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Portfolio Management

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  • 1. PORTFOLIO MANAGEMENT
  • 2. Designing the Business Portfolio • The business portfolio is the collection of businesses and products that make up the company. • The company must: – analyze its current business portfolio or Strategic Business Units (SBU’s) – decide which SBU’s should receive more, less, or no investment – develop growth strategies for adding new products or businesses to the portfolio 2
  • 3. BCG Growth Share Matrix Growth potential Star Problem Child The message • Segment your business portfolio properly • Allocate cash based on combinations of High industry growth and relative market share • Balance your portfolio What you have to believe Low • Cash flow follows relative market share • Growth is a good proxy for industry Cash Cow Dog High Low Relative market share DCO-ZZU43320040728sushPP1 Source: attractiveness • Capital is scarce • Business units are discrete and synergies negligible Corporate Strategy – Old and3 New Perspectives, Charles Roxburgh
  • 4. Analyzing Current SBU’s: Boston Consulting Group Approach High High Stars • High growth & share • Profit potential • May need heavy investment to grow Cash Cows Low Market Growth Rate Relative Market Share • Low growth, high share • Established, successful SBU’s •Produce cash Low Question Marks ? • High growth, low share • Build into Stars or phase out • Require cash to hold market share Dogs • Low growth & share • Low profit potential 4
  • 5. The McKinsey/GE nine-box matrix The message • Manage your portfolio actively • Judge businesses on: – Market attractiveness – Competitive position • Keep businesses that are well- positioned in good markets What you have to believe • Corporation is best owner for all the attractive businesses • Synergies between businesses are negligible • Corporate can access capital to fund growth DCO-ZZU43320040728sushPP1 5 Source: Corporate Strategy – Old and New Perspectives, Charles Roxburgh
  • 6. Analyzing Current SBU’s: GE’s Strategic Business-Planning Grid Business Strength Industry Attractiveness Strong Average Weak C High A Medium B D Low 6
  • 7. Problems With Matrix Approaches Can be Difficult, Time-Consuming, & Costly to Implement Difficult to Define SBU’s & Measure Market Share/ Growth Focus on Current Businesses, But Not future Planning Can Lead to Unwise Expansion or Diversification 7
  • 8. Developing Growth Strategies in the Age of Connectedness Product/ Market Expansion Grid Existing Products Existing Markets New Markets 1. Market Penetration 2. Market Development New Products 3. Product Development 4. Diversification 8
  • 9. Product/ Market Expansion Grid • Product Development: offering modified or new products to current markets. – How? New styles, flavors, colors, or modified products. • Diversification: new products for new markets. – How? Start up or buy new businesses. 9
  • 10. Planning Cross-Functional Strategies Marketing’s Role in Strategic Planning Guiding Philosophy Inputs to Strategic Planners Designs Strategies 10
  • 11. The Marketing Process DemographicEconomic Environment TechnologicalNatural Environment Marketing Intermediaries Product Suppliers Place Target Consumers Price Publics Promotion PoliticalLegal Environment Competitors SocialCultural Environment 11
  • 12. Connecting With Customers • Market Segmentation: determining distinct groups of buyers (segments) with different needs, characteristics, or behavior. • Market Targeting: evaluating each segment’s attractiveness and selecting one or more segments to enter. 12
  • 13. Connecting With Customers Market Positioning: arranging for a product to occupy a clear, distinctive, and desirable place relative to competing products in the minds of target consumers. i.e. Chevy Blazer is “like a rock.” POSITIONING: Text page 65 Bentley: “You don’t park it. You position it.” For what target market is Bentley positioned? Click or press spacebar to return. 13
  • 14. Marketing Strategies for Competitive Advantage Strategy a Company Adopts Depends on Its Industry Position 14
  • 15. SEGMENT ATTRACTIVENESS CRITERIA CRITERIA EXAMPLES OF CONSIDERATIONS SIZE MARKET POTENTIAL, CURRENT MARKET PENETRATION GROWTH PAST GROWTH, FORECASTS OF TECHNOLOGY CHANGE COMPETITION BARRIERS TO ENTRY, BARRIERS TO EXIT, POSITION OF COMPETITORS, ABILITY TO RETALIATE SEGMENT SATURATION GAPS IN THE MARKET RISK FIT RELATIONSHIPS WITH OTHER SEGMENTS PROFITABILITY ECONOMIC, POLITICAL, AND TECHNOLOGICAL COHERENCE WITH COMPANY’S STRENGTHS AND IMAGE SYNERGY, COST INTERACTIONS, IMAGE TRANSFERS, CANNIBALIZATION ENTRY COSTS, MARGIN, LEVELS, RETURN ON INVESTMENT
  • 16. ARTHUR D. LITTLE COMPANY’S MATRIX DOMINANT HARVEST HOLD STRONG BUILD FAVOURABLE TENABLE UNACCEPTABLE WEAK EMBRYONIC GROWTH MATURITY PRODUCT LIFE CYCLE DECLINE
  • 17. Portfolio frameworks shifted from competition in product markets to competition for corporate control So far … Now … Can the BU create value as a standalone enterprise? Can the corporate parent create more value from the BU than any other owner? BU under consideration Promote BU linkages Corporate Center Comp etitive positions Corporate center skills BU 1 Industry attractiveness BU 2 BU 3 BU linkages DCO-ZZU433Source: Strategy Primer Series – A structured 17 codification of strategy knowledge for 20040728sushPP1 McKinsey, Part 8: Portfolio Matrices; German Strategy Practice
  • 18. Toward a new approach to shaping portfolio Traditional approach (old world) Realities of today’s environment • Tendency to focus on business unit as the unit of analysis • Often opportunistic and reactive • Acquisition biased • Bimodal, tending toward consolidation within a piece of the value chain or major M&A Toward a new approach • View portfolio through multiple • Greater emphasis on economies of scope (not just scale) • Globalization • Falling transaction costs/expanding technology • Shorter product life cycles lenses • Vary approach by company archetypes • More programmatic vs. reactive • Balanced acquisition and exit approach • Consider broad range of vehicles Source: Emerging Thoughts on Shaping the Corporate Portfolio; David Dorton, Patrick Viguerie DCO-ZZU43320040728sushPP1 18
  • 19. Archetype-specific Synergies captured from each archetype Discrete, multibusiness Shared asset Integrated go to market • Significantly underperform • Outperform discrete, • Strongest performers by shared asset and integrated go to market • Most active segment (>2x other segments) • More balanced approach (acquisition/divestitures) • Highest experience level with large deals • Winners execute much smaller deal (20% of average size of losses) multibusiness (2x) yet lag integrated go to market • Most capital-intensive business model (nearly 2x D/E ratio vs. other segments) • Highest average deal size (nearly 3x other segments) • Winners execute fewer, smaller deals (50% size of losers) significant margin (8x better than discrete) • Most capital efficient business models (winners with 4x ROIC vs. winners in other segments) • Winners are much more acquisitive (>2x losers) Overall • Lowest performers across archetypes execute larger deal on average • Winners tend to be no more active than losers suggesting that quality matters more than activity • Winners tend to be relatively more acquisitive • Divestitures are underutilized as a value creation lever DCO-ZZU43320040728sushPP1 19 Source: Emerging Thoughts on Shaping the Corporate Portfolio; David Dorton, Patrick Viguerie
  • 20. 4 lenses through which to view and define the “shaping unit” for purposes of portfolio decisions 2 1 Risk/Return lens • Groups of products, businesses, or business system components with similar risk/return characteristics • Most appropriate when making – Buy/sell/JV decisions – Capital allocation and investment decisions DCO-ZZU433-20040728sushPP1 Capability/competency lens • Groups of existing, emerging or • potential units, based on discrete capabilities and competencies • Most appropriate when making – Hold vs. sell decisions (“better owner”) – Assessment of “white space” opportunities or opportunities to extend economies of scope Organizational/incentive lens • Units defined according to existing organizational and/or incentive structures • Most appropriate when making – Assessment of legal/tax/ accounting implications – Judgments as to how to effect portfolio change in an organization 3 Maturity lens • Business units defined according to stage of maturity of product in lifecycle • Most appropriate when making – Moderate diversification decisions to accelerate growth and perpetuate the corporate existence – Liberation decisions (sell, spin-off, carve out) 4 20 Source: Emerging Thoughts on Shaping the Corporate Portfolio; David Dorton, Patrick Viguerie
  • 21. Viewing the portfolio through lenses has important implications for shaping strategy Lens 1. Risk/return 2. Capabilities 3. S-curve High DISGUISE D EXAMPLE 4. Organizational/incentive Infrastructure 4 6 Upside Service 5 A 2 B C D 3 1 Low Low Other Liberate Legacy product Applications Joint venture Systems Data High Risk Illustrative findings • Future market cap not related • • • to size of current units Several “high-potential” growth businesses unlikely to meaningfully drive market cap At least one “big bet” required to drive value Several low risk, low return units • Invest aggressively to ensure “4” is successful Implications • Exit low return/high risk cluster • Isolate L/L cluster and exit if possible DCO-ZZU43320040728sushPP1 • Portfolio as configured requires • Revenues disproportionately • • • excellence along multiple dimensions Critical capabilities missing from at least 1 growth business Ownership of “A” compromises market opportunity Technical foundation in “D” required for success in “C” • Separate “A” to enable marketfocused pure play • Joint venture “D” build capabilities to support growth in “C” • • driven by mature businesses Growth investment in new businesses badly aligned with potential to drive value Diversification benefits from applications and systems business • Disproportionate management • • • Refocus growth investment • around moderately diversified growth profile Continue to scale vs. creating exit options for select mature businesses • Isolate businesses requiring performance vs. growth focus • Align incentives to capture • 21 focus and strategic attention to several small businesses without potential for real leadership Shared incentives and channels make true performance accountability and focus difficult Few incentives to capture cross-BU synergies (“silos”) upside and prepare for potential exit Create services sales capability
  • 22. The SHAPE framework: Building blocks of portfolio design Aspirations • Aspirations provide unconstrained guidance for portfolio agenda • Shaping agenda continually iterates between aspirations and portfolio characteristics Performance Profile Head room • Unit-by-unit economics • Companies should actively drive the risk/return profile of the portfolio • The shaping agenda should not be driven to moderate cash flow volatility risks manage their portfolio to ensure adequate growth head room and therefore, platforms for value creation • The weighted average maturity of the portfolio determines the available headroom Enablers Synergies • External factors determine the degrees of freedom available in creating the shaping agenda (e.g., capital markets, deal flow) • Dominant source of synergies • (economies of skill, scale, and scope) are determined by asset configuration “archetype” Transactions should follow shaping logic driven by asset configuration DCO-ZZU43320040728sushPP1 22 Source: Emerging Thoughts on Shaping the Corporate Portfolio; David Dorton, Patrick Viguerie
  • 23. Crafting a SHAPE agenda: an iterative process “Left brain” activity (aspirations) 2. What do we want to be? “Right brain” activity Shape agenda – “The Playbook” 1. How high should my aspirations be? 3. What skills can we leverage? 2. Program/ thematic shaping options 1. Portfolio diagnostic • Synergies • Headroom • Profile • Enablers 3. Transaction strategy 4. Do I have time to pull this off? Source: Emerging Thoughts on Shaping the Corporate Portfolio; David Dorton, Patrick Viguerie DCO-ZZU43320040728sushPP1 23
  • 24. Research has shown that moderately diversified companies can outperform over long time periods… Focused Cumulative excess returns to shareholders* Percent 600 CAGR Percent 558 10 225 6 112 4 500 400 300 200 100 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 DCO-ZZU43320040728sushPP1 Source: Emerging Thoughts on 24 Shaping the Corporate Portfolio; David Dorton, Patrick Viguerie Diversified Moderately diversified
  • 25. . . . and generate above-average growth performance and expectations Growth 1990-2000 Percent 10 year EPS growth CAGR All* Focused Top quartiles** 6 Moderately diversified Diversified 10 year EBITDA growth CAGR Top quartiles** 18 13 21 19 9 6 All* 22 11 • Moderately diversified 25 19 15 companies can create growth at or above that of focused companies • Particularly important given later stage S-curve status of moderately diversified companies on average • Case studies also illustrate that moderate diversification can create significant value form long-term growth expectations embedded in stock price * Average value ** Median value Note: Includes approximately 167 companies that existed fro the last 10 years, does not take into account entries and exits Source: Emerging Thoughts on Shaping the Corporate Portfolio; David Dorton, Patrick Viguerie; Compustat; McKinsey analysis DCO-ZZU43325 20040728sushPP1
  • 26. Moderate diversification allows companies to transcend multiple S-curves at certain points in their life cycle Transition periods Liberate units where net synergies are exhausted Enter new businesses where capabilities match discontinuities Focus to build capabilities and meet expectations DCO-ZZU43320040728sushPP1 Cull underperforming units rapidly Create multiple strategic options Moderately diversify to grow • Moderate diversification allows companies to place several bets on future potential growth opportunities • Strong focus on core business with dynamic moderate diversification generates higher growth by enabling companies to stride multiple S-curves Reshuffle business mix through active trading of portfolio Continuous loop 26 Source: Emerging Thoughts on Shaping the Corporate Portfolio; David Dorton, Patrick Viguerie
  • 27. Implications and opportunities for any given corporation depend on starting position… High Opportunistic liberation Relative expected long-term growth rate* Focus on delivery Dynamic portfolio reshaping Focused transformation Moderate diversification Low Low Degree of focus (HHI) * Long-term DCO-ZZU433- growth expectations embedded in the stock price relative to that of the industry 27 20040728sushPP1 Source: Emerging Thoughts on Shaping the Corporate Portfolio; David Dorton, Patrick Viguerie High
  • 28. . . . and requires aggressive management of entity boundary Rapid culling Definition Early liberation Active trading Proactivity • Rapidly exit when • Separate from new • Actively trade • Actively seek to match detect early signs of potential failure Negative pattern• Hold on to underperforming businesses too long • Divest only when faced with significant market pressure DCO-ZZU43320040728sushPP1 businesses when – Capabilities have been fully leveraged – Potential synergies have been captured – Value from liberation is substantial • Hold on to successful new businesses past the point where additional synergies can be captured/created portfolio on a continuous basis and have an M&A program that is balanced over time and programmatic ongoing internal scan for capabilities that can be applied in new related areas with external search for discontinuities • Relentlessly stick to • Passively manage the portfolio; do not constantly reevaluate M&A and divestiture opportunities core business or • Diversify in reaction to underperformance, external pressure or • Diversify by making “me too” moves a beat too late 11 points TRS difference between companies exhibiting 3-4 positive characteristics and those exhibiting 3-4 negative patterns 28 Source: Emerging Thoughts on Shaping the Corporate Portfolio; David Dorton, Patrick Viguerie
  • 29. Corporate portfolio diagnostic can help assess starting point Step Focus Performance and prospects 1. Evaluate business performance of BUs at high level • Financial performance • Associated Risks 2. Estimate life cycle phase of BUs 3. Evaluate growth potential and prospects of BUs, on a preliminary basis Implications • Understand at a high level where value is created • Understand where greatest value creation potential and growth opportunities are likely to be 4. Identify potential synergies yet to be captured Synergies between BUs, on a preliminary basis • Revenue based • Cost based • Asset based 5. Scan for emerging capabilities and new areas Capabilities of expertise potentially applicable to adjacent business spaces • Understand at a high level where there are clear synergies to be captured going forward • Identify BUs for which ongoing synergies are less clear as areas for further probing • Emerging capabilities identified may be matched to external discontinuities, once these have also been identified • A two-day diagnostic can provide a high-level view on: – Potential areas of streamlining – Potential changes in prioritization – Potential areas of future growth • It can help prioritize areas of reassessment and lead to effective changes in scope management • Combined with a CMD, it can be a powerful tool to start meaningful discussions with clients DCO-ZZU433-20040728sushPP1 29 Source: Focus is not enough: Shaping the Corporate Portfolio for Sustained Value Creation; Neil Harper, Patrick Viguerie
  • 30. Step 1 – Evaluate BU performance PROGRESS WORK IN at Ratings high level High growth, highly profitable business Very low growth, unprofitable business Steps Sample end product for one BU • List businesses in portfolio ( use a product driven approach to define businesses) • Obtain segment operating performance Pre tax ROIC data from annual reports, SEC filings and analyst reports ROIC • For each business create the ROIC tree to identify the key value levers; disaggregate sufficiently until the real sources of performances is reached Spread • Compute WACC for each BU using peer growth and spread for the last five to ten years SG&A Capital turnover WACC group unlevered beta of each business; subtract WACC from ROIC to derive the spread • Assess historical performance in NOPLAT 1 – tax rate Operating margin COGS/ revenue NOPLAT growth Rating: Rationale: High operating margins coupled with sustained revenue growth for the past DCO-ZZU433ten years 30 20040728sushPP1 Source: Focus is not enough: Shaping the Corporate Portfolio for Sustained Value Creation; Neil Harper, Patrick
  • 31. Step 2 – Identify S-curve positions of BUs in business mix evolution WORK IN PROGRESS Steps Sample end product BROADWING • Identify the major transition periods in corporate scope during the last decade Moderately diversified into non-telephony 1991 Streamlined businesses 1998 Local phone ($ 590 M) • Measure the EBITDA growth and excess returns relative to the industry for each major period Local phone ($ 718 M) Customer care and billing ($ 288M) • Identify the major business mix evolution events in each period • Plot each BU’s life cycle stage on company S-curve for each period Customer care and billing ($ 548M) Telemarketing ($ 448M) Telemarketing ($ 85M) • Characterize each period with the dominant scope management characteristics demonstrated during the period Wireless ($ 91 M) EBITDA CAGR Excess returns Analysis highlights comparative performance for every corporate scope period determined by where each BU stood in its life stage 1983-97 Proactive search 1% 4% • Spun off telemarketing, Streamline Change business mix • Acquired Auxton computers • Position for growth - 1998-1999 Early liberation -19% 35% and Vanguard Technologies to grow the customer care and billing business (1983) Formed telemarketing division (1989) customer care, and billing business after fully exploiting the synergies (1998) • Formed a JV with AT&T to provide wireless services (1998) • Acquired IXC Communications to enter the broadband business (1999) DCO-ZZU43331 Source: Focus is not enough: Shaping the Corporate Portfolio for Sustained Value Creation; Neil Harper, 20040728sushPP1 Patrick Viguerie
  • 32. Step 3 – Evaluate growth potential and future profitability of BUs Ratings Low uncertainty, high expected growth business High uncertainty, low expected growth business Steps Sample end product for one BU • Obtain expected segment operating performance data from analyst reports • Interview industry experts to check NOPLAT growth reasonableness of forecasts and make necessary adjustments • For each business, create the expected Expected ROIC Spread ROIC tree to identify the key value levers; disaggregate sufficiently until the real sources of performances is reached • Assess expected performance in NOPLAT growth and spread for the foreseeable future years; rate overall attractiveness DCO-ZZU43320040728sushPP1 Pre tax ROIC Capital turnover 1 – tax rate WACC Market BU share 1 3% 2 15% 3 30% • Compute WACC for each BU using peer group unlevered beta of each business; subtract WACC from ROIC to derive the spread Operating margin Industry growth Medium High Low Relative growth High Low Low Riski ness Low High Low Rating: Rationale: High expected ROIC due to capital turnover improvements coupled with with high growth relative to the industry 32 Source: Focus is not enough: Shaping the Corporate Portfolio for Sustained Value Creation; Neil Harper, Patrick Viguerie
  • 33. Step 4 – Identify potential synergies yet to be captured amongst BUs WORK IN PROGRESS Ratings Capabilities fully leveraged and potential synergies have been captured High potential for leveraging the capabilities from core and other BUs and high latent synergies to be captured BU1 BU2 BU3 BU4 Incremental synergy capture No significant incremental synergy to be captured Few incremental synergies to be captured Some limited incremental synergies to be captured Significant incremental synergies still to be captured Value from separation High given active market for corporate control and need for greater focus High Lower than value of incremental synergy capture Lower than value of incremental synergy capture Dis-synergy from separation Limited Limited Material Significant Value creation potential Low High Low to moderate Moderate to high Ability to extract value One of the pack One of the pack Natural owner Natural owner Candidate for culling or separation Candidate for liberation Candidate for lower prioritization (change in resource allocation) Steps • Conduct interviews with CST and BU managers to assess the asset, revenue and cost based synergies amongst the BUs • Assess the ability to extract value considering corporate center skills and business unit linkages in the portfolio • Develop a day 1 hypothesis for the given BU based on synergy assessment Overall attractiveness Consolidate for higher prioritization (change in business mix) DCO-ZZU43333 20040728sushPP1 Source: Focus is not enough: Shaping the Corporate Portfolio for Sustained Value Creation; Neil Harper, Patrick
  • 34. Step 5 – Assess the capabilities for WORK IN PROGRESS scanning the periphery Ratings Informed point of view on emerging technologies and business models: major players, opportunities and barriers, likely success, and threats/opportunities to core businesses Minimal understanding of emerging technologies or business models and how they impact core businesses Steps Sample end product • Identify who in organization is responsible for systematic Ratings based on ability to complete matrix below scanning of periphery (if possible, estimate headcount relative to competitors). New technologies and business models • Interview strategic planning, BU heads, to assess degree of 1 knowledge of periphery – Emerging technologies and business models – Major players in each technology/business – Opportunities and risks/barriers to success 2 3 A B C D – Expected success      Opportunities/ barriers – Assessment of threats/opportunities posed to core businesses Competitor bets literature searches, industry and analyst reports* • Tap employees who are alumni of competitors 5 Players – Competitor bets • Benchmark client view against McKinsey practice experts, 4 Likelihood of success Threats/ opportunities to Source: Focus is not enough: Shaping the Corporate Portfolio for Sustained Value Creation; Neil Harper, Patrick Viguerie DCO-ZZU433core 34 20040728sushPP1 * For complete methodology of periphery scan, see Creative Destruction EM Guide to Creation 
  • 35. Exit/ownership restructuring options should follow from this systematic diagnostic WORK IN PROGRESS Value with improvement** >current value Can be achieved by current mgmt? No Greater value to another player? No Material synergies with other BUs?* No IPO possible? No Consider full spin-off*** Yes Yes Yes Value of mkt-based mgmt incentives high? No Keep Yes Yes Keep and improve Consider sale Consider tracking stock Consider carve out then spin-off*** * Which can not be captured at arm’s length ** Hexagon framework for optimization *** Decision based on assessment of key sources of value: a) Include strategic flexibility; b) improved market for corporate DCO-ZZU433control; c) greater management focus; d) improved management incentivization 35 20040728sushPP1 Source: Focus is not enough: Shaping the Corporate Portfolio for Sustained Value Creation; Neil Harper, Patrick Viguerie
  • 36. Companies that actively manage their portfolios create more value than those that do not Value of $100 invested from Jan 1990-Dec 1999* $459 30% $353 Passive portfolios Average number of transactions** 2 Active portfolios 15 * Risk adjusted for beta, 200 largest companies (by market capitalization) in 1990 still existing in 2000 ** The third of the sample with the fewest transactions was classified “passive” and the third with the most transactions was classified “active” DCO-ZZU433- 36 Source: Proactive Divestiture: Selling ‘Good’ Businesses, Lee Dranikoff, Tim Koller, Sam Lee, Becca O’Brien, Antoon Schneider, Brian Williams 20040728sushPP1
  • 37. A majority of divestitures, which are an important part of active portfolio management, are only made in reaction to pressure Reactive Proactive vs. reactive divestitures* % of deals Proactive 100% = 49 Proactive divestitures for strategic reasons with no evidence of performance decline Pressure due to corporate parent underperformance (35%) 24 76 Proactive divestitures probably even fewer; benefit of the doubt was given when no evidence of pressure was found Pressure due to business unit underperformance – or both parent and business unit (41%) * Based on analyst reports, press articles and financial analysis of all divestitures mentioned in the WSJ during 4 one-month periods Source: Proactive Divestiture: Selling ‘Good’ Businesses, Lee Dranikoff, Tim Koller, Sam Lee, Becca O’Brien, Antoon Schneider, Brian Williams DCO-ZZU43320040728sushPP1 37
  • 38. Thus, most divestiture decisions are delayed for a significant period Timeliness of reactive divestitures % of deals 100% = 37 Rapid response • Quick exit when BU underperformance becomes clear • Timely response to market pressure • Reasonable step to resolve corporate underperformance, done as quickly as possible 35 Late response • Persistent, long-term business unit underperformance • Continuous investor pressure on corporation to divest • Business underperformance completely transparent to market • “Fire sale” or shut down 76% 65 DCO-ZZU43320040728sushPP1 38 Source: Proactive Divestiture: Selling ‘Good’ Businesses, Lee Dranikoff, Tim Koller, Sam Lee, Becca O’Brien, Antoon Schneider, Brian Williams
  • 39. Hanging on to business units too long can impose three types of costs on the corporation Hidden costs of ownership imposed by BU on its parent Costs imposed by wrong parent on BU Value decline due to unmet expectations The parent and the rest of the organization can be dragged down by a business unit and the business unit can impose a substantial opportunity cost of scarce management time By holding on too long, a parent can stunt business unit growth, causing lower performance Companies tend to hold on to businesses despite low potential to meet market expectations, dragging down overall shareholder returns – a cost that can be difficult to quantify DCO-ZZU43339 Source: Proactive Divestiture: Selling ‘Good’ Businesses, Lee Dranikoff, Tim Koller, Sam Lee, Becca O’Brien, Antoon Schneider, Brian Williams 20040728sushPP1
  • 40. Over time, business units impose substantial but largely hidden costs on their parent Potential costs Explanation 1. Culture and skill As a business unit matures, its culture may become incompatible with the culture that the company wants to create, hampering the rest of the corporation’s efforts to change 2. Imperative to create Stable operating units, while potentially important for cash management, can remove the impetus to create; without an “emergency,” incremental improvements triumph over substantial change 3. Management time Scarce management time can be diverted into operating a business unit that is not part of the future of the company 4. Decision making Mismatched business units can lead to poor decision making because of conflicts of interest and cross-subsidization 5. Talent attraction and management Attracting talent with the desired mindset is difficult when a company is viewed by the talent market as synonymous with one particular business unit (with different talent needs); maintaining contrasting employee propositions within the group is difficult 6. Investor credibility Investors may find it difficult to believe that a company can manage business units with different needs, creating a type of conglomerate discount and reducing appeal to all classes of investors DCO-ZZU43320040728sushPP1 40 Source: Proactive Divestiture: Selling ‘Good’ Businesses, Lee Dranikoff, Tim Koller, Sam Lee, Becca O’Brien, Antoon Schneider, Brian Williams
  • 41. Due to these factors, selling ‘good’ businesses should be considered in managing the company’s portfolio Potential types of sales Rationale Selling cash cows  definition, cash cows have high market shares in stable By industries  a result, they have low market headroom and low ability As to surprise the market  They also may present substantial downside risk if market share unexpectedly declines  they are likely to impose hidden costs of ownership on And the parent  These factors need to be balanced against the benefits of cash cows, e.g., stable cash flow during downturns Selling business with high market share  with cash cows, high-market-share businesses have As low market headroom and may present a risk if market share unexpectedly declines Selling business even if industry has significant remaining growth potential growth is positive, but declining, the market may be If disappointed, leading to lower shareholder returns Sell profitable businesses a business is profitable but imposes hidden costs on the If parent, it may require sale DCO-ZZU43320040728sushPP1 41 Source: Proactive Divestiture: Selling ‘Good’ Businesses, Lee Dranikoff, Tim Koller, Sam Lee, Becca O’Brien, Antoon Schneider, Brian Williams
  • 42. An ongoing proactive divestiture program requires 3 important elements Comments Forcing mechanisms • Most companies only divest when under some pressure or after some dramatic event, e.g., change in top management • Forcing mechanisms should be built into the corporate processes to prompt proactive divestitures • People with the right motivation, skills, and incentives are needed Talent Simple communication strategy to make the case for divestitures at every level of the organization, i.e., board, top management, and operating management • A simple communication strategy on divestitures has to be developed and communicated to the whole organization to uphold morale and avoid negative market signaling effects DCO-ZZU43342 Source: Proactive Divestiture: Selling ‘Good’ Businesses, Lee Dranikoff, Tim Koller, Sam Lee, Becca O’Brien, Antoon Schneider, Brian Williams 20040728sushPP1
  • 43. Proactive divestiture decision tree: 3 steps to divesting a business 1. ? Which businesses should ? be divested? ? ? ? ? ? ? Divestiture candidates 3. Can it be done, how and when? ? X Exit feasibility, method and timing DCO-ZZU43320040728sushPP1 2. Would what’s left make sense? Overall portfolio assessment 43 Source: Proactive Divestiture: Selling ‘Good’ Businesses, Lee Dranikoff, Tim Koller, Sam Lee, Becca O’Brien, Antoon Schneider, Brian Williams
  • 44. In summary, top performers in portfolio management excel in a specific set of dimensions Best practices 1 Define an appropriate level of portfolio complexity 2 Leverage truly distinctive corporate competencies and synergies 3 Selectively build growth opportunities 4 Proactively trade the portfolio and re-allocate resources DCO-ZZU433Source:20040728sushPP1 New Frontiers in Portfolio Management, Abengoeachea, et. al. 44
  • 45. GE BUSINESS SCREEN CELLS - STRATEGIES STRATEGY BUSINESS PROSPECTS COMPETITIVE COMPATIBILITY RECOMMENDED STRATEGY LEADER HIGH AVERAGE TRY HARDER HIGH MEDIUM DOUBLE OR QUIT HIGH WEAK GROWTH AVERAGE AVERAGE STRONG CUSTODIAL AVERAGE AVERAGE PHASE WITHDRAWAL LOW AVERAGE CASH GENERATION LOW STRONG LOW WEAK HOLD HIGH MARKET POSITION WITH ALL ANY RESOURCES ALLOCATE MORE RESOURCES TO BECOME LEADER PICK PRODUCTS LIKELY TO BE FUTURE HIGH FLYERS FOR DOUBLING AND ABANDON OTHERS. MAY HAVE STRONG COMPETITION WITH NO ONE COMPANY AS LEADER. ALLOCATE ENOUGH RESOURCES TO GROW WITH MARKET MAY HAVE MANY COMPETITORS, MAXIMISE CASH GENERATION WITH MINIMAL NEW RESOURCES. SLOW WITHDRAWAL TO RECOVER MOST OF THE INVESTMENT SPEND LITTLE CASH FOR FURTHER EXPANSION AND USE THIS AS A CASH RESOURCE FOR FASTER GROWING BUSINESSES LIQUIDATE AND INVEST ELSEWHERE DISINVEST
  • 46. SECTORAL PROSPECTS SHELL’S DIRECTIONAL POLICY MATRIX ATTRACTIVE LEADER AVERAGE LEADER GROWTH ATTRACTIVE CASH GENERATION STRONG TRY HARDER CUSTODIAL PHASED WITHDRAWAL AVERAGE UNITS COMPETITOR POSITION DOUBLE or QUIT HASED WITHDRAWAL DISINVEST WEAK

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