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Portfolio Management
How to apply the principles of portfolio management to your business?

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The term portfolio management intimidates a lot of business leaders and our experience has shown that whenever something is incomprehensible to an execute, s/he is either unlikely to implement it or let someone else take control.  iProceed uses a a very simple approach to portfolio management.

Image of iProceed portfolio managment approachSimple definition of Portfolio Management

If you think of your business as a portfolio of stocks in your portfolio, portfolio management is simply the process of adjusting your portfolio in line with external/internal environment.

All financial advisors emphasize that you must readjust your stock portfolio as you get older or if your marital status changes or if you have kids or if Internet stocks no longer make sense or if Indian companies are attractive due to a lot of outsourcing revenue.  In other words, if there is a material change either due to external or internal events, you must make changes in where your money is invested.  The same logic applies to your business.  (Related article:  Portfolio management approach to running a business)

Portfolio management applied to a business

Even the simplest business can think of itself in terms of a portfolio.  While it is easy to see how portfolio management applies to General Electric or Honeywell, it may not be so easy to see how it applies to a 3-person firm that designs websites.

Here is how it works.  Even if this person does only simple web designs, the firm might have customers who buy a one-page website to others that need 25-page websites.  Some websites need ecommerce capabilities while others might be oriented towards allowing downloading of music files.  The firm might design a one-page website for $100 but may charge thousands of dollars for a website with ecommerce functionalities.  In other words, even a small business has a portfolio of businesses.  (Related article:  Strategies for fast growth companies)

Components of portfolio and how to manage them

Cool:  This is the bread-and-butter of your business.  These components of business provide stable cash flow and define who you are in your market.  Everyone knows you for this and this business opens doors for you.  Some experts also refer to this as "core" or "base" of your business even though we put it in the middle of the triangle.  You must protect this business at any cost and your goal should be that it should not become a "dump" business.

Dump:  You can do two things with businesses that are no longer growing, are not profitable, and are a drag on your overall business.  One, you can simply dump them (first preference) or transform them into a "cool" business (can be hard, costly, and may not last for too long in that category).

Hot:  High-growth areas in which you want to participate so that as your "cool" businesses slowly move into the "dump" bucket, you already have new opportunities that will eventually replace them.  (Related article:  How to pursue products with short life cycles?)

How to divide your portfolio?

Make it a quantitative rather than subjective process.  Here are a few rules to use:

Portfolio Growth Profitability
Hot Greater than 1.5X GDP Higher than cost of capital
Cool Around GDP Around cost of capital
Dump Lower than GDP Lower than cost of capital

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