Portfolio Management

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

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

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

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


5

Source: Corporate Strategy – Old and New Perspectives, Charles Roxburgh

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

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

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

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

Planning Cross-Functional Strategies

Marketing’s Role in Strategic Planning

Guiding
Philosophy

Inputs to
Strategic
Planners

Designs
Strategies

10

The Marketing Process
DemographicEconomic
Environment

TechnologicalNatural
Environment

Marketing
Intermediaries

Product
Suppliers

Place

Target
Consumers

Price

Publics

Promotion

PoliticalLegal
Environment

Competitors

SocialCultural
Environment

11

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

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

Marketing Strategies for Competitive
Advantage

Strategy a Company
Adopts
Depends on Its
Industry Position

14

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

ARTHUR D. LITTLE COMPANY’S MATRIX

DOMINANT
HARVEST
HOLD

STRONG
BUILD

FAVOURABLE

TENABLE
UNACCEPTABLE

WEAK

EMBRYONIC

GROWTH

MATURITY

PRODUCT LIFE CYCLE

DECLINE

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

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

18

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

19

Source: Emerging Thoughts on Shaping the Corporate Portfolio; David Dorton, Patrick Viguerie

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
– 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
– Moderate diversification
decisions to accelerate
growth and perpetuate the
corporate existence
– Liberation decisions
(sell, spin-off, carve out)

4

20


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


• 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

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


22


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

23

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

Source: Emerging Thoughts on

24

Shaping the Corporate Portfolio; David Dorton, Patrick Viguerie

Diversified
Moderately
diversified

. . . 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

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

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


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

High

. . . 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


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


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

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

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

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

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


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

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
DCO-ZZU433core
34
20040728sushPP1
* For complete methodology of periphery scan, see Creative Destruction EM Guide to Creation



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


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

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


37

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


38


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
20040728sushPP1

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


40


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


41


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
20040728sushPP1

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

2.
Would what’s left
make sense?

Overall portfolio
assessment
43


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

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

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

Portfolio Management

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