112 CHAPTER 6 THE CORE OF YOUR PLAN
We are discussing businesses right now. When you have run an analysis of your col-
lection of businesses, you should repeat the same thinking for the products within each
business area. In other words, work through this section once, then do it again replacing
the word ‘business’ with ‘product’.
There are some wonderfully complex ways to conduct portfolio analysis. Fortunately,
you do not have to worry about these. The technique described here is simple and effec-
tive. Essentially, you are investigating how your businesses (or products) square up
against each other. The following box indicates the required steps.
Figure 6.1 combines several famous approaches to assessing the attractiveness of a
business. It is highly oversimplified of course, but is still useful. It provides an easy way
to visualise the forces at play. For each business area, run through measures of industry
attractiveness and your competitive strength (some examples are below) and plot your
position on the chart.
For example, if the industry is unattractive but you have a strong competitive position,
your business belongs in the lower, right quadrant. In this case, you have a cash cow. You will
not want to invest heavily, but instead should milk the existing business for all it is worth.
Four steps to analysing your collection of businesses
1 Consider the attractiveness of each business area. You have already done
this on your way through Chapters 4 and 5. Figure 6.1 shows a way of pulling all
this together. Moreover, by drawing blobs over the diagram (as described in the
text), you will see a good visual representation of where you are today.
2 Review the synergy between the businesses. You are looking for areas where
you can exploit your core competencies and strategic advantages to maximum
effect. Some obvious areas of synergy are indicated in the box on page 114.
3 Weigh up risks and returns. Consider where risks offset each other and
where returns are complementary. For example, a company with a wide
and mature product line could support better the risks of introducing a new
product than a shiny new undertaking. A manufacturer of equipment that
does well during boom times would be well balanced by a service company
that maintained the equipment during hard times when customers delay
spending money on new equipment.
4 Look for supporting cash flow. Apparently successful and growing businesses
frequently suffer because of the costs of carrying inventory, processing orders
and collecting accounts receivable. New businesses need funds for the initial
investment. This is where a cash cow (Figure 6.1) can come in useful by providing
the cash flow needed to nurture and expand problem children and stars.