When I was a kid, you could tell when somebody’s dad “made it,” because he would trade in the Chevy for an Oldsmobile or a Buick.

In those days, General Motors was dominant, and there were probably fewer than 20 brands of cars in the market. GM pioneered a process called portfolio segmentation by offering a stair-step selection of cars - from Chevrolet to Oldsmobile to Buick to Cadillac - to take advantage of consumers’ changing pocketbooks and preferences as they moved up from segment to segment of the market.

Over the next 40 years or so, GM gradually segmented the market within each of its brands, so you could buy a Buick that was less expensive than an Oldsmobile, and an Olds that was cheaper than some Chevys. At the same time, imported cars flooded the American automobile market, offering even more choices to consumers.

Eventually, there were more brands and models than there were market segments. Fierce competition erupted. GM was no longer dominant, and the once clearly defined Oldsmobile market segment became blurred and crowded with competitors. The Oldsmobile brand faded away and was recently buried by GM.

This is a case of a company that created a brilliant strategy under one set of market conditions, but was not able to effectively maintain that strategy when market conditions changed. GM didn’t anticipate the intense competition from overseas or understand that market segments are fluid. What can be learned from the demise of GM’s Oldsmobile line? That the markets and segments you compete in today will probably undergo major changes or disappear completely in a few years.

Re-thinking who and how you choose to serve in markets is especially significant during an economic downturn. Recently, management and technology consulting firm Booz-Allen Hamilton surveyed top executives at large companies to understand how they’re responding to the recession. About 90 percent were either experiencing a downturn in business or preparing for a possible downturn. Most had implemented classic discretionary cost-cutting measures such as reducing headcount, cutting travel budgets, decreasing bonus pay, trimming IT investments, and cutting training and development.

But how do they know where to cut or when a cut is good or bad? How do they know if a short-term expense reduction today will compromise long-term competitiveness?

The solution is for business owners and managers to know which market and product segments are value creators (we’ll call them eagles) and which are value destroyers (turkeys). Then they can increase attention and resources to the eagles and decrease resources to turkeys, or exit those segments entirely.

Especially in an economic downturn, companies find that value creators provide a greater share of profits, while the value destroyers erode profits at an increasing pace. The strategic imperative is clear: Feed the eagles and starve the turkeys!

To differentiate between turkeys and eagles, it’s necessary to objectively assess the attractiveness of the markets in which you compete, your competitive position in those markets, and your company’s relative strengths and weaknesses. In my experience, the best tool for conducting this analysis is a formal portfolio assessment.

Market Attractiveness

By following a few simple rules and applying a few key measurements, you can quickly and accurately determine the attractiveness of markets or segments. A key rule is to disaggregate revenue streams. While it makes for easy accounting to track a single revenue stream, it is misleading. Any market or product segment that produces more than 10 percent of revenue should be treated as a separate business or strategic business unit (SBU) for assessment purposes.

After the revenue stream is segmented and SBUs are identified, you need to understand the attractiveness of each market in which each SBU competes. For instance, if one of your SBUs manufactures widgets, you need to know how widgets stack up against the following key measurements:

• What are the market economics for widgets?
• How big are the widget market and industry? How fast are they growing each year?
• What is the widget industry structure and what are its competitive dynamics?
• How will environmental factors (i.e., demographics and economic, technological, and political
  change, etc.) affect the widget market today and in the future?
• What risks lie in the widget market (i.e., obsolescence)?

Answers to these questions are what you need to determine the widget market’s attractiveness. Do this for each SBU, then you’re ready for the second part of the portfolio assessment: determining your competitive position and relative strengths and weaknesses.

Competitive Position - Strengths and Weaknesses

Again, answering a few key questions will help you understand your competitive position within your market(s):

• What is your share of the available market for widgets?
• What is the profitability of your widget SBU relative to that of the market and competitors?
• Can you sustain command of the key success factors for the widget market?
• Who are your key competitors in the widget market, and what is their relative competitive position?
• What strengths will allow you to capitalize on widget market opportunities and what
  weaknesses make you vulnerable to widget market risks?

During this analysis, it is imperative that you not be like the golfer who shot a hole-in-one and wrote down a zero on his scorecard. You’ll simply be fooling yourself, and that will take you down the wrong path.

Portfolio Assessment Matrix

Armed with information about each SBU’s market attractiveness and your competitive position, you are ready to document your findings on a portfolio assessment matrix. For many years, I’ve used the matrix on page 20, because it clearly illuminates the options a company may want to pursue for its positioning. Plot your SBUs in the appropriate spot on the matrix according to revenue. For example, plot your widgets SBU, doodads SBU, whatchamacallits SBU, and thingamajigs SBU with circles whose sizes represent the amount of revenue you enjoy from each one.

By plotting the SBUs on the matrix, it becomes clear what your strategy ought to be. The most attractive quadrant is the eagle, where both the market attractiveness and your competitive position are high. These are the SBUs to feed by actively investing in them. Conversely, those in the bottom left quadrant are turkeys, to starve by reducing resources or exiting the segment. The upper left quadrant represents opportunities in which to selectively invest, while the bottom right quadrant represents cash cows to milk for profits.

Portfolio Segmentation in Action

Portfolio segmentation helps a company objectively choose strategic options and direction. My firm recently worked with a local public company that had two business lines, both in very mature markets. The markets were not growing and were unattractive, and the company had a very small share of them. By plotting the two revenue streams on the portfolio assessment matrix, it became obvious they had some turkeys on their hands. They sold those businesses.

On the other hand, the company had a new product concept with high market attractiveness and a good competitive position. This is where the company’s opportunity lies, and where it is now investing its resources.

A well-known example of a company that practiced portfolio segmentation is Abbott Laboratories, which understood that although 99 percent of its revenues came from pharmaceuticals at the time, it could not become the best pharmaceutical company in the world. But it could become the best at creating a product portfolio that would lower the cost of health care. Through portfolio segmentation and analysis, Abbott Labs shifted its focus away from drugs to create a lower-cost product portfolio, principally hospital nutritional products, diagnostics, and supplies. Abbott has been very successful since it made the change.

So don’t be a turkey and rely on the status quo for your future success. Do a formal portfolio assessment, and then you may fly with the eagles.