HOW TO ALLOCATE THE RIGHT PORTFOLIO RESOURCES
 

 

 

 

 

 

 

 

 

 

 

 

 

Portfolio approaches provide a useful tool for strategists. Granted, these approaches have limitations, but all these limitations can be overcome with a little imagination and foresight. The real concern about the portfolio approach is that its elegant simplicity often tempts managers to believe that it can solve all prob- lems of corporate choices and resource allocation. The truth is that it addresses only half of the problem: the back half. The portfolio approach is a powerful tool for helping the strategist select from a menu of available opportunities, but it does not put the menu into his or her hands. That is the front half of the problem. The other critical dimension in making strategic choices is the need to generate a rich array of business options from which to choose.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

A diversified organization needs to examine its widely different businesses at the corporate level to see how each business fits within the overall corporate purpose and to come to grips with the resource allocation problem. The portfolio approaches described in this chapter help management determine the role that each business plays in the corporation and allocate resources accordingly. Three portfolio approaches were introduced: product life cycle, growth rate- relative market share matrix, and multifactor portfolio matrix. The product life- cycle approach determines the life status of different products and whether the company has enough viable products to provide desired growth in the future. If the company lacks new products with which to generate growth in coming years, investments may be made in new products. If growth is hurt by the early matu- rity of promising products, the strategic effort may be directed toward extension of their life cycles. The second approach, the growth rate-relative market share matrix, suggests locating products or businesses on a matrix with relative market share and growth rate as its dimensions. The four cells in the matrix, whose positions are based on whether growth is high or low and whether relative market share is high or low, are labeled stars, cash cows, question marks, and dogs. The strategy for a product or business in each cell, which is primarily based on the business’s cash flow implications, was outlined.