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Corporate Portfolio Management: Appraising Four Decades of Academic Researc


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Few major corporations are single business entities; rather, they are organizations that target many
product-market combinations. Although academia has shown great interest in diversification and mergers
and acquisitions, the management of multi-business portfolios, also known as corporate portfolio management (CPM), has received considerably less attention since the 1980s. This raises the question of why.
Reviewing the scholarly literature on CPM we investigate the reasons for th

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  1. 1. 50 Academy of Management Perspectives November A R T I C L E S Corporate Portfolio Management: Appraising Four Decades of Academic Research by Michael Nippa, Ulrich Pidun, and Harald Rubner Executive Overview Few major corporations are single business entities; rather, they are organizations that target many product-market combinations. Although academia has shown great interest in diversification and mergers and acquisitions, the management of multi-business portfolios, also known as corporate portfolio manage- ment (CPM), has received considerably less attention since the 1980s. This raises the question of why. Reviewing the scholarly literature on CPM we investigate the reasons for this disinterest and suggest a future research agenda for management scholars in this important domain.D espite the ongoing academic drumbeat calling as a means to add value to a number of different for the breakup of diversified corporations, businesses held by a corporation. multi-business firms remain the most preva- Corporate portfolio management (CPM)—lent form of organization around the world. This is which should not be limited to simple matrices ortrue for both mature and emerging economies other instruments for managing the corporate(Chakrabarti, Singh, & Mahmood, 2007). The portfolio—is at the center of corporate strategy. Itdominance of multi-business firms, however, flies comprises key corporate-level strategic decisions,in the face of theoretical models and empirical such as entry into new businesses, allocation ofstudies asserting that corporate diversification de- scarce resources to different business units, andstroys value (e.g., Berger & Ofek, 1995; Lang & liquidation of value-destroying divisions. CPMStulz, 1994; Lyandres, 2007; Rajan, Servaes, & should thus be highly relevant for executives andZingales, 2000). This inconsistency pushes schol- investors as well as for strategic managementars to better understand multi-business firms and scholars. A recent study of leading multi-businesshow they are managed. Rather than focusing only firms worldwide proves that top management per-on business strategies that deal with gaining com- ceives CPM to be highly relevant and importantpetitive advantage within a particular industry or (Pidun, Rubner, Kruehler, Untiedt, & Nippa,market, strategic management research should put 2011). However, in academia, a comprehensivemore emphasis on investigating corporate strategy review reveals only a few, often outdated, studies* Michael Nippa (nippa@bwl.tu-freiberg.de) is Chair of Management, Leadership, and Human Resources, Faculty of Business Adminis-tration, Technische Universität Bergakademie Freiberg, Germany, and Adjunct Professor of Management, Lee Kong Chian School ofBusiness, Singapore Management University, Singapore.Ulrich Pidun (pidun.ulrich@bcg.com) is Associate Director, Corporate Development, The Boston Consulting Group, GmbH, Frankfurt,Germany, and Visiting Professor for Strategic Management in the Resource Industry, Technische Universität Bergakademie Freiberg,Germany.Harald Rubner (rubner.harald@bcg.com) is Senior Partner and Managing Director, The Boston Consulting Group, GmbH, Cologne,Germany, and a BCG fellow.Copyright of the Academy of Management, all rights reserved. Contents may not be copied, emailed, posted to a listserv, or otherwise transmitted without the copyright holder’s express written permission.Users may print, download, or email articles for individual use only. http://dx.doi.org/10.5465/amp.2010.0164
  2. 2. 2011 Nippa, Pidun, and Rubner 51that focus predominantly on CPM and the process tegic management research in three ways. First,of analyzing, reviewing, and actively managing it demonstrates how the understanding of CPMthe corporate portfolio. Most research contribu- is influenced by academic hearsay, perpetua-tions focus on related but specific issues, such as tion, and paradigms that hamper objective anal-diversification strategies (David, O’Brien, Yo- yses and methodological advancements. Sec-shikawa, & Delios, 2010; Hoskisson & Johnson, ond, we highlight the need for substantial1992), mergers and acquisitions (Chatterjee, theory development and lay out an agenda for1992; Trautwein, 1990), or parenting advantage future research in this important domain of(Campbell & Luchs, 1992; Goold, Campbell, & corporate strategy.Alexander, 1998). Hence, the objectives of this paper are toaddress the apparent gap between the practical The Rise and Fall of CPM in Strategicand theoretical importance and the ongoing Management Thinking Cacademic disregard of CPM, and to subsequently enturies ago, the Fugger banking family dy-derive promising fields of future research. Three nasty, which dominated Europe in the 15thmotivations guided our critical appraisal of four and 16th centuries, and the East India Com-decades of academic research: (a) the apparent pany, the powerful megacorporation that had aneed to systematically assess the intellectual near-monopoly on all commerce in India andground and scholarly debate regarding CPM and China between the 17th and 19th centuries, wereCPM instruments, (b) the wish to uncover and aware of the need to successfully manage differentto clarify common misbeliefs about CPM, and business activities, such as expanding into new(c) our intention to elaborate interesting re- ventures, allocating scarce resources, closing downsearch questions that will help close the iden- unprofitable branches, and dealing with dissentingtified gaps. governors. The same is true for large companies The paper starts by briefly outlining impor- that emerged during the industrialization era intant shifts in the approach to corporate strategy the late 19th century, such as General Electricand CPM caused by major changes in the com- and Siemens. However, multi-business firms be-petitive environment and dominant scholarly came more prevalent and a subject of major schol-paradigms over the last decades. Central to the arly interest only in the decade after the Secondquestion of whether scholars acknowledge the World War (Rumelt, 1974, 1982). In those earlyimportance and relevance of CPM is the over- days, three important paradigms emerged thatriding economic rationale supporting whether, shaped strategic management thinking for almostand under what conditions, diversification adds three decades and subsequently fostered corporatevalue to or destroys value within the firm (i.e., diversification activities.whether external market coordination of busi- First, firm growth was seen as the most impor-nesses outperforms internal, hierarchical coor- tant driver of profitability and success. The war-dination). Hence, our review distinguishes time economy (e.g., Liberty ships and B-24s) hadamong three interrelated research streams that proven that high-volume production offered manymirror the scholarly debate of CPM: (a) the cost advantages, gained primarily through learn-economic valuation of diversification strategies ing, specialization, and economies of scale. Con-at large as a sine qua non of any CPM activity, sequently, scale growth— gaining market share(b) research applying and assessing CPM instru- through organic growth or acquisitions— becamements, particularly criticism regarding promi- the dominant strategy. In addition, resurging mar-nent decision-support matrices, and (c) studies kets offered many opportunities for internationalthat focus on CPM practices (i.e., the process of and product diversification.managing the corporate portfolio). Finally, we Second, it was believed that a corporate econ-propose promising fields of future research. omy, or hierarchical coordination, would outperform Our research contributes to the field of stra- a market economy—mainly due to transaction
  3. 3. 52 Academy of Management Perspectives Novembercosts (Williamson, 1975) and the supposed inher- ing a portfolio of assorted investments that varyent advantages of strategic planning and resource with regard to profit or return expectations,allocation (Galbraith, 1952). This belief was growth potential, and risk. Therefore, applyingbased on theoretical reasoning and empirical ev- and transferring the concept of portfolio manage-idence that proved corporate headquarters to be ment from finance theory (Markowitz, 1952;more efficient than external capital markets when Sharpe, 1963) to the real economy was logical.it came to resource allocation and the steering of At the time, the name most clearly attached tostrategic business units. this emerging portfolio approach was that of Bruce Third, the development of, and belief in, gen- D. Henderson, founder of the Boston Consultingeral management skills and universal principles of Group (BCG). In the late 1960s he systematizedmanagement (e.g., Drucker, 1954) bolstered the and simplified a process for evaluating the differ-idea that managers educated at leading business ent products or business units of a corporation inschools were optimally qualified to manage multi- relation to their cash flow generation and con-business firms efficiently (Grant, 2010). Manage- sumption. “The portfolio composition is a func-ment scholars tried to identify and describe basic tion of the balance between cash flows,” he wrote.principles of management and to develop manage- “High-growth products require cash to grow. Low-ment methods and tools to apply in various indus- growth products should generate cash. Both kindstries and businesses (Goold & Luchs, 1993). Con- are needed simultaneously” (Henderson, 1970, p.sequently, it was perceived that management 1). Thus, market growth (as proxy for cash de-elites should be able to successfully lead a set of mand) and relative market share (as proxy for cashdifferent strategic business units. generation via an experience curve effect) consti- Propelled by these paradigms, diversification tuted the basic dimensions of the CPM conceptstrategies became the norm between 1950 and that became known as the BCG growth-share1970 (Rumelt, 1982). Diversification strategies matrix. Responding to its success and marketacross different industries showed comparable pat- needs, other management consultants, such asterns, and investors appeared to reward expanded McKinsey (Wind, 1974) and A. D. Littlediversification (Shleifer & Vishny, 1991). Al- (Wright, 1978), developed similar CPM matrices.though diversification in related businesses dom- These became very popular among corporateinated from the late 1950s through the mid-1960s, management, were used by many large companiesdiversification into weakly and non-related con- (Bettis & Hall, 1981; Haspeslagh, 1982), andglomerate businesses came into favor soon after. quickly found their way into many strategic man-In the wake of a general quest for growth, con- agement textbooks of the time.glomerates with unrelated business units and high By the 1980s, however, the pendulum of stra-price/earnings multiples (such as Transamerica, tegic management thinking started to swing backITT, and Hanson) became the darlings of the toward more focused corporate portfolios. Thisstock markets and received cheap capital that was accompanied by a major paradigm shift withinenabled them to continue to grow through the the field of strategic management. A new domi-acquisition of additional businesses. nance of theory-based beliefs in the superiority of This shift toward diversifying into unrelated markets (invisible hand) over corporations (visi-conglomerate businesses had a significant impact ble hand) built on theories of core competencieson management. Management of diversified cor- or capabilities-oriented corporate strategy (Collisporations had to formulate and implement effi- & Montgomery, 1995; Prahalad & Hamel, 1990;cient corporate strategies to generate and allocate Stalk, Evans, & Shulman, 1992). In turn, externalfree cash flow, exploit synergies, identify new forces established a market for corporate controlgrowth opportunities, and/or decide whether to that stimulated company restructuring, corporatesell low-performing businesses. spin-offs, and increasingly more focused compa- From a financial perspective, managing differ- nies (Goold & Luchs, 1993). More and moreent businesses of a corporation resembles manag- economists argued that increasingly efficient fi-
  4. 4. 2011 Nippa, Pidun, and Rubner 53nancial markets were better at allocating capital corporate performance. They draw mainly on ar-than managers of multi-business firms and, conse- guments from market power theory, internal cap-quently, should outperform organizational ar- ital market efficiency reasoning, transaction costsrangements. theory, portfolio theory, industry or product life It followed logically that if corporate diversifi- cycles, and taxation advantages (Gomes & Liv-cation strategies are per se inefficient and value- dan, 2004; Grant, 2010; Lubatkin & Chatterjee,destroying (Jensen, 1989; Wernerfelt & Mont- 1994; Markides & Williamson, 1996). For exam-gomery, 1988), then CPM and CPM tools, too, ple, significant advantages of corporate diversifi-were dispensable and scholars should not squander cation are said to derive from economies of scaletheir efforts there. The predominance of an eco- and scope, smart allocation of capital based onnomic paradigm that denies the pertinence of sophisticated knowledge about businesses, explo-corporate diversification may be the reason for ration of new business opportunities while simul-scholars’ diminishing interest in CPM: If there is taneously exploiting mature businesses, and taxno economic rationale whatsoever for corporate benefits of profit retention. Consequently, inves-diversification, research on how to effectively tors should prefer diversified over less diversifiedmanage a corporate portfolio also loses its attrac- multi-business firms, leading to a diversification ortiveness. conglomerate premium (Palich et al., 2000). Our investigation of the status of corporate Advocates of value-destroying models referportfolio management research thus started with a predominantly to internal transaction costs andquestion: How relevant is CPM as a key discipline principal-agent reasoning, and argue that the costof corporate strategy given the alleged economic of increasing bureaucracy and subsequent coordi-inferiority of corporate diversification in contrast nation and governance costs exceed the economicto market-based diversification? In the subsequent benefits of diversification, such as exploitingsection we investigate the major causes of schol- economies of scope (Denis, Denis, & Sarin, 1997;arly criticism of CPM and how valid they are. And Jones & Hill, 1988; Lu & Beamish, 2004), leadingfinally, we provide answers to the question of to to a decrease in profitability or a lower economicwhat extent scholars have systematically investi- value of corporate diversification compared to agated actual CPM practices and implementation market-based diversification (Markides, 1995).of CPM instruments. The more efficient the external capital market, the lower the market-based transaction costs com-Does Research on Diversification Eviscerate CPM? pared to internalization. Empirical findings show-The diversification-performance link has been in- ing that conglomerates trade at a discount, rela-tensively studied by management researchers from tive to a portfolio of comparable stand-alonevarious disciplines since the late 1980s (e.g., firms, reinforced researchers’ belief that diversifi-Chatterjee & Wernerfelt, 1991; Goold & Luchs, cation destroys value (Gomes & Livdan, 2004).1993; Hitt, Tihany, Miller, & Connelly, 2006; Authors advocating inverted-U models arguePalich, Cardinal, & Miller, 2000; Ramanujam & that there is an optimal level of diversification—Varadarajan, 1989). Advancing Palich et al. that is, that moderately diversified firms outper-(2000), rationales and empirical evidence can be form both single-business firms and limited diver-organized into three categories: value creation sifiers on one hand and highly diversifiedfrom diversification, value destruction from diver- corporations on the other. In particular, somesification, or an inverted U form (see Table 1). For argue that there is a trade-off between benefits andeach category one finds theoretical justifications costs of diversification. Multi-business firms thatas well as empirical support. are engaged in related markets (related diversifi- ers) are able to benefit from synergies or the le-Theoretical Models of the Diversification-Performance Link. verage of resources at reasonable coordinationValue-enhancing models propose a consistently costs, leading to an increase in profitability com-positive relationship between diversification and pared to focused firms and limited diversifiers (Lu-
  5. 5. 54 Academy of Management Perspectives NovemberTable 1Generic Models and Empirical Evidence of the Diversification-Performance Link* Value-Enhancing Models Inverted-U Models Value-Destroying Models THEORETICAL RATIONALE • Market power advantages such as cross- • Synergies and parenting advantage can be • Internal power struggles increase subsidization exploited to only a certain degree of influence costs • Economies of scale and scope regarding diversification • Inefficient internal capital markets multiple-use resources • Competitive advantages restricted to related • Inappropriate expansion due to agency • Capital market advantages and more diversification problems efficient allocation • The less related the diversification the more • Corporate diversification reduces risk, or costs outlast benefits volatility in rates of return EMPIRICAL EVIDENCE Profitability increase -Shape run of profitability Profitability decrease • Schoar (2002) • Rumelt (1974, 1982) • Berger and Ofek (1995) • Mathur, Singh, and Gleason (2004) • Itami, Kagono, Yoshihara, and Sakuma (1982) • Rajan and colleagues (2000) • Grant, Jammine, and Thomas (1988) • Maksimovic and Phillips (2002) • Hoskisson and Hitt (1990) • Palich and colleagues (2000)‡ • Singh and colleagues (2010) Diversification premium Contingent market value Diversification discount • Jandik and Makhija (2005) • Wernerfelt and Montgomery (1988) • Lang and Stulz (1994) • Yan (2006)1 • Palich and colleagues (2000)‡ • Berger and Ofek (1995) • David and colleagues (2010) • Villalonga (2004) • Servaes (1996) • Denis, Denis, and Yost (2002) • Best, Hodges, and Lin (2004) Substantially modified from Palich and colleagues (2000). Key: *selection; ‡ meta-analysis; 1for costly external capital markets only.batkin & Chatterjee, 1994). These businesses also 2004; Palich et al., 2000; Singh, Gaur, & Schmid,may be able to explore and exploit parenting 2010; Tallman & Li, 1996).advantages (Goold, Campbell, & Alexander,1994, 1998). Empirical Evidence for These Models. Our focused review The more a multi-business firm diversifies in reveals that there is no clear empirical proof of anless-related businesses, the more coordination unconditional economic disadvantage of corpo-costs (e.g., increased monitoring, bureaucracy, re- rate diversification. There are a few studies thatsource allocation, conflict) soar and benefits de- support value-enhancing models (Schoar, 2002;cline, leading to decreasing profitability (Jones & Yan, 2006) as well as some studies that appear toHill, 1988; Nayyar, 1992). Consequently, any ad- prove value-destroying models (Berger & Ofek,ditional diversification beyond the optimal diver- 1995; Servaes, 1996). To date, inverted-U modelssification level reduces the overall profitability seem to have the most support in empirical studiesand value of the corporation (Gomes & Livdan, and meta-analyses (Hoskisson & Hitt, 1990;
  6. 6. 2011 Nippa, Pidun, and Rubner 55Palich et al., 2000; Rumelt, 1974; Santalo & 2011; Seeger, 1984), reception and assessment byBecerra, 2008; Singh et al., 2010). There is ample academia have been overwhelmingly negative.evidence that corporate diversification pays as However, a closer look reveals some interestinglong as the benefits deriving from factors predom- patterns over time (see Figure 1). Research-ori-inantly subsumed under relatedness are not over- ented journals rarely published articles that ex-compensated by escalating internal coordina- plained and demonstrated methodologies and in-tion costs. struments (“Propositions of CPM tools” in After more than 40 years of research, there is Figure 1). Rather, once the CPM matrices hadthus no clear understanding of whether corporate found broad acceptance in the corporate worlddiversification adds or destroys value. Several au- and business schools alike, they were put to thethors have pointed out that comparisons and con- test (“Evaluation of CPM tools,” predominantly inclusions are impeded by the different concepts, the early 1980s). At the same time a few research-assumptions, variables, measures, and methods ers conducted surveys that investigated differentemployed (Hitt et al., 2006; Robins & Wiersema, aspects of the use of CPM in large multi-business2003). For example, there is little differentiation firms (“Surveys on CPM implementation,” Bettisbetween relatedness and the extent of diversifica- & Hall, 1981; Haspeslagh, 1982). Surprisingly,tion (Bettis & Hall, 1983) and/or product, market, although CPM methods are still taught at businessor international diversification. As there is no schools around the world, research interest seemspredominant empirical proof of the economic su- to have vanished after the mid-1980s, apart fromperiority of market-based diversification over cor- some rare exceptions in the 1990s. This raises anporate diversification, the more interesting ques- interesting question: what causes this apparenttions may be how diversification can increase the scholarly neglect in light of CPM’s ongoing prac-value of a company and how a corporation should tical use? The first thought is that the academicmanage its diversified portfolio. assessment and fierce criticism of CPM matrices (Day, 1977; Wensley, 1981; Wind, Mahajan, &What Are the Major Causes of Scholarly Criticism Swire, 1983) led researchers to claim their generalof CPM, and How Valid Are They? inferiority and/or potential harm to the firmAs mentioned above, CPM frameworks and in- from CPM.struments have been developed to help executives Before detailing the criticism, however, we willof diversified corporations make strategic deci- elaborate on important aspects and streams ofsions. Whereas the original BCG growth-share criticism. As there is not one single CPM matrixmatrix quantifies market attractiveness and com- but different, partly competing ones (Wind et al.,petitive position based on single proxies (market 1983), scholars need to recognize which model isgrowth in contrast to relative market share), being criticized, although all of them compare anframeworks such as the GE/McKinsey industry internal dimension (mission, capabilities) with anattractiveness-business strength matrix aggregate external one (market, environment) (Davis &multiple parameters (Bettis & Hall, 1981; Wind Devinney, 1997). While most criticism centers on& Mahajan, 1981). Although some traditional the traditional BCG growth-share matrix—prob-corporate portfolio instruments consider different ably because of its widespread use, success, andvariables, they ultimately modify only two dimen- pictorial labeling—some authors (e.g., Slater &sions: market conditions (the “attractiveness” di- Zwirlein, 1992) address other matrices or the port-mension) and company potential relative to com- folio approach in general (e.g., Devinney & Stew-petitors (the “competitive position” dimension; art, 1988). Furthermore, there is almost no devel-Hambrick & MacMillan, 1982, p. 85). opment of criticism; with rare exceptions the While practitioners perceive CPM matrices as different authors do not build on previous contri-useful and intelligible tools for corporate planning butions, although they refer to them. Finally,and particularly resource allocation (Day, 1977; there is disagreement among critics with regard toHax & Majluf, 1983a; Hedley, 1977; Pidun et al., applied methods, reliability, and generalizability
  7. 7. 56 Academy of Management Perspectives NovemberFigure 1Main Scholarly-Oriented Publications on CPM Issuesof findings and conclusions (e.g., Armstrong & dimensions, may avoid the problem of relying onBrodie, 1994a, 1994b, in contrast to Wensley, just one measure at the cost of becoming less1994). The following review of the criticism of transparent and prone to manipulation (Hax &CPM instruments makes use of broad categories Majluf, 1983b; Wensley, 1981; Wind et al., 1983).that show up in the overall picture: on one hand, Accordingly, CPM matrices are frequently markedscholarly contributions that emphasize conceptual as oversimplified methods that will most likelyand methodological deficiencies, and on the lead to inferior strategic decisions (Armstrong &other, those that focus on shortcomings and prob- Brodie, 1994a; Seeger, 1984; Slater & Zwir-lems with regard to application, implementation, lein, 1992).and outcomes (see Table 2). Beyond pointing to the risk of oversimplifica- tion, critics challenge some fundamental assump-Criticism Regarding the Basic Concept and Operationalization of tions of the original CPM matrices, such as theCPM Matrices. Many authors question whether CPM objective of maintaining a balanced portfolio inmatrices are appropriate models for strategy for- terms of internal cash flows, the positive correla-mulation and decision making at the corporate tion between market share and profitability, andlevel. Some question whether management within the superiority of investments in industry growth.multi-business firms can make reliable decisions According to Henderson (1970), the preferredbased on just two variables and a single objec- corporate portfolio should be balanced with regardtive—that is, cash flow balance (Ansoff, Kirsch, to internal cash flows. Even in times of rather& Roventa, 1982; Seeger, 1984; Wensley, 1981, inefficient external capital markets, scholars have1982)—while others emphasize the virtue of this questioned this assumption, criticizing that “thesimplicity (Day, 1977; Derkinderen & Crum, capital market as a source of funds seems to be1984; Wensley, 1994). Other approaches, such as almost ignored in some approaches” (Wensley,the industry attractiveness-business strength ma- 1981, p. 176). A similar opinion is expressed bytrix that aggregates a variety of variables into two Hax and Majluf (1983a), who argued that exter-
  8. 8. 2011 Nippa, Pidun, and Rubner 57Table 2Important Scholarly Criticism Regarding CPM Matrices Category of Criticism Primary Foundation Author(s) Journal F M A O conceptual empirical Criticism/Proposals for Improvement 1 Day (1977) Journal of Wrong assumptions regarding generalizability of Marketing market share profitability link; other firm ✓ objectives than cash balance; measures; unanticipated consequences. 2 Christensen and colleagues Academy of Inappropriateness of strategic prescriptions for (1981) Management corporate “dog” divisions; invalid or too narrow J J ✓ Proceedings assumptions that need careful verification in a particular context. 3 Wensley (1981) Journal of Preference for high market growth (e.g., faster Marketing payoff) and cash balance (e.g., disregard of ✓ external capital market and risk) empirically and theoretically not justified. 4 Hambrick and MacMillan California Use of PIMS data to prove performance (1982) Management predictions of BCG matrix; results challenge the J J ✓ Review dictum that all “dogs” are rather worthless; proposal for further strategic analyses. 5 Hambrick, MacMillan, and Academy of Empirical test and extension of the BCG product Day (1982) Management portfolio matrix. Result: expanded J ✓ Journal understanding of the strategic profile of each type of business. 6 MacMillan, Hambrick, and Academy of Empirical analysis of the association between the Day (1982) Management strategic attributes and profitability of SBUs in J J ✓ Journal the four cells of the BCG matrix. Challenge some early strategic prescriptions. 7 Ansoff and colleagues (1982) Industrial Challenge “point hypothesis,” i.e., determination Marketing of a certain location of each SBU; formulate a J ✓ Management need for “area hypothesis” and propose dispersed positioning of SBUs. 8 Wensley (1982) Strategic Criticizes very unrealistic competitive responses Management and overemphasis of economics and cost J ✓ Journal advantages; questions link between market share and growth and profitability. 9 Barksdale and Harris (1982) Long Range Definitional problems (e.g., SBUs or product/ Planning market groups; standardized market growth J ✓ rates); incompleteness (pioneering products, negative growth); offer own model.10 Bettis and Hall (1983) Long Range Basic model is inappropriate for most large Planning diversified firms, i.e., there is no clear division J ✓ into a “reasonable number” of independent SBUs (disregards relatedness).11 Hax and Majluf (1983a, Interfaces Popular labels; measuring market share at the 1983b) consumer end; SBUs not independent; validity J J J ✓ of share and growth; profitable portfolios do not have to be cash flow balanced. (Continues)
  9. 9. 58 Academy of Management Perspectives NovemberTable 2(Continued) Category of Criticism Primary Foundation Author(s) Journal F M A O conceptual empirical Criticism/Proposals for Improvement12 Wind and colleagues (1983) Journal of Inconsistencies with respect to classification of Marketing SBUs within portfolio due to equivocal J J ✓ ✓ operational definitions and weightings of variables, division rules applied, and model used.13 Derkinderen and Crum Long Range Share/growth portfolio techniques disregard (1984) Planning subtle but strategically important situational J J J ✓ characteristics, and therefore can lead to problematic recommendations.14 Seeger (1984) Strategic Problem of oversimplification and stereotyping Management leading to wrong decisions by naive users; J ✓ Journal dangerous misapplication if model seen as a prescription of norm strategies.15 Devinney and Stewart (1988) Management Referring to limitations of traditional CPM and Science project selection models, an advanced model is J ✓ proposed that accounts for different forms of risk, interdependencies, etc.16 Proctor and Kitchen (1990) Marketing Mainly repetition of what is already known, e.g., Intelligence and univariate measures (market growth and J ✓ Planning share); high growth markets may be inattractive; disregard of capabilities.17 Morrison and Wensley (1991) Journal of Review of the history of the BCG matrix and Marketing further advancements; systematization of J ✓ Management established criticism (e.g., focus, assumptions, definitions, politicking, implementation).18 Slater and Zwirlein (1992) Journal of Investment decisions based on prescriptions from Management GE-/McK industry attractiveness— ✓ competitive position matrix may lead to value destruction instead of value creation.19 Armstrong and Brodie International Laboratory experiments with 1,000 subjects (1994a) Journal of (not specified) showed that those who knew or ✓ Research in used the BCG matrix were misled and chose an Marketing inferior investment decision.20 Armstrong and Green (2007) International Paper does not focus on CPM, but on competitor Journal of and market share orientation (key for CPM ✓ ✓ Business matrices); result: competitor-oriented objectives especially market share are harmful. F Fundamental M Model A Application O Outcome Issue is central to the paper J Issue mentioned, but not major focus of papernal capital markets are often more efficient than quiring, maintaining, and selling strategic businessinternal ones, and that other rationales and plan- units (SBUs) are therefore needed.ning tools to support decision making about ac- As a heuristic regarding the cash flow of a product
  10. 10. 2011 Nippa, Pidun, and Rubner 59or business, Henderson (1970, p. 1) originally and discussions of the strategic implications . . .proposed that “[m]argins and cash generated are a rather than on the fundamental measurement andfunction of market share. High margins and high validation issues involved” (Wind et al., 1983, p.market share go together. This is a matter of 90). There is no consistency among critics regard-common observation explained by the experience ing how to overcome the vagueness and ambigu-curve effect.” Challenging this assumption, Day ity. Some scholars demand more rigorous “rules,”(1977) highlighted the fact that the economic measures, and quantification (Armstrong & Bro-value of market share differs significantly from die, 1994a; Derkinderen & Crum, 1984; Wind etindustry to industry. Apparently, important con- al., 1983), while others argue that there is antingencies such as technology and sourcing mod- inherent vagueness in determining future strate-erate the relationship of market share and profit- gies and propose replacing “single-point position-ability; thus, firms that make increasing relative ing” of business units with “dispersed positioning”market share a strategic priority may neglect other based on estimated probabilities of applied evalu-important drivers of profitability (Hax & Majluf, ation criteria (Ansoff et al., 1982).1983a). More generally, Armstrong and Green The lack of important variables that influence(2007) reviewed and summarized studies that the process of defining efficient frontiers or man-proved, from their point of view, that pure com- aging multi-business firms at large is frequentlypetitor-oriented objectives, especially increasing addressed (Barksdale & Harris, 1982; Derkinderenmarket share, come at costs that in most cases & Crum, 1984; Proctor & Kitchen, 1993; Wens-reduce rather than increase profitability. ley, 1981), yet only a few scholars propose a con- The final challenge, the superiority of invest- ceptual alternative other than modulating andments in industry growth, was addressed by Hax sophisticating the basic scheme. Devinney andand Majluf (1983a, p. 56) when they asked: “Is Stewart (1988) pointed out that the products (orindustry growth really the only variable that fully SBUs) in a corporate portfolio can be consideredexplains growth opportunities?” This is particu- as alternative investments competing for scarcelarly relevant to the BCG growth-share matrix resources, much like financial products. However,with its emphasis on industry and business growth. the straight application of portfolio models andWensley (1981) argued that there is no empirical instruments that have been designed for financialevidence that expanding market share in rapid- market investments is limited by imperfect mea-growth markets is economically easier—that is, surement and trading, the need to account formore profitable—than in low-growth markets. managerial knowledge and control, external in-Consequently, the assumption that free cash flow vestment alternatives, specific production econo-should be directed from mature or slowly growing mies (especially interdependencies), and moremarkets toward high-growth markets appears to be complex risk-return relationships.unfounded. The authors further emphasized that internal Besides challenging these assumptions, scholars corporate diversification is justified only if eco-frequently criticized the lack of clear definitions, nomically positive interdependencies exist, butcriteria, and metrics, particularly with regard to even in this case these synergies bear costs inthe definition of the relevant markets and SBUs terms of higher risk (Devinney & Stewart, 1988,or the scales and dividing lines of the portfolio p. 1084). They pointed out that products are riskymatrices (Ansoff et al., 1982; Christensen, Coo- assets that are not traded currently but could beper, & de Kluyver, 1981; Day, 1977; Morrison & traded if their external value exceeded the inter-Wensley, 1991). Wind and colleagues (1983) nal value potential. Based on these clarificationsdemonstrated how variations of definitions of ma- they developed, operationalized, and conceptuallytrix dimensions and boundary lines lead to signif- tested a sophisticated multi-product investmenticantly different conclusions and how “[i]t is quite model that built on a theory of traded and non-surprising . . . that most of the portfolio literature traded assets. This theory-based comprehensivehas focused on the selling of specific approaches operational guide for decision making in multi-
  11. 11. 60 Academy of Management Perspectives Novemberbusiness firms offers a promising research direction fied into a limited number of categories withfor advancing CPM. specific strategic recommendations based on only few simplistic criteria (Haspeslagh, 1982;Criticism Regarding Misapplication and Outcomes. Criticism Hax & Majluf, 1983a). An often-cited exampleof traditional CPM instruments highlights prob- is the work of Wind and colleagues (1983), wholems, deficiencies, and errors associated with the compared standardized portfolio models empir-application of CPM methods resulting from (a) ically and reported striking differences in theinadvertent or deliberate misapplication of the classification of 15 SBUs of a large Fortune 500instrument, (b) blind implementation of the pre- multinational industrial firm. They concludedscriptive strategies that follow from the analysis, that “it might be desirable to avoid using aor (c) the general inferiority of strategic conclu- single portfolio model and instead to integratesions from CPM matrices. the various models to take advantage of their First, critics often cite the inadequate appli- unique capabilities” (Wind et al., 1983, p. 98).cation of CPM instruments. Particularly when Assuming that portfolio planning concepts areapplying semi-quantitative, multidimensional consistent with modern finance theory, Slater andmeasures as in the case of the GE/McKinsey Zwirlein (1992) tested whether respective pre-industry attractiveness-business strength ma- scriptions lead to superior corporate performancetrix, the wide scope of interpretation regarding by analyzing reporting data from 129 multi-busi-key elements and measurements creates many ness firms in a seven-year time frame. Their resultsopportunities for pursuing individual interests showed that an investment that is consistent withat the cost of overall corporate objectives (Day, the normative recommendations of the industry1977; Hax & Majluf, 1983b). Managers may attractiveness-business strengths matrix is notchoose just those market definitions, boundary only “not positively associated with creation oflines, and evaluation data that support their shareholder value, it appears to be associated withgeneral beliefs or interests, resulting in a more value destruction” (p. 729). Finally, Armstrongfavorable (or unfavorable) position of the re- and Brodie (1994b) conducted laboratory experi-spective SBU in the grid system. ments with 1,015 subjects from several countries Second, some critics question whether pre- that provided experimental evidence that knowl-scriptive strategies, especially concerning “dog edge and actual application of the BCG matrixbusinesses,” are appropriate and feasible (e.g., has a tendency to mislead individual decisionChristensen et al., 1981). Applying Profit Impact makers into selecting the apparently inferior in-of Market Strategy (PIMS) data, Hambrick and vestment decision. Hence, they concluded: “UntilMacMillan (1982) and Hambrick, MacMillan, contrary evidence is produced, we advise againstand Day (1982) proved empirically that dog busi- using matrix methods under all circumstances”nesses are not worthless to the corporation be- (p. 84).cause they often generate unexpected positivecash flows that can nurture at least one “question Have Scholars Systematically Investigated Actualmark business.” Among others, Seeger (1984) CPM Practices and Implementation?pointed out that unintended misinterpretations Many, even fierce critics of CPM, admit thatcombined with blind adherence to normative inappropriate application of CPM concepts andstrategy recommendations lead to wrong decisions misuse of its matrices is not inherent to the meth-that can jeopardize the whole corporation, just as ods, but the result of how they are actually appliedmuch as deceptive behavior by different interest by management. Thus, one would assume thatgroups. there would be plenty of studies focusing on the Third, a different stream of criticism claims formal and informal processes of managing corpo-that even the correct and unbiased application rate portfolios, and particularly on the practicalof CPM matrices may lead to inferior decisions application of the above-mentioned CPM matri-and value destruction because SBUs are classi- ces to verify and substantiate pitfalls and draw-
  12. 12. 2011 Nippa, Pidun, and Rubner 61backs. However, there are relatively few studies, tant role in the success of CPM approachesand these are mostly outdated survey-based inves- (van der Velten & Ansoff, 1998).tigations. • There is a need to actively seek and acquire The few empirically based analyses of how relevant information based on adequate orga-CPM tools are used within the strategic planning nizational structures and sophisticated manage-processes of corporations (see Figure 1) showed ment processes (van der Velten &essentially that: Ansoff, 1998).• Firms, or their strategists, apply a wide vari- Proposing a Research Agenda for ety of concepts of CPM. While some use Advancing CPM CPM matrices as strategic management tools O ur review has uncovered a broad need for only in special situations, others develop an additional research for advancing corporate integrated portfolio management system portfolio management. Future research on (Bettis & Hall, 1981; van der Velten & An- CPM should examine a rich set of issues. First, we soff, 1998). need to address criticism of existing CPM instru-• The type of diversification a firm is aiming for ments, from disagreement about the relevance of and maintaining has a significant impact on corporate diversification at large as well as from the way CPM is implemented. Portfolio man- gaps in the existing theory. Additionally, we need agement systems are widely used by dominant to investigate the application of CPM methods as vertical and related diversified firms, whereas part of strategic management processes. conglomerates and—rather self-evidently— single-business firms make little or no use of Research Needs Resulting From an Assessment of CPM (Bettis & Hall, 1981). the Validity of CPM Criticism• Too little growth (i.e., performance problems), Strategic decisions are widely believed to have too much growth (i.e., capital constraints), and significant impact on the potential success of an a lack of strategic thinking motivate managers organization. Methods and instruments employed to adopt CPM (Bettis & Hall, 1981; Haspe- by firms to support strategic decision making need slagh, 1982). to consider the inherent uncertainty, dynamism,• Defining appropriate SBUs based on clear cri- and complexity of the strategic setting. Criticizing teria and different perspectives (e.g., headquar- strategic management tools such as CPM matrices ters versus business units) is a key success factor because of oversimplification requires a clear dis- for the efficient use of CPM instruments (Bettis tinction between instrumental simplification and & Hall, 1983). misleading, logical, or methodological oversimpli-• CPM is a valuable concept and/or tool for fication. Ultimately, oversimplification is more a establishing an accepted framework for strate- matter of how managers apply strategic planning gic control and for managing the inherent ten- tools than the tools themselves, as these managers sion of centralization versus decentralization have to decide whether additional information is within multi-business firms (Haspe- necessary to substantiate decisions (Day, 1977; slagh, 1982). van der Velten & Ansoff, 1998). Therefore, schol-• The most important contribution portfolio ars need to develop more sophisticated CPM planning can add is to the management pro- methods that integrate important decision vari- cess. The essence of managing diversity is the ables (e.g., risk, synergies, locus of control in cap- creation in each business of a pattern of influ- ital markets) and moderators (e.g., relatedness of ence that corresponds to the nature of the SBUs, industry characteristics, market institu- business, its competitive position, and its stra- tions) to generate greater insight. tegic mission (Haspeslagh, 1982, p. 73). In addition, scholars need to explore whether• Social dynamics, especially a high degree of CPM relevance differs around the world. Today, mutual trust among managers, play an impor- the economic and competitive environments of
  13. 13. 62 Academy of Management Perspectives Novemberemergent economies may in fact reflect the orig- market diversification generally outperforms cor-inal assumptions about CPM. In contrast, the porate diversification. Even in developed coun-external capital markets in developed countries in tries, multi-business firms prevail. Empirical evi-the last two decades have shown a high degree of dence supports the assumption that relatedefficiency and call for different CPM approaches. diversification offers economic advantages overHowever, if we understand CPM more generally single-business firms. Furthermore, a recent globalas an attempt to substantiate the economically survey on the CPM practices of leading corpora-optimal combination of multiple businesses under tions, which we conducted in response to the lackone corporate umbrella, the question of efficient of such studies, reveals that CPM concepts andcapital allocation is supplemented by other deter- instruments are still widely applied and consideredminants. Therefore, there is the need to under- as highly relevant (Pidun et al., 2011). As a result,stand the impact of CPM in different institutional scholars should investigate the reasons for thesettings. enduring ambiguity and discrepancies in the re- Existing CPM instruments have also been crit- sults of studies of the diversification-performanceicized for giving no guidance regarding the defini- link. Future research on diversification strategiestion of strategic business units as planning objects, should specifically focus on important contingen-and their ambiguity with respect to dimensions, cies already highlighted by some studies of theborder lines, and measures. However, this rather diversification-performance link, such as differentgeneral criticism is as right as it is wrong, as one forms of relatedness, market conditions, or indus-has to take differences of existing CPM instru- try characteristics (Santalo & Becerra, 2008).ments into account. Whereas, for instance, the Suitable studies will contribute to answering onegrowth-share matrix relies mainly on two metrics, of the key questions of strategic management:the industry attractiveness-business strengths ma- what type and degree of diversification is adequatetrix aggregates multiple parameters. Accordingly, under which circumstances? The advancement ofchallenges do not question the validity of the concepts such as synergies, parenting advantage,general concept, but call for attentive application and additional moderators (e.g., ownership struc-and further improvements of existing instruments. ture) can add important building blocks. Moreover, some critics have highlighted theadvantage of not trying to “calculate” uncertain- Need for Theory Developmentties inherent in strategic decision making and The most striking gap we found with regard to theclaim that vagueness is a distinct advantage of scholarly debate about CPM is the lack of con-CPM matrices: “Indeed, the danger would be ceptual approaches, theory-based advancements,greatest if we employed some standardized ap- and development of specific theories in this im-proach to derive market share and therefore portant field of corporate strategy. If corporateavoided directly assessing the alternative interpre- diversification pays off mainly for related diversi-tations” (Wensley, 1982, p. 155). Instead of fication, the concept of synergies or frameworks ofthrowing out the baby with the bathwater, future corporate ownership, such as the parenting advan-research should focus on two things: (a) develop- tage approach (Campbell, Goold, & Alexander,ing instruments that support decision makers in 1995; Campbell & Luchs, 1992), should play abetter defining markets, scales, and multiple map- more prominent role in advancing our under-ping to reduce ambiguity and arbitrariness and (b) standing of CPM.providing managers with guidelines on important Exploring ways to use real options reasoning incontingencies that affect the appropriateness and this special field of corporate strategy is anotherapplicability of these measures. area for further theory development. Assessing and quantifying growth options or holding op-Further Probing the Relevance of CPM Research tions, for example, may help to better capture theOur review of the diversification literature did not strategic value of single business units as part ofproduce unanimous theoretical evidence that the corporate portfolio.
  14. 14. 2011 Nippa, Pidun, and Rubner 63 Another key issue within theory development issue of distinct contingencies. Determining dif-was highlighted by Kale and Singh (2009), who ferent forms of balance and respective measuresargued that managing strategic alliances as a port- may complement this research field.folio is a conceptual approach that is promisingbut unexplored. Specifically, scholars predomi- Understanding and Improvingnantly addressed single alliances and their under- CPM Implementationlying motives, success factors, and required capa- Although misapplication of CPM instruments hasbilities. However, selecting and maintaining a been frequently criticized, scholarly knowledgeportfolio of strategic alliances requires on one about CPM implementation and related strategichand different management skills than managing decision-making processes has been proven to bea single alliance and on the other hand other meager and outdated. It is clearly necessary tomethods and measures than those required for conduct empirical studies that analyze how man-managing a traditional corporate portfolio. agers of multi-business firms manage their corpo- Theoretical models of the portfolio problem rate portfolios. Such studies should investigatebased on risk and return reasoning (e.g., Devinney how satisfied decision makers are with their ap-& Stewart, 1988) offer a promising starting point proaches to CPM and what is needed to fill ap-for developing concepts that integrate corporate parent deficiencies and gaps, including new chal-risk management and corporate strategic planning lenges to CPM that are not covered by existing(for an early attempt see Cardozo & Wind, 1985). concepts and instruments. In addition, analyzingHowever, they have to account for significant possible biases introduced by applying certaindifferences between financial and corporate port- CPM tools as well as highlighting important con-folio characteristics (Devinney, Stewart, & tingencies may help to develop more appropriateShocker, 1985). More specifically, investments in methods. To distinguish good CPM practices frombusinesses are structurally different from invest- less effective ones, future research may comparements in financial markets, leading to technical the CPM approaches and processes of successfullimitations of applying financial portfolio tech- multi-business firms with those of their less suc-niques— especially the capital asset pricing model cessful peers. Such research initiatives should be(Devinney & Stewart, 1988). Financial markets able to identify important key success factors fordefine risk as the systematic deviation of returns. applying corporate portfolio management.Arbitraging unsystematic risks is a fundamental Future research should also focus on organiza-assumption of efficient investment strategies in tional capabilities and management skills that arefinancial markets, but cannot be directly applied required to effectively implement CPM, includingto the variance of accounting-based return met- those that have to be embedded within the busi-rics. Moreover, the risk of a business investment ness units to create value for the corporation atvaries with the product life cycle, which is not large. For example, the field may benefit stronglyfeatured in current financial portfolio techniques. from studies that address organizational ambidex-These challenges and open questions offer inter- terity, to better understand the positive impact onesting future research opportunities. the corporate portfolio of balancing businesses Scholars should also focus on the following that exploit existing capabilities with others thatquestions: What constitutes a good corporate explore new opportunities.portfolio? Should a good portfolio be balancedwith regard to certain factors (e.g., cash flows, asimplied in the original growth-share matrix, or Conclusions Texploitation versus exploration of corporate capa- he objectives of this paper were to appraise thebilities), or is there a target function that should current state of research into corporate portfo-be maximized (as implied in the industry attrac- lio management as a major strategic manage-tiveness-business strength matrix)? It may turn out ment task of multi-business firms, to prove andthat it is not an either/or decision but rather an challenge its value for practitioners and scholars,
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