WEEK 4: PORTFOLIO MANAGEMENT METHOD School: WEEK 4: PORTFOLIO MANAGEMENT METHOD Once businesses introduce new products anddevelopment projects, it is required that they would put in place a number of strategic and dynamic decision making processes that will ensure that their products and projects are up-dates, revised and up to standard with the market in which they find themselves (Cooper, Edgett and Kleinschmidt, 2014). This dynamic decision process engaged by the businesses is what is referred to as portfolio management. With the popularity of portfolio management and its importance to the survival of businesses, there are a number of ways that companies have strategically approached it.
From the experience of my country, there are three major methods that are commonly employed when it comes to portfolio management. These three methods are heuristic models, scoring techniques and visual or mapping techniques. Depending on the business orientation of a particular company, there are numerous ways that each of the methods has their own strengths and weaknesses. In a much generalized argument however, Evans (2006) noted that the use of scoring technique is currently one of the most common methods practiced.
This paper therefore delves into the outlook of this method, as well as its strengths and weaknesses. The scoring technique of portfolio management has been explained to be a type of method used with the aim of arriving at precise investment needs. This means that the scoring method dwells much on the use of quantitative numeric indexes in arriving at very specific values that represent the current and future state of any investments made by the organization (Faulkner, 2006). According to Bodie, Kane and Marcus (2011), knowing the actual outcomes of new products and project developments is very crucial for the survival of any investment programme.
In effect, when using the scoring technique, the focus and attention of portfolio managers is to ensure that particular methodologies are put in place to enhance profitability and assistance in numerous strategic planning (Sushant, 2014). Due to the complex nature of scoring technique, there are several divisional methods that come under it to ensure that different organisations can be selective according to methods that are easier for them to use and those that meet their specific investment needs.
This is a very crucial thing because Bodie, Kane and Marcus (2011) warned on the potential failure that can be recorded when the wrong portfolio management method is selected. Under the scoring technique, Sushant (2014) identifies two major methods namely Simple Additive Weighting (SAW) and Weight Product Method. From personal experiences and the experience of the current business environment, there are specific strengths and weaknesses that can be associated with the scoring technique in general. These strengths and weaknesses have been generalised to apply to the two major methods that come under the technique.
Writing on the strengths, Evans (2006) noted that scoring technique this method is highly beneficial as it does not rely on depend on the use of certain ratios that are commonly used in traditional ratio analysis. It would be noted that in traditional ratio analysis, there is much speculation, hypothesis drawing and assumptions in the making of investment forecasts and predictions. This is a problem that does not enhance accuracy and precision. Using the scoring technique, this weakness is overcome and thus the benefit of giving highly precise outcomes of portfolio management is guaranteed.
What is more, the problem with the need to give each ratio an equal level of importance which causes delay in portfolio management is dealt with when scoring technique is used. This is because scoring technique only requires that each ratio will be weighted according to its ability (Faulkner, 2006). Regardless of the strengths that have been stressed above, there have been a number of criticisms about the weakness of the scoring technique.
First and foremost, the need to optimise outcomes when there are mixed project scenarios is difficult. This means that in portfolio management, the scoring method is effective only for specific projects at a time. This situation causes much delay in most of the time because it makes is impossible to undertake combined portfolio management using different variables of studies (Evans, 2006). Meanwhile in portfolio management, efficiency has been noted to be an important tool for ensuring success (Bodie, Kane and Marcus, 2011). What is more, the scoring method has been noted to be highly demanding in terms of its statistical underpinnings.
For example according to Sushant (2014), “It is imperative to have a sufficient large sample, accurate database and consistent long period in order to reveal trends in the company’s behaviour and measuring its impact. ” This means that there is no way accurate can be achieved while approaching the management of portfolio in a way other than statistical accuracy. Meanwhile, in behavioural business theories, there is room for investment trends to be predicted and worked with quantitatively. References Bodie, Z., Kane, A.
& Marcus, A.J. (2011) Investments. 9th ed. New York: McGrawHill. Cooper R. G., Edgett S. J. and Kleinschmidt E. J. (2014). Portfolio Management: Fundamental for New Product Success. Product Development Institute Inc. : London. Evans, P. (2006). “Streamlining formal portfolio management”, Scrip Magazine, Vol. 4 No. 2, pp. 4-33 Faulkner, T. (2006). “Applying ‘options thinking’ to R&D valuation”, Research-Technology Management, Vol. 24 No. 2, pp. 123-143 Sushant (2014). Scoring Techniques. [Online] Available at http: //www. portfoliomanagement. in/scoring-techniques. html [April 10, 2014]