Definition: Portfolio analysis is an examination of the components included in a mix of products with the purpose of making decisions that are expected to improve overall return. The term applies to the process that allows a manager to recognize better ways to allocate resources with the goal of increasing profits. It might also refer to an investment portfolio composed by securities.
What Does Portfolio Analysis Mean?
When a company markets a range of different product or services it is required to conduct portfolio analysis periodically. This means to analyze each product separately in terms of profitability, contribution to the company’s income and growth potential. This analysis facilitates the identification of products that are not profitable at all or play poorly within the group.
The products are categorized by pre-defined criteria such as sales value, market share, gross profitability, contribution margin and life cycle. The results could clearly point to products that should be taken out of the market or simply receive fewer resources. It might also indicate that the company must increase its investments and efforts to some star products that have a higher potential. The analysis is made to improve the global portfolio’s performance since the ultimate objective is maximizing profit for shareholders.
Example
Shine Shoes manufactures and markets 55 models of women shoes. The General Manager realized that sales increased but profitability steadily decreased over the past two years. He did not know what happened and he asked a consultant to conduct a portfolio analysis. The study provided some interesting results. The top five models represented 17% of total sales. However, those five were not profitable at all because production costs were too high.
At the same time other models were highly profitable but their sales were negligible within the overall portfolio. The Manager decided that higher investment in marketing and sales effort should be made in the most profitable models and thus to push the overall profit up. The results were positive and the company improved notably its finances thanks to the insights obtained by the portfolio analysis.
