How to Apply A Portfolio Analysis Effectively

How to Apply A Portfolio Analysis Effectively

October 31, 2010 Email This Post Email This Post Print This Post Print This Post

What are you thinking of when you hear the word portfolio?

Are you thinking of financial products like shares and bonds or something like that?

Then you think of exactly the same as I did just a few years ago.

The word portfolio has had a very financial sound for me and it always caused some kind of consternation, since it seemed to belong to spheres in which I was not at home.

The portfolio analysis has always represented a tool for me which has been created for bankers, brokers and other market analysts.

But over the time, I could also learn that the portfolio analysis is much more than that. The portfolio analysis is a tool that helps us to focus on the important things during a decision process.

The portfolio analysis supports us in making strategic decisions and deriving corresponding actions while establishing the right priorities.

The portfolio analysis is not just concerned with the abstract issues of finance. Far from this! It can be applied to any subject that we are confronted with as executives in companies or
other organizations. And this in a very practical, concise and clear form.

How Does A Portfolio Analysis Look Like?

In its essence the portfolio analysis a 2-dimensional matrix that sets two variables in relation to one another. These chosen variables should describe a certain object sufficiently.

Additionally there are 2 or 3 ranges of values defined to form the values of the variables.

Here is a short list of potential research objects:

  • Technologies
  • Markets
  • Services
  • Leadership styles
  • Risks
  • Hazards
  • Scenarios
  • Processes
  • Projects

If we want to analyze various risks for example in order to develop strategies to avoid them in the future, possible variables could be:

  • Extent of damage
  • Probability of occurence

The extent of damage and the probability of occurence of a risk can be high or low so “high” and “low” are pretty good value ranges for our variables.
If this classification should be too simplistic for you, you could also add a field like “average” if you want.

Depending on this assessment, we generate a 2 x 2 or 3 x 3 – matrix, which could look like this one:

Portfolio Analysis

Looks pretty good, doesn’t it :-) ?

Assessment Of Risks

Now the next step in a portfolio analysis is to identify all the relevant risks and then to place them in the fields of your matrix.

Here you have 4 examples for risks that companies are actually faced with:

  • Environmental disasters,
  • Economic downturns,
  • Currency War and
  • Protectionism

Of course you can perform this analysis at each company level. A single department then has certainly to deal with other risks than the company has to.

But certain types of risks can also be broken down to the operational levels.

Now, how do we place these 4 risks in our matrix?

Portfolio Analysis

This is a very simple example for how it might look like. Of course, the assessment criteria depend on a large number of influence factors

(Company size, industry, branche, country, export / …)

The complexity of such an assessment is the reason why a portfolio analysis should always be performed by a appropriate strategic leadership team.

Derivation Of Actions And Strategies

The last step then is the derivation of appropriate measures and strategies.

Certainly, the risks that have a high probability of occurrence and a high extent of damage should be treated differently than their counterparts.

At the beginning of this analysis you should focus on the biggest identified risks because your resources are always limited (at least I think so !? :-) )

These risks determine and dominate the prevention strategies for the future.

In the best case you are able to put some actions together so that they can be effectively used in order to avoid a whole range of risks.

Thats’s a good way to increase the effectiveness of your actions even more.

So What Have We Done?

We were able to visualize the identified risks of this example clearly for further strategic discussions using the portfolio analysis.

Afterwards we set priority on the biggest risks in order to work out the very specific actions and strategies that are necessary to attack them.

I think I do not exaggerate when I say that the application of this method is almost endless, as it can be very simply and effectively applied to a wide range of issues.

Let this method inspire you. Just try it out!

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Posted in Management Techniques on Oct 31st, 2010, 19:04 by haukeborow