landing whenever is possible in the benefits of each model that we had currently covered. This is our objective today. Next Tuesday, we will proceed with the comparative example of using the BCG, the GE-Mckinsey, the Shell Directional Policy, and the ADL Matrixes. We then will proceed to reflect on the limitations or disadvantages, landing in each framework particularities when it comes to restrictions or boundaries or frontiers for each framework too.

“The Birdie Housing Mask”. An aquarelle painted by Eleonora Escalante.

At the bottom of this page, we will share the music that has been nominated for today, without forgetting to explain the “A thousand years” song choice of last week. However, there is a lot of material to release. So here we go again and let´s start.

Advantages of Portfolio Analysis as the base for Corporate Strategic Planning

  1. It forces to explore, to look into and study. It encourages top management to evaluate each of the corporation SBUs individually and to set objectives, allocate resources and understand clearly where they are going (1).
  2. It stimulates the use of externally industry research information. In order to build the matrixes, the importance of searching and calculating good data implies a Design-Build research (DBR) process that will aid the industry associations to be extremely careful when gathering information. Given the pollution of data on the Internet, it is a commensurate gain improvement for companies living in each country to begin the creation of excellent business intelligence divisions in their respective industries associations.
  3. It requests knowledge in action. To build a portfolio analysis matrix is corporate strategy as an art. The design, the formulation and the validation of critical factors is not a task for juniors or inexperienced professionals only. It requires industry experts with decades of experience, at the same time than solid analytical tools (beyond a business intelligence software). Companies which have dedicated resources and experienced people that have sticked to use any or all or a tailormade portfolio analysis matrix for years, are the best knowledgeable companies when it comes to each SBU´s industries.
  4. Graphical plotting is like painting. It is easier to understand and communicate when we use graphical depiction, and colors, and bubbles. A graphic aids a lot to create mental maps that later are easy to remember.
  5. SBU managers elevate. SBU managers, who are involved in the Design-Based Research process begin to scale from functional managers to strategic managers. Meanwhile immersed in the SBUs positioning process for the elaboration of the matrix, managers grow and evolve in their strategic thinking capabilities. SBU managers shift from an status of executor/facilitator of business strategies coming from the Board of Directors to a designer of his/her own SBU corporate strategy.
  6. To create a portfolio analysis matrix is like doing an MBA in practice. When SBU Managers are involved in the consideration of economics, data industry, social-educational-human talent critical factors of their SBUs they can examine the nature of interrelationships between cause and effect, and they adopt a more proactive approach to management. SBU managers not only begin to think strategically (2) , but they fulfill their role as decentralized, unfathomable, and effective decision makers.
  7. A Tailor-made Portfolio Analysis matrix is golden. Corporations must invest time and resources in creating their own tailor made portfolio analysis matrix. This tool is a precious incomparable jewel for those who have dedicated years of DBR and know how to use it. As any irreplaceable jewel that is valuable, it is well kept in private at the corporate level. Usually, these diversified corporations have directors and SBU managers well aligned in what, when, where, how and why to lead improvements in strategies. The allocation of resources improves substantially (2). SBU managers are in good condition to discern, but are integral enough to adapt strategic planning according to changeable circumstances, and they understand how to provide improved levels of management control systems, beyond the business intelligence software that is sold in the market.
  8. Portfolio Analysis ties the creative knot between theory and practice: An SBU Manager who doesn’t know how to do a DBR for strategic planning using portfolio analysis matrixes, is usually blind for decision making. For strategic planning, doing and managing a portfolio analysis matrix involves certain type of brain capabilities that show the link between this theoretical saga and success. It requires that an SBU manager is solid in every subject I have taught at Eleonora Escalante Strategy since 2017.
    An SBU manager must be able to identify the relevant critical factors, beyond the financial, operational and marketing performance objectives: They know that growth and profitability are always in tradeoff (3), they understand the subtle parameters about the differentials and boundaries in the industry stage of life cycle, they also know how to think in free-cashflows, and not in profits or revenues. They also see untapped market potentials and how to keep their SBU floating in the middle of crisis (as the pandemic), in their respective industries maturity, and in the presence of product substitutes. They also understand cleverly that price wars (reducing costs of delivery or changing to digital distribution channel) are the beginning of losing value for long-term strategic planning. Conscious and informed/experienced SBU managers know by heart that the new digital model will cause their own destruction (long-term), and they know that attacking the little competitors comes back to them as a boomerang, etc.
  9. A tailor-made portfolio analysis matrix starts as a pure organization analysis. It is the correct link on how to group the product market units under an SBU. An SBU usually includes few product market units.  Not all products can be treated as independent strategic SBUs, because they share resources, and we can´t fragment the corporation in thousands of SBUs, illogically. Usually, different products group together within an SBU, and this is called clustering of products. When clustering decision making, each product is compared with every other product to determine their interrelationship along a variety of top-down (cost and technologies related) and bottom-up (market-sales related) criteria. A tailor-made portfolio matrix works wonders to provide the elements of discernment for it. Of course, since managers are obliged to use design-based research thinking, then several testing loops are required to be sure of the product cluster group under each SBU(4). The choice, validation, and application to delimit an SBU is material for another saga, that we will try to develop next year. Nevertheless, there is a reason why a portfolio analysis matrix is unique and beautiful if we know how to use it.
  10. A tailormade portfolio analysis matrix can’t be copied from one corporation to another one. Why? Because each diversified organization has its delimitation on what products are below each SBU. There aren´t equal diversified corporations.
  11. Musica vieja pero buena. These oldies matrixes can become the base for new integral corporate strategy portfolio analysis tools. Eleonora Escalante Strategy believes in rejuvenation, and by adapting this tools with new integral factors, we can start to build our new models for the future.
  12. No pain no gain. To do a portfolio analysis matrix is not easy, it is one of the most difficult tasks any consulting team or manager can build. It takes months, to polish data. It takes months to convene into assessing the scales, ratings and weighted scores properly. But as much the difficulty, then the result also means success. It is necessary to suffer or work hard in order to succeed or make progress.
Hard work is the price we must take for success. “I know the price of success: dedication, hard work, and an unremitting devotion to the things you want to see happen.- FRANK LLOYD WRIGHT

In our next post, we will proceed to compare the four models with an example and numbers: BCG Matrix, GE-McKinsey Matrix, Shell Directional policy matrix, and A.D. Little matrix.

Why did we choose Christina Perri’s song last week? Although that I am not a fan of the Twilight Series, this song moves feelings. Regardless that Ms. Perri and Mr. Hodges wrote it for the specific film “Breaking Down part I”, the deepest connotation of the lyrics is irrelevant once you listen to it without paying attention to the words. Brooklyn Duo altogether with Dover Quartet interpretation is sublimely respectful to the instruments: the piano, the cello, and the violins. If you search about the meaning of this song on the Internet, you probably will bump into messages as> “This song is about waiting for 1,000 years for “the one”. No matter what feeling of fear, or scared to lose humanity by accepting to become a vampire, Bella option for Edward prevailed” (5)

One step closer
I have died every day waiting for you
Darling don’t be afraid I have loved you
For a thousand years

Songwriters: David Hodges / Christina Perri

I’ll love you for a thousand more. In our Eleonora Escalante Strategy rationale, we see beyond that song message. We believe in the immortality of the song well captured by the Brooklyn Duo. Well played music with traditional instruments inspires the innermost feelings… the feelings that instruments provoke are more powerful than a thousand words. Human feelings are the reason why we, as part of the consulting industry, are dedicating all our efforts to repair the corporate strategy tools, so we don´t continue extending the damage or the omission to fix our most difficult problems in the world. The most relevant issues are environmental devastation, racism, inequality, middle-class fragility and reduction, extreme poverty, nuclear warheads and armament, the institutionalization of legally accepted crimes (abortion, euthanasia, death penalty), and now add the excessive usage of the disruptive digital technologies grouped under NAIQIs (Nanotechnologies, Artificial Intelligence, Quantum Supremacy, and the Internet).

We all are on duty to repair what is not right. As business owners, at Eleonora Escalante Strategy domain, when doing corporate strategy, we are obliged to fix our frameworks and include humanity, the “human factors” to cause feelings of joy by helping others to succeed.

Song for today. Today´s piece of music is about John Williams. We have chosen three YouTube videos about this composition. The first one is performed by violin master Itzhak Perlman with the Pittsburgh Symphony Orchestra. The second one is directed by John Williams and performed by the London Symphony Orchestra. The third one is the original composed theme released in 1993, which is the soundtrack for the movie “Schindler’s List”. Can you feel the differences between the three? Just close your eyes, and ask yourself what you feel?

Blessings and see you again next week. Enjoy your weekend. Thank you for reading to me.

Sources of reference utilized today:

  2. Gilligan, Colin and Wilson, Richard; Strategic Marketing Planning, Butterworth-Heinemann (Elsevier), Oxford, UK, 2003.
  3. Hax, A., Majluf, N. The use of Growth-Share Matrix in Strategic Planning. Interfaces 13. 1983. Pp 46-60
  4. Day, George. Strategic Market Analysis and Definition: An integrated approach. Strategic Management Journal, 1981. Vol 2. No. 3. Pp 281-299.
  5. Interview with Christina Perri:

Disclaimer: Illustrations in Watercolor are painted by Eleonora Escalante. Other types of illustrations or videos (which are not mine) are used for educational purposes ONLY. Nevertheless, the majority of the pictures, images, or videos shown on this blog are not mine. I do not own any of the lovely photos or images posted unless otherwise stated.

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