Redefining Business Portfolio Strategy: The Synergistic Portfolio Framework

Professionals and MBA students who are familiar with the traditional BCG matrix, its evident that it serves a an important milestone in strategic management. But it often overlooks the dynamic interaction between the business units. This realization arose the need or a more integrative approach.

Understanding Traditional Limitations

The BCG matrix categorizes businesses into 4 quadrants - Stars, Cash Cows, Qestion marks, and Dogs - based the the growth and market share. While allocating resources, this model views each unit in isloation. It focuses solely on market metrics without considering inter unit synergies or changes in market conditions and competitive factors. It ignores factors such as technological changes, regulatory impact, and macroeconomic conditions.

Introduction to Synergistic Portfolio Framework

Developed by Professors Phanish Puranam and Laurence Venneste, this framework revolutionizes traditional resource allocation. I came accross this framework when listening to Professor Venneste's lecture on resouce allocation. Professpr Venneste gives different perspectives of resource allocation: Financial, Uncertainty, Synergistic, and Social. While learning about the synergistic perspective, I was introduced to this framework.

According to this framework, we analyse the portfolio not as independent businesses but as businesses that may have synergies with each other. It states that the synergy for the businesses is the sum of incoming benefits and outgoing benefits.

Consider a plane with two axes, on the y axis we have incoming benefits and on the x axis we have the outgoing benefits. We draw a diagonal crossing the zero mark as shown in the figure. If the business is above the diagonal, the synergies are positive and if the business is below the diagonal, the synergies are negative. We place the businesses on the plane as per our benefit analysis. Units are then categorized based on their net synergistic impact:

• Fits: Both the business unit and the portfolio mutually benefit.
• Misfits: Neither the unit nor the portfolio benefits.
• Givers and Altruists: These units provide more to the portfolio than they receive.
• Takers and Parasites: These units receive more from the portfolio than they contribute.

The guideline is straightforward: invest in business units that lie above the diagonal, where synergies are positive, and be cautious with those below it.

Identification of Icoming and Outgoing Benefits

One way of calculating or estimating the benefits is to compare the current situation with the situation where we would divest the business through a spin off, i.e., we make the business independent while leaving the portfolio as is.

• Incoming benefit can be calculated as the value of business before the spin off subtracted by the value of business after the spin-off.
• Outgoing benefit can be calculated as the value of the rest of the portfolio before the spin off subtracted by the value of the portfolio after the spin-off.

Using the framework

The guidelines are simple, invest in businesses above the diagonal line and don’t invest in businesses below the line.

In the financial perspective, we prioritize good over bad businesses and the good and bad are defined on as standalone basis. Here we still define good or bad but based on benefits and contribution to the portfolio.

If we move the diagonal towards the bottom left, then we are getting a less focused portfolio and that is towards a more exploration phase (when we want to invest small amounts in new business to explore growing markets). When we move the diagonal towards up, then, we have a more focused portfolio and more exploitive approach where we get the most out of are businesses.

Thus, when we allocate resources, we start with the Givers and then go to the takers only in the last.

Enhancements Requied in the Current Framework

Below mentioned methods can be incorporated to make the framework more robust when implementing in real world scenario: