Organizational Portfolio Analysis: Focusing on Risk Inside the Corporation

This article presents a new application of Organizational Portfolio Analysis (OPA) and applies it to some leading corporations to reveal how their corporate risk arises from the risks of their individual business units. OPA offers an insightful method of analysis that can aid executives in their corporate strategic decision-making. OPA models the corporation as a portfolio of business units. It provides a graphical representation of the organizational portfolio and the role of the different business units within it. The contribution of a business unit to the reduction of corporate risk is captured in variables representing risk, synchronization and weight.In a corporation, each business unit has a particular risk that is the magnitude of the fluctuation of its profits over time, which may be expressed relative to the fluctuations in the overall corporate profit. A business unit accentuates or dampens corporate profit fluctuations, thereby shaping corporate risk. Three types of business units are distinguished by their risks relative to corporate risk: Amplifiers, Conformers and Stabilizers. Business unit profit can also fluctuate in synchronization with, or against, corporate profit fluctuations. Therefore, Weak Countercyclical and Strong Countercyclical business units are also distinguished. The composition of the organizational portfolio in terms of these five business unit types shapes corporate risk.Executives who wish to change the risk of their corporation can use OPA to see the ways in which they must alter their business units to attain their desired level of corporate risk. The action options include changing the portfolio of business units versus making changes within the business units and changes that can be made in the short-term versus changes that can be made in the longer term.