Applications of Portfolio Models
A portfolio model helps in identifying business opportunities within the existing business units and relocating investments for overall profits. But firms need to develop or acquire new businesses to achieve the desired results. If an evaluation of the performance of an existing portfolio does not fulfill the corporate goal, then firms may decide to go for acquisitions and new business development.
Table of Contents
- 1 Applications of Portfolio Models
- 2 Planning for Business Growth
- 3 Companies Can Go for Intensive Growth
- 4 Companies Can Go for Integrative Growth
- 5 Companies Can Go for Diversified Growth
- 6 Companies Can Downsize Their Business
Planning for Business Growth
Companies pursue different kinds of growth strategies at different points in time. There are three strategic options available for achieving further growth in business. A firm can identify new opportunities within the existing business through intensive growth opportunities.
It can also look at acquiring new businesses, which are similar to its current operations through integrative growth opportunities. Finally, a firm can find out attractive opportunities from an unrelated area and add them to current business through diversification growth opportunities. Ansoff has developed a product-market expansion grid to identify intensive growth strategies for firms.
The figure explains the concept of product-market expansion.
Ian Ansoff has proposed a useful framework called the product/market expansion grid for detecting new intensive growth opportunities.
There are four strategies, one for each of the quadrants:
- Market Penetration Strategy
- Market Development Strategy
- Product Development Strategy
- Diversification Strategy
Market Penetration Strategy
When the product is in the current market, it can still grow. There are three major approaches to increasing the current product’s market share:
- Encourage current customers to buy more.
- Attract competitor customers.
- Convince non-users to use the product.
Market Development Strategy
When the current product is launched in a new market, there are three approaches to developing the market:
- Expand distribution channels.
- Sell in new locations.
- Identify the potential users.
Product Development Strategy
Product Development StrategyWhen a new product is launched in the current market, the intensive growth strategies could be to:
- Develop new features.
- Develop different quality levels.
- Improve the technology
When a new product is launched in a new market, diversification makes good sense as better opportunities are found outside the present business.
The diversification strategies are of three type
- Concentric Diversification Strategy: Develop new products with the earlier technology for new segments.
- Conglomerate Diversification Strategy: Develop new products for new markets.
- Horizontal Diversification Strategy: Develop new products with new technology for old customers.
Companies Can Go for Intensive Growth
The company operates in a particular product market and targets certain marketing goals. It would like to penetrate further into the same market to arrive at the economy of scale of operation. Deeper penetration is possible both in geographic and demographical terms. In a national market, if it is covering a few states, it would like to cover more states by increasing the scope for geographic coverage.
Similarly, if it is targeting a particular demographic segment, it can penetrate deeper into different demographic segments in the same geographic market. So the objective is to gain market share in the same product market. As new product developments involve further investments, the marketing manager would like to look for newer markets through a market development strategy.
His additional expenses are in the form of marketing expenditures for these new markets. When the existing product does not provide the required push, the company would like to bring new, innovative products into the existing market. This is called product development strategy. It also has another alternative to take a completely new product to a completely new market. This is called the diversification strategy.
Companies Can Go for Integrative Growth
Companies can also grow by integrating their business operations. When a company integrates its supply function with the core business, this is called backward integration. Instead of relying on a supplier, the company may decide to go for self-production.
Similarly, it can go for forward integration by taking over some of its retailers and wholesalers. They can also take over some of their competitors and complementary organizations and grow in business. This is called horizontal integration.
Very recently we have seen a series of mergers, takeovers, and integration in the Indian market. Let us take an example of the petroleum sector. There are exploring companies like ONGC, refineries like Kochi refineries, and marketing and distribution companies like HPCL, BPCL, and Indian Oil.
The complete value chain consists of exploring companies, refineries, and marketing and distribution companies. If ONGC wants to grow faster, it can go for forward integration by taking over refineries and marketing distribution companies.
If a company like Indian Oil has to go for expansion, it can do backward integration and take over refineries and oil exploring companies. Reliance Petrochemicals has gone for horizontal integration by taking over management of a company like IPCL, which is in a similar business as Reliance Industries.
Companies Can Go for Diversified Growth
Another way to grow in business is through diversified growth if they find that the current business does not give the desired return and growth through an integrative growth strategy. A diversification growth strategy is followed when firms discover better opportunity growth beyond their current business.
If there is a good business opportunity with similar operations to the current business, companies find this diversification more feasible. There are three kinds of diversification possible – concentric, horizontal, and conglomerate.
When a company can find a business, which has a marketing or technological synergy with the current business line, even though the new product may be directed towards new segments, this kind of diversification is called concentric diversification.
A company may search for new products that might interest the existing customers but may require a new technology to produce; this kind of diversification is called horizontal diversification. Though the company may invest in a new production process but can use the existing marketing network for delivering the new product to existing customers.
When a company seeks an entirely new business for an entirely new market, this kind of diversification is called conglomerate diversification.
Companies Can Downsize Their Business
We have learned from portfolio analysis that companies have to take various decisions like investing, divesting, pruning, and harvesting for their business units. We have explained all the possible strategies for investment decisions in the form of intensive, integrative, and diversification-related growth strategies.
But companies need to downsize the business to increase efficiency and profitability for the firm. Downsizing helps in increasing production and marketing efficiency, reduction in costs, and efficient utilization of manpower and production processes.
A business unit, which does not have future potential, needs less resource allocation and should slowly phase out similar businesses for long-term growth and success.