Plotting your opportunity portfolio

In turbulent markets, firms need portfolio agility–the ability to quickly and effectively remove resources from businesses that have stagnated or no longer fit a company’s strategy and reallocate them to promising opportunities. Before shifting resources among them, executives often  categorize units within a portfolio using frameworks such as the growth share matrix. Despite its widespread use, this framework gives a static snapshot of a portfolio at a point in time and overemphasizes the benefits of scale.

An alternative approach to mapping a portfolio begins by dis-aggregating an organization into components that correspond to opportunities, recognizing that these units vary by life-cycle stage-i.e., start-up, scaling the business, maturity, and decline. Opportunities begin  in the start-up phase, when an entrepreneur or manager spots an unmet need in the marketplace and envisions a new way to meet the need. Like youth, the start-up stage is marked by constant experimentation to identify the best customers and develop the right business model.

After validating the opportunity and stabilizing the business model, the opportunity enters adolescence and scales up to seize market share. Then comes maturity, in which the opportunity-now its own business unit-fights for market share against well-known rivals in a clearly delineated market. The final stage is decline, which can come about from a number of sources, including the entry of low-cost competitors, shifting consumer preferences, or the introduction of substitute products.

The organizational form of opportunities vary by stage. Start-ups in the experimental phase, for example, are often projects, either formal development initiatives or skunk-work efforts flying beneath the radar. Mature opportunities are often business units with their own profit-and-loss responsibilities. Opportunities also vary by industry. In the fast-moving consumer goods industry opportunities typically cluster around brands within specific geographies. Professional service firms view opportunities as specific client offerings. The opportunity life-cycle framework can be used at various levels within a company to analyze various business units or to dis-aggregate customers and products within a specific division or group.

Different opportunities can be denoted as balls that vary in color-red when an opportunity consumes cash and green when it throws off cash. They also vary in size depending on the magnitude of resources they consume or generate.  The balls are placed in the appropriate stage in the opportunity life-cycle to present a snapshot of the portfolio at a point in time. The vertical axis plots the elapsed time from an opportunity’s inception to the present, and the horizontal denotes stage in the life-cycle.

In this graph, opportunities typically follow an upward-sloping line from young experiments (bottom-left of figure) to old, declining businesses (top-right). The stages in the life-cycle convey an implicit sense of progress over time, as an opportunity passes from one stage to another. Plotting actual opportunities against expectations reveals outliers. These outliers, in turn, raise questions that can focus attention on potential issues in the opportunity portfolio.

The easiest way to map an opportunity portfolio is to start with financial resources. The operating cash flows consumed or produced by an opportunity in a year determines its size. The basic plotting can be refined in several ways. A bank might use net present value of the opportunity to determine the size of the ball. Further refinements include the scoring of opportunities by risk, shadow circles to denote their potential magnitude, and arrows to indicate the speed that opportunities move from one stage to the next, relative to initial forecasts or industry averages.

This first-cut analysis provides the basis for plotting non-financial resources, which vary by industry, and might include engineering person hours, production capacity, or information technology resources. The allocation of management talent across opportunities is an important consideration in almost all situations. One global engineering firm identified its 20 most promising managers and marked their initials on the opportunities they managed. All but two of those high-potential individuals were running mature businesses or staunching the bleeding in declining operations, leaving second string managers to scale the opportunities crucial to the firm’s future health.

None of these refinements help in every situation, but are meant to suggest ways to extend the tool to deepen executives’ understanding of portfolio dynamics and enhance their ability to anticipate how events might unfold. The figure “plotting an opportunity portfolio” provides a blank template to conduct a quick diagnostic of your own organization’s opportunity portfolio.

The point of the mapping exercise is not precision. Mapping an organization’s portfolio of opportunities should surface critical questions. Are resources currently in balance? Can the mature opportunities fund all the start-up and scaling activities being undertaken? Do we have enough or too many early-stage start-ups? Is a core business about to enter a period of decline? Portfolio imbalance is often a symptom of a deeper pathology in how resources are allocated within the firm.

Leading in turbulent times

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Don Sull is professor of management practice in strategic and international management, and faculty director of executive education at London Business School. This blog is dedicated to helping entrepreneurs, managers, and outside directors to lead more effectively in a turbulent world.

Over the past decade, Prof Sull has studied volatile industries including telecommunications, airlines, fast fashion, and information technology, as well as turbulent countries including Brazil and China, and found specific behaviours that consistently differentiate more, and less, successful firms. His conclusion is that actions, not an individual’s traits, increase the odds of success in turbulent markets, and these actions can be learned.