How to solve the biggest problem with your business portfolio
Simply put, your business portfolio is the collection of products or services provided by your business.
In my experience, the biggest problem facing most small businesses is understanding which products or services generate the most cash.
Big businesses have the same problem too. However big businesses have a variety of tools that they can use to understand their business portfolio.
Many of these tools can be used or adapted for use by small business owners to increase sales, reduce costs and make more money. But only if they knew about them!
One such tool is the Growth Share Matrix (also known as the Product Portfolio Matrix, Boston Box, Portfolio diagram and the BCG Matrix) . This matrix was developed by the Boston Consulting Group back in 1970.
So it’s been around a while and stood the test of time.
Business portfolio analysis is a tool often used by big businesses to analyse the performance of their business portfolio.
The idea being that in any successful business, the business should have a portfolio of products with different growth rates and different market shares.
How the growth share matrix is used
Originally the Growth Share Matrix was designed to help manage cash flows. It was believed that an indicator of the ability to generate cash was market share. i.e. the bigger the market share the product or service would have, then the more cash it would generate.
On the other hand, cash usage was linked to low market share was low and the growth rate or the product or service. (E.g. spending money on promotion)
It might not sound it, but it’s quite a simple idea.
However, working out your relative growth and market share is a bit beyond the capabilities of most small business owners. This is because you simply don’t have access to the data and the time it takes to work it out.
So lets see how you can use use some of the principles of portfolio analysis to analyse your small business portfolio.
Let’s start with a very simple example so you can see what I mean:
What zoos and business portfolios have in common
I live in New Zealand. Which as you probably know is a small country (c4m population) and just about as far as you can get from anywhere.
Whenever we go to Sydney, Australia with the little one, we like to go and visit Taronga Zoo.
If you’ve never been to Taronga, the whole experience is something else.
First of all because you get to it by ferry from the world famous Circular Quay, passing the harbour bridge and the Opera House. It’s a great trip. Throughout your visit to the Zoo you catch glimpses of the Sydney skyline with those iconic landmarks; like this:
When you enter the zoo you see lots of native Australian wildlife, koalas, birds and reptiles. But let’s be honest, as pretty or as cute or as scary as these animals might be, no one visits the zoo to just see them.
No, people visit zoos to see the monkeys and the gorillas, the elephants and the giraffes and the lions and tigers.
But if a zoo was just populated with the big stuff, then chances are you wouldn’t spend that much time there.
Which of course would mean that you’re less likely to buy a coffee or a sandwich or something from the gift shop.
So zoos have lots of animals, birds, shows and talks to keep you interested and spend more time (and money) there.
Of course the better the time you have at the zoo, the more likely you are to visit again or tell others about it.
So let’s think about how your business could be more like a zoo:
Why your business needs to be more like a zoo
Just like a zoo has “every day” animals and “star” animals, your business needs to have a mix of products or services too in its business portfolio.
When the Boston Consulting Group (BCG) developed the BCG Matrix they in effect used it to describe a businesses lifecycle, and used the following terms:
Question Marks – (also known as problem child/children) are those products or services which have a low market share, in a fast growing market. Question Marks are the starting point for most businesses. Question Marks have the potential to gain market share and become stars and eventually Cash Cows when the market growth slows or stops.
Stars – are products or services which have a high market share in a fast growing market.
Cash Cows – is where a business has a high market share in a slow growing market. These type of products or services generate cash in much greater amounts than is needed to produce or maintain them.
Dogs – are products or services with a low market share in a mature, slow growing market. Eventually these products or services will “die”.
Cash is the lifeblood of any business. And of course products or services need to generate cashflow to fund the ongoing expenses of running a business and the development of new products or services.
Lets use the example of a web designer.
In the beginning you may start out with one source of income. For example, building websites for small businesses. As you start to become more successful and pick up customers you may do quite nicely. This would be a “Question Mark” in your business portfolio.
As your reputation for building websites grew you might take on more web designers and become a “Star” in your business portfolio.
But just imagine another web designer opened up in town. Your income would be impacted as you compete for business. Your growth rate will slow. Suddenly your website building may well start to be a “Cash Cow” in your business portfolio.
The problem with products or services that fall into this category is that these are most attractive markets to enter for new competitors. This is because competitors see you’re making good money as you have a proven market and customers for your products or services. And so, they may mimic what you do, undercut you or provide better service/products.
Now, just imagine a third web designer opens up shop. Very quickly your growth would start to fall and you might have to cut your prices to make ends meet. Thus making your business a “Dog” in your business portfolio.
To get around this, you could expand your business by maybe offering other services such as website or SEO consulting. In the beginning when you start offering these services they would represent a small part of your income.
These types of products or services would be considered to be “potential” and represent the future of your business.
How to understand your business portfolio
In the above example, it’s fairly easy to keep track of what your business is doing. But in reality you need to have a plan for what to do with each category in your business portfolio. You will also need to think about creating and introducing new products or services or closing down old ones.
How to business portfolio analysis to your business
The first step in doing this is to understand where your business portfolio is at now.
When I work with coaching clients looking to work out what to do with their business portfolio, I ask them to list all the products and services that they offer in one column of a spreadsheet.
Then in the column next to it note the revenue for the product or service for the previous 12 months.
Then in the column next to the prior year revenue I ask them to list the income for the year before that. (I.e 2 years revenue).
(If you have 3 years of revenue to hand – create a 4th column and enter the revenue from 2 years prior)
So basically in the 3 columns you will have:
12 months revenue by product/service
Prior year revenue.
Then in the 4th column (5th column if you have 3 years of revenue) calculate the Sales Growth of each revenue line.
Then sort your products/Services in order of growth (lowest to highest).
What do the numbers tell you?
Here’s what the numbers tell you:
Products/services that have negative growth – these are your “Dogs“.
Products/services with flat or low growth (1-3%) these should be considered your “Cash Cows“
Products/services that are growing at over 10% are your “Stars“.
Products/services that are growing at 5% should be considered as your “Question marks“.
Then compare your growth rates to your total income. To do this, total up how much income you’re making from all your products/services.
Then compare how much of your total revenue comes from each category.
You can calculate this by simply taking the total amount of revenue from your products you consider as “Dogs” and dividing it by the total revenue from all your products or services. Then multiply that number by 100 in order to calculate a percentage.
Repeat step 4 for each of your categories.
If too much of your income is from dogs or cash cows then you’ve got a problem. Dogs are an immediate problem and cash cows will become a problem at some point.
Create a portfolio of products or services.
Now, the knack of building a successful business is to have a mix of products/services in each of the categories. So, that when a “dog” eventually stops producing revenue, or it costs you too much to make/deliver it, then you will need to have other products/services coming on stream to avoid dips in revenue.
When you haven’t got any stars then you need to think about introducing new products/services.
If you’ve got dogs, then you need to think about how you exit from that product/service line and introducing “problem children”.
Done For You Downloadable Template
If you’d like a spreadsheet to help you analyse your business portfolio you can access the Google Sheet I’ve created just for you. Note it is read only, so in order to make changes you’ll need to save it as a copy.
In this post you’ve learned what a business portfolio is and why it’s important. A business portfolio analysis will help you understand where your cash is coming from and more importantly at what stage your business product or service is at. Finally, I’ve explained how to use a business portfolio analysis to work out your growth levels.
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