Applications to Business Portfolios

Help for applications to business portfolios in the portfolio optimization template for Excel

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Portfolio Optimization Help Topics: Setting Up the Inputs Running the Optimization Process Analyzing and Utilizing the Results Applications to Business Portfolios

A business can be regarded as simply a collection of investments. Portfolio optimization can be applied at a variety of different levels within an organization reconciling up to the total organization. Such levels typically include business units making up the entire organization, products and services making up business units, and so on. It is important that profitability for each business or product can be identified by attributing costs and revenues that otherwise be recorded at an aggregated level. Methods such as Value Stream Mapping can assist in accomplishing this. In utilizing the model for a portfolio of business units, two applications are particularly useful for specific decision making purposes. These are:

Capital Allocation. By running optimization analysis on all businesses currently undertaken by the organization, the results of the optimized portfolio can provide a useful basis on where and where not to allocate available capital. This can be particularly useful during business planning phases in order to prioritize competing capital requirements in plans and proposals submitted from ongoing business units. Optimal capital allocation within can reduce financial risk for the organization and maximize returns to shareholders.
Investment and Divestment. For proposals on investment into new businesses, it is useful to run the optimization process on all current business units without the new business and all businesses with the new business. The difference between the two risk and return profiles can be useful for evaluating the impact that the new business will have on the current structure of the organization. Conversely, omitting an existing business unit from the analysis can assist in decisions to divest the business unit and the impact that it will have on the overall organization.

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