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1UvodIntroduction

Portfolio analysis had a major contribution infacilitating the problem of a company's strategic planning.These techniques, which can be found in many differentvariations, aredevelopedto satisfy theemerging needs foracentralized decision about crucial strategic issues in

industrial companies. The great advantage of thosetechniques wasseenin thefact that they provideda meansofcomparing numerous business activities in relation to eachother, establishing the priorities and deciding betweenwinnersandlosers.

Large companies have often complex situations inseveral different activities and a lot of Strategic BusinessUnits (SBU). For that reason, the analysis of strategicoptions is necessary to be completed with the portfolioanalysis. Portfolio matrices as a powerful analysis methodtool help in optimizing the strategic managerial decision-making.Analytical studies approach with matricesexplainshow the strategies of individual SBU have to fit into theoverall strategyof the joined company, i.e.corporation.

One of the most important ideas of portfolio analysis isto understand the current position of a product life cycle(PLC). Themodelof theindustrylife cycle,showninFigure1, represents an industry with the introduction, growth,maturity and decline stages. Life cycle of differentindustries has different length. In modern, highlytechnological industries it is possible to analyze, shape andcontrol the strategy by the use of industry life time cycle.Because some products or services produce considerableamount of profitwhile othersdo not, besidePLC, cash-flowdata arein thecentral focusofobjectresearching.

101

S. ic, H. Hadi, M. Ikoni

ISSN 1330-3651UDC/UDK 65.012.2 : 658.014.12

Samir ic, Hari Hadi, Milan Ikoni

This paper briefly represents themethodsthathave been developedto assista company'sportfolio analysis.The core of this reviewconsistsin thepresentationof two mostimportant businessportfoliomatrices -ADLand DPM.Large companiesare oftenan agglomerationof complex organizationof strategicbusinessunits with various production and marketing programs. The aim of this article is to point out the positive synergy of portfolio analysis on a company's marketgrowth,competition andfuture businessplanning.

Key words: formulationof strategy, portfolioanalysis, strategicbusinessunit

Subject review

Sredinji dio pregleda ovog lanka su dvije najznaajnije matrice su obino sastavljene odca s razliiti ovog lanka je naglaavanje poeljne sinergije analize portfelja na

trini rasttvrtke,suparnike odnose i budue poslovnoplaniranje.

strateke metode predstavljene s : ADL i DPM. Velike kompanijestratekih poslovnih jedini m proizvodnim i marketinkim programom. Cilj

Kljunerijei:formuliranjestrategije, analizaportfelja,stratekaposlovnajedinica

Pregledni lanak

Analiza portfelja kao koristan alat stratekog menadmenta pri formuliranju strategije


Technical Gazette 16, (2009),4 101-105

2Types of portfolio matricesVrsteportfeljmatrica

Creation of portfolio matrix starts by examining thepositions of products considering relevant categories.Those categories can be attractiveness, growth or maturityof an industry, strength of a business unit to operatecompetitively within market, business strength ortechnological skillsetc. [1]

To visualize the mix of various SBU (products)positions, the strategy manager uses two dimensionaldiagrams (matrix). For instance, the ADL matrix uses 4 5= 20cellssystem and DPM uses3 3 = 9 cells system. Bothmatrices use circles to indicate a SBU's position, with thearea of circlebeingproportional to theproduct sales volumeratio.

The Boston Consulting Group (BCG) portfolio matrixas thefirst model provides a meansof ratingproducts and/orservices in order to assess the future probable cashcontributions and demands of each product or service. Themodel assigns product or market strategies on the basis of aproduct's industrygrowthand its marketshare relative to thecommon industrycompetitors, as twomaindimensions[2].

The following General Electric matrix (GE) as a multifactor matrix was designed to overcome some of thenegative limitations in considering the market share andindustry growth. GE matrix includes different variables

PORTFOLIO ANALYSIS A USEFUL MANAGEMENT TOOL

Figure 1

Slika 1

Product (industry) life cycle model

Model ivotnog ciklusa proizvoda (industrije).

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such as business strength or industrial attractivenesscategories. The factors of business strength can be marketshare, cost of competitiveness, technological skills etc. Thefactors of industrial attractiveness can be industry growth,inflationsensitivity, cyclicality-seasonalitymarketetc.

The large company Shell wanted to include morequalitative variables, because GE matrix had a lot ofvariables that were difficult to measure objectively.

Consequently, Directional Policy Matrix (DPM) came as apowerful tool with better quantities assessment of CriticalSuccess Factors ratings (CSFs). Dimensions on axes are thecompany's competitivecapabilities and prospects for sectorprofitability [3, 4].

The ADL matrix has a major advantage in young andembryonic industries with new products or industries with"winners" in a mature stage of PLC. The market of thosesegmented SBUs is quite homogenous with mostly oneproduct. The ADL dimension's categories are thecompetitive positionandindustrymaturityina PLC.

On one hand, the intention of this paper is to give thereaderan insight into theportfolio analysisapproach.On the

other hand, this paper shows the relationships of variousdata (for example external risk, price competitive)considering the concepts of industry strategy formulation.Thevaluesandpitfalls of theportfolioanalysis concept willbe presented in the followingchapters.

Arthur D. Little, Inc. (ADL), one of the best-knownconsulting firms, developed in the late 1970s a structuredmethodology for consideration of strategies which aredependenton thelifecycleof theindustry.

The ADL portfolio management approach uses thedimensions of environmental assessment throughcompetitive position and business strength assessmentthrough industry maturity category. Its application isparticularly suited to smaller industrial companies and forstrategicbusiness unitsof large companies[5].

Company's competitive position is determined bystrategic actions and competitor's strategies. Quality andstrengthof competitive position are indicatorsof company'sstrength. The ADL matrix categorizes every segment ofcompany according to its position which can be dominant,strong, favorable,tenable orweak.

Industry maturity could almost be renamed into"Industry life cycle". Of course not only industries shouldbe considered here but also segments. There are fourcategoriesof industry maturity: embryonic, growth, matureand aging. Positioning into one of the four categories is averysophisticated procedureanddepends onmanyfactors.

Creation of ADL Matrix is done step by step strictlyfollowinga defined andconsistent methodology. Four steps

3The ADL matrix

3.1Competitive position

3.2Industry maturity

ADL matrica

Konkurentski poloaj

Industrijska zrelost

Portfolio analysis a useful management tool

Tehni ki vjesnik 16, (2009),4 101-105

have tobe thefollowing [6]:Determining the SBUs of the company (strategicsegmentationdonebyclearlydefinedprocedures).Identifying phases of an industrial maturity for eachSBU (this should be done for each business in allSBUs).Determine SBUs competitive position (company'scompetitiveness in specific, narrowly defined

industry).Plotting the sizes and positions of SBUs on ADLMatrix.

The position of SBU is represented by the circle sizesproportionate to the size of the industry where they belong.On the matrix can be seen relative relations between thesizes of all the industries in which the company is active.Company's market share is represented by slices. ADL

matrixwith industrysizes is showninFigure2.

!

!

!

!

3.3ADL matrix plottingIzrada ADL matice


102

The analyst must constantly review the phase'sdetermination in the life cycle of the industry for eachstrategic centre of the company. InADLmatrix competitive

industries should be analyzed and compared with specificindustry by the use of Porter's industrial model structures[7].

Developed industrial companies have ADL Matrixsimilar to one shown in Figure 3. It can be seen that mostproducts/industries with biggest shares are in the area ofgrowthor inmaturestagemeaning that these companiescanmakesignificant profit andrevenues.

Comparisons should be very narrow and must includeboth comparison of business units and comparableproducts. Strategies for each Industry Maturity andCompetitive position are shown in Table 1. A company'sanalyst and management should be very careful but alsointuitivewhenchoosing therightstrategicmovement.

Figure 2Slika 2.

ADL Matrix with the industry sizesADL matrica s veliinama industrija

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103Technical Gazette 16, (2009),4 101-105

Analiza portfelja kao koristan alat stratekog menadmenta pri formuliranju strategijeS. ic, H. Hadi, M. Ikoni

4The DPM matrixDPM matrica

The Directional Policy Matrix (DPM) was developedby the "Shell in mid-seventiesof the twentieth century. It is

an improved version of the GE matrix of industrialattractiveness and business strength, because Shell wantedto incorporate morequalitativevariables.

The purpose of DPM is the synchronizing of the cash-flows obtained in large companies with the proviso that it isespecially appropriate in companies that have activities inthecapital strong industries.

Like the GE, the DPM also uses multivariatedimensions to measure attractiveness and capabilities. Twodiagram dimensions are the horizontal company'scompetitive capabilities on the abscissa, and the verticalprospects for sector profitability on the ordinate, as it can beseeninFigure4.

Both categories comprise a set of Critical Success subFactors (CSFs). The choice of CSF's depends entirely uponthe company and environment, from which strengths/weaknessandopportunities/threatsarise.

The position of a strategic business unit on each axis is

determined bay weighting numerous sub factors.Company's competitive capabilities sub factors include forexample: market share, production capability, productresearch and development. The Prospects for sectorprofitability sub factors include market quality and growth,risk, environmental factors, industryfeedbacksituationetc.

Additionally, an Environment risk factor instead of thevertical prospects for sector profitability dimension hasbeen included as an additional hybrid form of DPM matrix.This is done because the original DPM matrix had lesselaborated influences across environmental factors onSBUs.

Position of specific SBU on a matrix diagram isobtained by calculation. Calculation of total CSFsweightingforspecified SBUacross both dimensions shouldbe done by followingsteps:

Identifying and selecting company's important CSFsforonedimension.Ordering and weighting them in terms of their relativeimportance from0 to1.

Absolute scoring with CSFs scoring system, forexample from1 to10.Calculatingeach CSFwiththeformula:

!

!

!

!

Weightx score= totalCSFs weighting.

Figure 3Slika 3.

ADL Matrix of developed industrial companiesADL matrica razvijenih industrijskih tvrtki

Table 1Tablica 1.

ADL Matrix with strategies for each combinationADL matrica s strategijama za svaku mogunost

INDUSTRY MATURITYCOMPETITIVE POSITION

EMBRYONIC GROWTH MATURE AGING

DOMINANT

Aggressive push for marketshareInvest faster than market sharedictates

Maintain position and marketshare Invest to sustain growth

Maintain position, grow marketshare Reinvest as necessary

Maintain position Reinvest as necessary

STRONG

Aggressive push for marketshare Improve competitive advantage Invest faster than market sharedictates

Aggressive push for marketshare Improve competitive advantage Invest

Maintain position, grow marketshare as the industry grows Reinvest as necessary

Maintain position Cut expenses to maximize profit Minimum reinvestment

FAVORABLE

Moderate to aggressive push formarket share Improve competitive advantage Invest selectively

Improve competitive advantageand market share Selectively invest

Develop a niche Minimum or selectivereinvestment

Cut expenses to maximize profitor withdraw Get out of current investment

TENABLE Look for ways to improveindustry position Invest very selectively

Develop a niche and maintain it Invest selectively Develop a niche or plan awithdrawal Selective reinvestment

Phased withdrawal or abandonmarket Divest

WEAK If benefits do not outweigh costsget out of market Invest or divest

Improve position, or get out ofthe market Invest or divest

Improve position or planwithdrawal Selectively invest or divest

Abandon market Divest

Figure 4Slika 4.

DPL matrixDPL matrica

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104 Tehni ki vjesnik 16, (2009),4 101-105

Portfolio analysis a useful management tool S. ic, H. Hadi, M. Ikoni

Total sum for plotting one dimension is obtained bysumming of individual totalCSFs weightingofSBU's.

After calculations all data are ready to be plotted onDPM matrix diagram (see short example in Table 2). Thefirst dimension is to be plotted on the abscissa and thesecondon theordinate.

As it can be seen, company's competitive capabilitiesdimensionfor specifiedSBU is5,5out of total10.

It means that the average total is 5,5 and will be plotted

on the DPM grid on the abscissa. The same procedure willbe conducted for the seconddimension.Interpretations, strategic recommendations and options

used in the DPM matrix are much more detailed andcomprehensive than those used in the GE matrix. They areclearly prescribed through nine cells as additional minianalyses.

Each cell strategy is indicated by a key word, forexample SBU located in the position 9 has strategy"Leader", i.e. the best position. The SBU located in theposition 1 has strategy "Disinvest", i.e. the worst position.Their appearance is showninFigure5 [9].

insights into many strategic situations. For instance, onepurpose is to look at activities within organization'sbusiness units relative to each other, so that strategic issuescanbe noticed withincompanyon time.Thesecond purposeis to make the analysis more future oriented by the next twoeffects. The one is to look at the likely positive and/ornegative movements across the portfolio. The second is theimpact of the actions which company or competitors can

stimulate through planned strategy. To achieve these goals,the portfolio analysis requires an approach that generates adeep understanding of the factors which really influencebusiness success, and which can be related to otheranalytical approaches.

The DPM has better recommendations about strategythrough matrix cells and better review of environment riskasopposite toGEmatrix.

Great advantages of ADL matrix are that it includesPLC dimension and is especially suitable for segmentedmarket, for instance for one product. Due to that, the ADLmatrix instead of SBUs shows the combination ofproducts/marketpositions (strategiccenters)on a matrix.

Negative aspects of portfolio matrix models may causeanorganizationto put toomuch stresson market growthandaccess into high growth business activities. They may alsocause companies to pay insufficient attention to operationmanagement with the current business activities.Respectively, the attention is focused mostly toward thestrategicmanagement.

DPMmatricesare responsive to thescores, weights andratings (quantitative methods with CSFs) and can bemanipulated to assume desired results. Further, since anaveragingprocess is takingplace, several SBUs may endupin the same cell location, but could vary considerably interms of their ratings against specific factors. It means thatmany products or services will end up in the middle of thematrix and this makes it difficult to suggest an appropriatestrategyoption.

The matrix models do not accommodate the synergybetween two or more products/services (SBUs) and thissuggests that making strategic option for one in isolationfrom the others may be short sighted. TheADLmatrix PLCdimension is a questionable factor in a corporation strategicdecision, so it is advisable to use ADL matrix afterimplementationof GEmatrix.

However, the portfolio matrix models are usefulstrategic management tools. Precautionary measuresrequire more formal and detailed planning techniques andschemes to complete the corresponding portfolio analysis.

To achieve that, it is wise to include other strategic matriceslike Ansoff, Product/market evolution, B2B customer/suppliermatrix etc.

This paper derives from thescientific research project (Modeling of AdvancedProductionStructures of the Intelligent Manufacturing, No.069-0692979-1740) supported by the Croatian Ministry ofScience,EducationandSport.

Acknowledgement.

COMPANYS COMPETITIVE CAPABILITIES CSFS FORSPECIFIED SBU

No. CSF Weight Score TCSW

1. Market share 0,2 7 1,42. Production capability 0,1 5 0,5

3. Product research and develop. 0,5 4 2,04. Customer relations 0,2 8 1,6TOTAL SUM: 1,0 - 5,5

Table 2Tablica 2.

Calculation of total CSFs weighting for one specified SBUe vanosti telja uspjeha

za SPJ-u

[8]Proraun ukupn kritinih ini

odreenu [8]

Figure 5Slika 5.

The DPM matrix strategic recommendationsStrateke preporuke DPM matrice

5ConclusionsZakljuci

Positive aspect of portfolio matrix models is easy touse.Thebenefit ofusingsuchmodels isto get an ideaof theprofile of strong or weak products or services in anindustrial or marketing mix. Furthermore, it can give

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7ReferencesLiteratura

[1] Proctor, T. Strategic marketing: an introduction, Routledge,Florence, London,2000, pp.26.

[2] Katsioloudes, M. Strategic Management, Butterworth -Heinemann,Oxford,2006, pp.309-311.

[3] Buble, M. at all. Strategijski management, Ekonomskifakultet,Split,1997, pp.212-254

[4] Buble, M. at all. Strateki menadment, Sinergija, Zagreb,2005,pp.135-144

[5] ArthurD.Little, Inc.,AmanagementSystemfor 1980's,1980,SanFrancisco,USA

[6] Patel, P.; Younger, M. A rame of Reference for StrategyDevelopment, LongRangePlanning 11, 1978 ,pp. 6-12

[7] Porter,M. E. CompetitiveStrategy: Techniques forAnalyzingIndustries and Competitors, Free Press, New York, 1980, pp.29-33

[8] McDonald, M. H. B. Some Methodological Comments onThe Directional Policy Matrix, Journal of MarketingManagement 6, 1990 , pp.62-65

[9] Brownlie, D. Strategic Marketing Concepts and Models,Journalof MarketingManagement 1, 1985 ,pp. 172-192

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Technical Gazette 16, (2009),4 101-105


Authors' addressesAdrese autora

m .r sc. dipl.Samir ic, ing.

ing.

Izv. prof. dr.

University of RijekaFaculty of EngineeringDepartment of Industrial Engineering and ManagementVukovarska 58, 51000 Rijeka, Croatiae-mail: [email protected]

University of Rijeka

Faculty of EngineeringDepartment of Industrial Engineering and ManagementVukovarska 58, 51000 Rijeka, Croatiae-mail: [email protected]

University of RijekaFaculty of EngineeringDepartment of Industrial Engineering and ManagementVukovarska 58, 51000 Rijeka, Croatiae-mail: [email protected]

Hari Hadi, dipl.

sc. Milan Ikoni


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