Portfolio Analysis: Igniting a long-term spirit in a short-term world (XXIX). Disadvantages of Portfolio Analysis.
Today´s subject is about the disadvantages of portfolio analysis. We have covered the utility bill of this saga, but still, the medullary crucial part is missing. And this is coming as of next Friday. We wanted to show you the method, how to do portfolio analysis starting from the design-based research. By this time, we are honored by your presence, because corporate strategy tools like this one, are not comfortable or easy. Even for those who have taken a Master of Business Administration previously. If you started to read us on August 9th and survived viewing us up to this day – despite the fracture of Eleonora Escalante Strategy – then I am happy for you, because you have stuck with us for three months. We almost accomplished our outline, and I am so grateful to you for learning with our saga. We are thankful for Thanksgiving too. We don´t cease praying for Eleonora Escalante Strategy harvest time.
I also wish to express that I am recovering my foot movement quickly. The physiotherapy treatment and swimming have helped vastly. So thankful to God for the rehabilitation success, thankful to my family, thankful to the three orthopedic doctors that have supervised my case (Doctor José Roberto Pineda Galero, Doctor Rafael Olivares Acosta, and Doctor Tito Guerrero). I am also immensely thankful to the Fit Sport diligent physiotherapists who have made this possible and are still helping me to recover my foot health completely. Thank you!
Let´s continue today with the disadvantages of portfolio analysis.
- Changing the mindset at the corporate level is not easy. The utilization of portfolio analysis matrixes comes from principles and correctness. Each matrix is an analytical tool designed by consulting houses to help the Board of Directors members and the CEO, to make decisions. Decisions when holding a diversified ensemble of strategic business units. Each matrix includes several factors, beyond financial ratios. In a complex world that is so technologically advanced today in comparison to the 1980s decade; it is so essential to return back to the correct data and change the mindsets. Oldies tools are not wrong, they simply were left behind. But oldies have wisdom, if we adjust the external and internal factors to our needs and wants of today. We can only humanize and help our employees and societies with the tools of today, if we know the oldies, the roots and origins of our portfolio analysis. It takes guts and the will to change our ideas if we take the courage to go back to the oldies frameworks, and adjust them accordingly. Our new portfolio models can work wonders to solve our civilization issues if we are honest enough to go back in time where and when we were worried with doing the things right, not to win the first place.
- There is a need for study. Using portfolio analysis matrixes require previous training and analytical skills coming from managerial experience; and the theory related to economics, business, education, mathematics, statistics, social sciences, etc. Economists, environmentalists, sociologists, historians, stats and math people, and not just needed, but we need more MBAs with diverse backgrounds that could be an answer to holistically design the specific new matrixes of corporate strategy. Consultants need to be re-educated to take decisions beyond financial ratios, and the exploration of the contexts in which the firm (with respective SBUs) operates.
- SBUs clearly defined. The delimitation of SBUs is part of the compatibility compromise to simplify the distinct levels of autonomy and flexibility (2). When the corporate headquarters oversee different layers of physical, intangible, and shared resources; the self-sufficiency for each SUB is clearly affected. It is extremely hard to divide SBUs, when the centralization of human resources, technology, marketing, operations, logistics, financial services, etc. is in the hands of the corporate parent. To divide SBUs, in this latter case, require an organizational broken-down analysis too.
- Top-down and bottom-up analysis of strategic markets are necessary. It is imperative to take the time to perform both analyses, to avoid myopic market definitions (3). Researchers suggest that there are inherent deficiencies to each approach individually, which need to be balanced by the contrasting perspective. So, both analysis are required. Factors as market share can be quantified only if the market is clearly well defined. And by accepting that there are multiple markets definitions, then it is evident that many matrixes will be distinguished.
- The BCG matrix has multiple issues. It can´t be used alone. The BCG portfolio market share/growth matrix is over-simplified, and it is misleading; particularly when we define the dimensions of growth rate and market share. It is too general, and it dismisses other important strategic factors that are clearly determinant into the decision of cashflows and higher profits (4).
- Portfolio Analysis is not a piece of cake. It requires to understand the premises of the original oldies, otherwise it is quite impossible to check what is the meaning of many technological software that is commercially utilized by practitioners. Nowadays, when you say the phrase “Portfolio Analysis”, no one remembers these oldies tools, but everyone hangs to the investment portfolio analysis that is taught to us in the finance courses. The gap between this saga theory and practice is due to the failure of most strategy books that do not teach corporate strategy, but only business strategy. And to the lack of explanation of strategic thinking underpinning these techniques (4)
- If done properly is time consuming. To offer design-based research for portfolio analysis is like entering into a maze. It takes a lot of time (4) to go back and forth, to polish the tool and convert it in a “tailor-made” utensil for the diversified corporation. It takes a lot of time to gather good data, and clean it from rubbish that might not be directly related to each SBU. Sometimes it requires to change and admit that our current organizational chart is wrong, simply because otherwise, it won´t make any sense. It mandates coherence, a multidimensional approach, and the humility of searching from other practitioners (as scientists, economists, statisticians, environmentalists, sociologists, historians, beyond the UNDP SDGs). It demands to change the mindset from cost-efficiency to differentiation and hybrid corporate strategies of people organizational responsiveness in a dynamic way.
- When countries do not have industry databases (similar or better than the former PIMS), the portfolio analysis tools are a motive of frustration. In fierce competition surroundings, companies keep their information under key-locks. And if they share some data, usually it is altered on purpose, because it is like extending a future bleeding in revenues or profits. No one wants to share the business intelligence of their SBUs, just to be an object of data robbery by the competitors. Try to find real data, and trust me, it will be a hard roadmap that will frustrate because of the many intents to get it correctly. Transparency is not always available at the industry data gathering, neither at the same company for the employees. Corporate strategy authorities tend to keep them in secret, to avoid being defrauded by a crooked spy employee that can sell information to the competition.
- With the low-cost strategy products coming from China, SBUs have been shut down. There is a trend that has lavished all over the world: local SBUs have stopped manufacturing in their own territory, and begun to import from China several years ago. Many SBUs have become wholesalers or distributors of imported good and services. Many entities with diversified SBU´s are nowadays agency importers, traders with knowledge in coordination of containers flux from China and specialists in customs, or dealers, and the portfolio analysis tool is not relevant for their decision making anymore.
- Limitations noticed by professors of strategy: I would like to share the limitations that other strategy teachers´ equals have observed. Wheelen and Hunger (5) convey: “(a) Defining product/market segments is difficult. (b) Portfolio analysis use of standard strategies can miss opportunities or be impractical. (c) Illusion of scientific rigor when in reality the plot positions are based on subjective judgements. (d) Value-burdened terms or tags as dogs, cash cows, etc; can lead to self-fulfilling prophecies. Wind and Mahajan (6) articulate that when plotting SBUs, the usage of simple strategy recipes as “divest, or harvest, or grow fast or focus, or hit smaller firms, or hold, etc”, are suggestions that may constrain management and BoD motivation to try alternative innovative solutions like repositioning products, provoking adjacencies, developing new domestic or international market segments, etc. For these professors, the way the portfolio model is constructed may suggest an unwise change, that will cause a company to go into injudicious decisions. For professors Hax and Majluf, “ironically, one of the problems with the attractiveness-strength matrix arises from the complexity of multidimensional indicators; managers don´t agree many times about them and they may categorize wrong weights and rankings; finally it is hard to assess industry attractiveness because of lack of clarity in the standards.
- For Eleonora Escalante Strategy, the main disadvantage of these tools is to don´t know the theory of them. To don´t know how to DBR build them, and how to fill them with the right and correct data. Any algorithm that is created by tech software and artificial intelligence is doomed to fail, if there is vagueness of definitions and if there is ambiguity of data, or lack of bold criteria to understand all the factors involved. Basically if we don´t understand the theory for a tailormade purpose of portfolio analysis matrixes, we will fail, sooner or later we are predestined to go wrong. We took you back in time to the roots, to the original ideas from researchers in these matters (1980s), ONLY because we believe in the originators of theories (the founders of knowledge). And we trust that oldies matter when we want to build an integral new framework in our context of high tech. Particularly when we want to rebuild the corporate strategy tools in an ethically correct manner.
We will stop here. Thank you for staying with me all these weeks. We will proceed on our next episode to the medullary essential segment of the saga. See you then.
Why did we choose Train’s theme “Marry me”? Apologetic for being so selfishly snow-white with you. But I love this song personally because I wish it to be played in my future wedding with Alex Guillermo Lozano Artolachipi. It is essential for my corporate strategy as a future bride! I am also a human with feelings. I adore beautiful music. And I also wish so much to be married soon!.
Song of today. Today I will post a few songs about thanksgiving. Our publications are global, and half of my readers belong to the United States of America. So we will celebrate Thanksgiving this week too. We are thankful, grateful, appreciative, filled with gratitude for all the blessings. Particularly thankful for the possibility to listen to songs, watch and produce art, learn corporate strategy, move our feet and hands, dream of new heights every morning, pray for the harvest of our past efforts. Thank you, God, Jesus, and the Holy Spirit, because, despite the pandemic, we acknowledge your gifts day by day.
Best wishes for Thanksgiving!
Bendiciones para el día de Gracias
See you next Friday. Remember, we have a new saga cooking: “Bees at work”. More information to come. Stay tuned!
Sources of reference utilized today:
- Wind, Yoram; Mahajan, V.; Swire, D. An empirical Comparison of Standardized Portfolio Models.
- Magalhaes, M; Souza; M.; D´Orey, F. The marketing strategy and implementation of strategic business units, how to choose a methodology of segmentation strategic marketing. International Journal of Entrepreneurship. 2019. Volume 23. Issue 3.
- Day, G. Strategic Market Analysis and Definition: An Integrated Approach. Strategic Management Journal, 1981. Vol. 2, no. 3. Pp 281-299.
- Wind, Y. and Mahajan, V. Designing product and business portfolios. Harvard Business Review Magazine. January 1981.
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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