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Portfolio Management
How to apply the principles of portfolio management to
your business?
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.
 Simple 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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Questions,
comments, feedback, and suggestions
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