Page 36 - Portfolio Analysis

Ideally the portfolio should be balanced as shown in diagram 18. The
degree of imbalance is indicated by the extent to which the portfolio
departs from the balance displayed. Figure 20 below shows the situation
where the company product, product 1, is reaching the end of its life and
sales are beginning to fall. In order to maintain the business growth rate, ie
its profit momentum line, a new product had to be introduced early in 1994
so that as sales for product 1 fell sales for product 2 were sufficiently stong
to overcome the profit shortfall and maintain the profit momentum into
1999.

FIGURE 20

PROFIT MOMENTUM
LINE
Profit Shortfall

SALES Profit Shortfall
Product 3

Product 2
Product 1

1993 Sunk Costs 1996 1999 2003
Year

However, cash is a scarce commodity and opportunities for cash
generation differ between SBUs greatly. The business has to identify the
products most likely to maintain or increse market share and thus provide
future cash flow.

Among the indicators of overall health are the size and vulnerability of the
cash cows, the prospects for the stars, if any, and the number of problem
and dogs with which the business must cope. Particular attention must be
paid to those divisions with large cash appetities. Unless the company
has an abundant cash flow, it cannot affort to sponsor many such divisions
at any one time. If resources (including debt capacity) are spread too