Renaissance of the Portfolio

Renaissance of the Portfolio

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Renaissance of the Portfolio

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    • AnthonyMiles
    San Francisco more about Anthony

    • The portfolio concept asserts that the chief executive should make decisive investment choices for the benefit of shareholders.

    • The portfolio concept also stresses the need to keep resources fully employed in the highest-yield areas.

    • The concept works only when competitive advantage is real, and when the competitive nature of the market has been ascertained.


    The current wave of corporate restructuring is bringing about radical changes in many companies' business portfolios. For most this is a positive action, the recognition of a need for focus on areas of competitive strength and greatest opportunity for future growth. For a few it is a retreat to a focus on businesses with secure net cash flow, the aftermath of the pyrrhic victory of successful take-over defense. In either case it is compelling witness to the power of the portfolio concept.

    This set of ideas was developed in the late sixties, proved immensely popular and powerful during the seventies, and then drifted out of the limelight for a variety of reasons in the late seventies and early eighties. It is time to retrieve these ideas before they are lost to the wastebasket of business fads and to reconsider seriously what they still have to contribute.

    What the Portfolio Concept Says

    The basic message is very simple. It begins with the fact that most companies participate in a number of different “businesses,” even if all fall within one general industry category. These businesses were not created equal, are not equal at any point in time, and will never offer equal opportunities to earn high and sustained returns.

    The portfolio concept asserts that one of the primary responsibilities of the chief executive is to make decisive investment choices for the benefit of shareholders. To make choices there must be alternatives. For some companies there are too many, and the challenge is finding a sound rationale for discrimination. For others there are too few, and the challenge for them is creating opportunity. For all there is a need to ensure that every major alternative for a given business has been uncovered and considered before a course of action is chosen.

    Companies must choose on the basis of the closely linked combination of sustainable competitive advantage and potential financial contribution to the company. The former yields the high profits that convert to high net cash flow as growth slows and investment requirements moderate. This in turn creates the high returns and high valuations that satisfy shareholders and protect against take-overs. More positively, high returns and high valuation make raising new capital relatively easy and cheap. They make acquisitions possible. The company has superior ability to repeat the process and invest to grow in pursuit of competitive advantage in new businesses.

    The portfolio concept stresses the critical need to keep resources fully employed in the areas where they have the highest yield or potential yield. This means focusing technical and human resources where the company can gain and hold an edge over competitors that is valued by customers. It means concentrating physical assets where they can be used to create or support unique or at least scarce capability. And it means using equity capital only where there is no safely cheaper alternative.


    Imagine a company following these guidelines, and you have a company that grows, is profitable, earns high returns, has a high valuation, is in full command of its fate, and is very well protected. One of the two basic justifications of potential acquirers – the ability to use existing resources more efficiently or effectively than current management is doing – is all but eliminated.

    All enduring and continuously successful corporations follow this pattern, whether they think of it as a portfolio strategy or not.

    Real Advantage

    Like all great ideas, the portfolio concept is simple – but the application is not. The portfolio concept is a guide to action, a summary of thinking, and not a substitute for detailed analysis and judgment.

    First there is the problem of sustainable competitive advantage. The portfolio concept builds on the observation that superior profitability depends first and foremost on competitive advantage, and that growth is easiest where the market itself is growing. Often superior market share carries with it competitive advantage. Often, but by no means always. Advantage may be based on superior technology, speed of response, quality, attention to specific customer needs, location – many factors that may or may not translate into overall market share leadership.

    What matters is not whether advantage fits some preconception or general rule, but that the company pursues advantages that are truly available to the business, are valued by customers, provide a basis for competitive differentiation, and have lasting power. This almost always requires focus within the marketplace. Thus the search for advantage must be serious, detailed, imaginative, and rigorous. The bigger the company and the further removed the strategist from the business, the more likely it is that opportunity will be overlooked, and the greater the risk of oversimplifying what it will take to succeed.

    The fact is that some markets yield more opportunities for advantage than others, and some none at all. Some companies invest heavily in pursuit of the mirage of a secure future competitive edge. Nowhere is this more likely to end in disappointment than where there is blind faith in the value of market share or in the rewards of technological superiority. The portfolio concept works only when competitive advantage is real, when all the homework has been done, and when the competitive nature and likely future evolution of the market have been ascertained.

    Leveraged buyouts, raiders, and low-laborcost foreign competition have gone a long way toward taking care of another problem: the disadvantaged business, performing poorly and relatively stable, but with no realistic hope of much improvement in its market, competitive fundamentals, or performance. While these have not disappeared, they have in many cases become free-standing special cases, highly leveraged and managed for cash flow – very much along the lines the portfolio concept indicated. Marketplace forces have brought about an appropriate solution where corporate managements were reluctant to act decisively.

    Discovering Growth
    Second, there is the issue of growth. The long period of across-the-board expansion through the sixties and into the seventies spoiled us, and we now think of growth as more elusive. The easy conditions of broad market growth have given way to more localized patterns of growth. These often involve substitution – not just product-for-product substitution, but the substitution of one (better) way of doing business for another. Latent customer needs must be uncovered before they become obvious. Creating and exploiting growth opportunities in these conditions calls for more insight, better preparation, and greater risk taking than before. Growth is often where you make it. Growth opportunities often lie dormant within what at first sight appear to be low growth, “mature” markets. This only heightens the importance of first-class, forward-thinking staff work closely combined with vigorous and decisive management. Building and sustaining a strong portfolio is more difficult now, but more necessary than ever.
    From Strength to Strength

    It has been easy to pick at the portfolio concept as being too simplistic or difficult to interpret in action, or to cavil with one aspect or another of the way it has been discussed or displayed. This is to miss the essential point.

    All exceptional rewards in business derive from that scarce commodity, competitive advantage. To have the right to stay in business a company must earn these rewards, and then keep doing so. Building new positions of advantage on top of old calls for focus of effort and intensity of application. That is what the portfolio teaches and experience confirms.

    Each new turn in the business cycle only strengthens the message.

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