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Managing the Corporate Portfolio
To maximize value, a company must determine to what extent its current portfolio of businesses will help it meet its aspirations. Building a portfolio is not just a financial exercise, since shareholders can buy and sell shares of various companies to get the reward/risk tradeoff they prefer. Instead, it is a combination of exploiting the strategic advantages of the corporation, relentlessly looking for performance improvement opportunities, and managing a growth pipeline. Three perspectives on portfolio management follow.
Corporate Theme Analysis
As spin-offs and divestitures become more common, companies have to justify why they retain ownership of their component businesses. Researchers still debate whether the majority of multibusiness companies add value
2 For more on how to reverse-engineer a company's share price, see T. Koller and R. Dobbs, "The Expectations Treadmill," McKinsey Quarterly, vol. 3 (1998), pp. 32-43.
Exhibit 6.2 Seven Recurring Corporate Themes
The Industry Shaper repeatedly spots discontinuities in industries and acts pre-emptively to shape the emerging new industry to its own advantage.
The Deal Maker systematically beats the market through its superior skill at spotting and executing deals. This could either be through superior insight into the inherent value of companies or through superior insight into specific industries.
The Scarce Asset Allocator efficiently allocates capital, cash, time, and talent across multiple business units.
The Skill Replicator repeatedly transfers particular skills across business units. The skill of lateral transfer is a distinct skill from the functional skill itself.
The Performance Manager has proven skills at instilling a high performance ethic with matching incentives and MIS processes across multiple business units.
The Talent Agency institutionalizes a model for attracting, retaining, and developing talent that is truly distinctive relative to all others in the industry.
The Growth Asset Attractor possesses a proven and sustained record of consistently leading in innovation in multiple businesses.
above the sum of their parts. Y et there are some multibusiness companies where the corporate center consistently brings out the best from a diverse set of businesses. We have identified seven corporate themes, or ways in which the corporate center can add value, as listed in Exhibit 6.2. Successful multibusiness companies create value across their component businesses by being distinctive in at least one or two of these themes. A company analyzing its portfolio should examine how well it executes each theme, and if it is distinctive in none, determine which theme is most appropriate for its businesses and develop the relevant skills.
Outside-In Restructuring Analysis
In Chapter 2, Ralph Demsky used a hexagon framework to examine potential value improvements at the EG Corporation. The hexagon helps quantify the impact of value creation levers: investor communication; internal improvements; disposals; growth opportunities (whether organic or through acquisitions), and financial engineering. Using the hexagon can help management understand how much value to expect from restructuring and where the biggest opportunities lie.
Three Horizon Analysis
An analysis of companies with sustained above-average growth indicates that they manage their business portfolios across three horizons.3 These
3 M. Baghai, S. Coley, and D. White, The Alchemy of Growth: Kickstarting and Sustaining Growth in Your Company (London: Orion Business, 1999).
Exhibit 6.3 Three Horizons of Growth
companies ensure that their portfolios always include businesses in all three of the stages of development depicted in Exhibit 6.3:
1. Horizon 1 includes current core businesses, which generally account for the greatest part of current profits and cash flow.
2. Horizon 2 includes emerging opportunities, the "rising star" businesses of the company that already have customers and revenues, even if they do not yet generate positive cash flow.
3. Horizon 3 includes future options, which are opportunities where initial activity has already begun, be it a pilot project, minority stake, or memorandum of understanding.
Since value-based management is sometimes faulted for placing too little stress on profitable growth, doing a growth horizon analysis will ensure a balanced viewpoint on potential sources of value creation.
Combining these three perspectives helps managers put traditional value-based management activities into the broader context of creating value for the firm. Sometimes restructuring the portfolio to realign it with the overarching corporate strategy or to begin building growth businesses has much greater potential than improving the performance in any one business. If the portfolio is in reasonably good shape, then it is useful to look into the organizational and performance management dimensions of making value happen.