portfolio management

PORTFOLIO MANAGEMENT

2

Designing the Business Portfolio

• The business portfolio is the collection of businesses and products that make up the company.

• The company must:

– analyze its current business portfolio or Strategic Business Units (SBU’s)

– decide which SBU’s should receive more, less, or no investment

– develop growth strategies for adding new products or businesses to the portfolio

DCO-ZZU433-20040728sushPP1

3

BCG Growth Share Matrix

High

Gro

wth

po

ten

tial

Low

Relative market share

Star Problem Child

Cash Cow Dog

The message

•Segment your business portfolio properly •Allocate cash based on combinations of

industry growth and relative market share •Balance your portfolio

What you have to believe

•Cash flow follows relative market share •Growth is a good proxy for industry

attractiveness •Capital is scarce •Business units are discrete and synergies

negligible Low High

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

4

Question Marks • High growth, low share • Build into Stars or phase out • Require cash to hold market share

Stars • High growth & share • Profit potential • May need heavy investment to grow

Cash Cows • Low growth, high share • Established, successful SBU’s •Produce cash

Dogs • Low growth & share • Low profit potential

Relative Market Share High Low

Mar

ket

Gro

wth

Rat

e

Lo

w

H

igh

Analyzing Current SBU’s:

Boston Consulting Group Approach

?


5

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

The McKinsey/GE nine-box matrix

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

6

Business Strength

High

Medium

Low

Strong Average Weak

A

B

C

D

Ind

ust

ry A

ttra

ctiv

en

ess

Analyzing Current SBU’s: GE’s Strategic Business-Planning Grid

7

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

Problems With Matrix Approaches

8

1. Market

Penetration

2. Market

Development

3. Product

Development

4. Diversification

Existing Markets

New Markets

Existing Products

New Products

Product/ Market Expansion Grid

Developing Growth Strategies in the Age of Connectedness

9

Product/ Market Expansion Grid

• Product Development: offering modified or new products to current markets.

– How? New styles, flavors, colors, or modified products.

• Diversification: new products for new markets.

– How? Start up or buy new businesses.

10

Guiding Philosophy

Inputs to Strategic Planners

Marketing’s Role in Strategic Planning

Designs Strategies

Planning Cross-Functional Strategies

11

Target Consumers

Product

Place Price

Promotion

Competitors

Marketing Intermediaries

Publics Suppliers

Demographic- Economic

Environment

Technological- Natural

Environment

Political- Legal

Environment

Social- Cultural

Environment

The Marketing Process

12

Connecting With Customers

• Market Segmentation: determining distinct groups of buyers (segments) with different needs, characteristics, or behavior.

• Market Targeting: evaluating each segment’s attractiveness and selecting one or more segments to enter.

13

Connecting With Customers

Market Positioning: arranging for a product to occupy a clear, distinctive, and desirable place relative to competing products in the minds of target consumers. i.e. Chevy Blazer is “like a rock.”

POSITIONING:

Bentley: “You don’t park it. You position it.”

For what target market is Bentley positioned?

Text page 65

Click or press spacebar to return.

14

Marketing Strategies for Competitive Advantage

Strategy a Company Adopts

Depends on Its Industry Position

SEGMENT ATTRACTIVENESS CRITERIA

SIZE GROWTH COMPETITION SEGMENT SATURATION RISK FIT RELATIONSHIPS WITH

OTHER SEGMENTS PROFITABILITY

MARKET POTENTIAL, CURRENT MARKET PENETRATION

PAST GROWTH, FORECASTS OF TECHNOLOGY CHANGE

BARRIERS TO ENTRY, BARRIERS TO EXIT, POSITION OF COMPETITORS, ABILITY TO RETALIATE

GAPS IN THE MARKET

ECONOMIC, POLITICAL, AND TECHNOLOGICAL

COHERENCE WITH COMPANY’S STRENGTHS AND IMAGE

SYNERGY, COST INTERACTIONS, IMAGE TRANSFERS, CANNIBALIZATION

ENTRY COSTS, MARGIN, LEVELS, RETURN ON INVESTMENT

CRITERIA EXAMPLES OF CONSIDERATIONS

DOMINANT

STRONG

FAVOURABLE

TENABLE

WEAK

BUILD

HOLD

HARVEST

UNACCEPTABLE

EMBRYONIC GROWTH MATURITY DECLINE

PRODUCT LIFE CYCLE

ARTHUR D. LITTLE COMPANY’S MATRIX


17

Portfolio frameworks shifted from competition in product markets to competition for corporate control

Source: Strategy Primer Series – A structured codification of strategy knowledge for McKinsey, Part 8: Portfolio Matrices; German Strategy Practice

Industry attractiveness

Compe-titive posi-tions

Can the BU create value as a standalone enterprise?

So far … Now …

Can the corporate parent create more value from the BU than any other owner?

BU 1

Corporate Center

Corporate center skills

BU linkages

BU 2

BU 3

Promote BU linkages

BU under consideration


18

Toward a new approach to shaping portfolio

Traditional approach (old world) •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

lenses •Vary approach by company

archetypes •More programmatic vs. reactive •Balanced acquisition and exit

approach •Consider broad range of vehicles

Realities of today’s environment

•Greater emphasis on economies of scope (not just scale)

•Globalization •Falling transaction

costs/expanding technology

•Shorter product life cycles

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


19

Synergies captured from each archetype

Discrete, multibusiness • Significantly underperform

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)

Archetype-specific

Shared asset • Outperform discrete,

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)

Integrated go to market • Strongest performers by

significant margin (8x better than discrete)

• Most capital efficient business models (winners with 4x ROIC vs. winners in other segments)

• Winners are much more acquisitive (>2x losers)

Overall • Lowest performers across archetypes execute larger deal on average • Winners tend to be no more active than losers suggesting that quality matters more than activity • Winners tend to be relatively more acquisitive • Divestitures are underutilized as a value creation lever


DCO-ZZU433-20040728sushPP1 20

4 lenses through which to view and define the “shaping unit” for purposes of portfolio decisions

1

2

3

4

Organizational/incentive lens • Units defined according to existing organizational and/or incentive structures • Most appropriate when making

– Assessment of legal/tax/ accounting implications – Judgments as to how to effect portfolio change in an organization

Maturity lens • Business units defined

according to stage of maturity of product in lifecycle

• Most appropriate when making – Moderate diversification

decisions to accelerate growth and perpetuate the corporate existence

– Liberation decisions (sell, spin-off, carve out)

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

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



21

Viewing the portfolio through lenses has important implications for shaping strategy

DISGUISED

EXAMPLE

High

Low

Upside

Low High

Risk

Illustrative findings Implications

Lens 1. Risk/return 2. Capabilities 4. Organizational/incentive 3. S-curve

6 5

4

2

1

3

A B C D

Liberate Joint venture

Infrastructure

Applica-tions

Other Data

Systems

Legacy product

Service

• 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

• Exit low return/high risk cluster • Isolate L/L cluster and exit if

possible

• Portfolio as configured requires 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 market-focused pure play

• Joint venture “D” build capabilities to support growth in “C”

• Disproportionate management 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”)

• Isolate businesses requiring performance vs. growth focus

• Align incentives to capture upside and prepare for potential exit

• Create services sales capability

• Revenues disproportionately driven by mature businesses

• Growth investment in new businesses badly aligned with potential to drive value

• Diversification benefits from applications and systems business

• Refocus growth investment around moderately diversified growth profile

• Continue to scale vs. creating exit options for select mature businesses


22

The SHAPE framework: Building blocks of portfolio design

Aspirations • Aspirations provide unconstrained guidance

for portfolio agenda • Shaping agenda continually iterates between

aspirations and portfolio characteristics

Head room • Companies should actively

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

Synergies • 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

Performance Profile • Unit-by-unit economics

drive the risk/return profile of the portfolio

• The shaping agenda should not be driven to moderate cash flow volatility risks

Enablers • External factors

determine the degrees of freedom available in creating the shaping agenda (e.g., capital markets, deal flow)



23

Crafting a SHAPE agenda: an iterative process

Shape agenda – “The Playbook”

“Left brain” activity (aspirations) “Right brain” activity

1. How high should my aspirations be?

2. What do we want to be?

3. What skills can we leverage?

4. Do I have time to pull this off?

3. Transaction strategy

2. Program/ thematic shaping options

1. Portfolio diagnostic • Synergies • Headroom • Profile • Enablers



24

Research has shown that moderately diversified companies can outperform over long time periods…

Focused

Diversified

Moderately diversified

0

100

200

300

400

500

600

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000

112

225

558

Cumulative excess returns to shareholders* Percent

4

6

10

CAGR Percent



25

6

9

6

. . . and generate above-average growth performance and expectations

* 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

Top quartiles** Top quartiles** All*

Focused

Moderately diversified

Diversified

All*

Growth 1990-2000

Percent

18

19

13

21

22

11

25

19

15

• Moderately diversified 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

10 year EPS growth CAGR

10 year EBITDA growth CAGR


26

Moderate diversification allows companies to transcend multiple S-curves at certain points in their life cycle

• 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

Transition periods

Focus to build capabilities and meet expectations

Moderately diversify to grow

Reshuffle business mix through active trading of portfolio

Continuous loop

Cull under-performing units rapidly Create

multiple strategic options

Enter new businesses where capabilities match discontinuities

Liberate units where net synergies are exhausted



27

Implications and opportunities for any given corporation depend on starting position…

Relative expected long-term growth rate*

Low

* Long-term growth expectations embedded in the stock price relative to that of the industry


Degree of focus (HHI)

High

Low

High

Focused transformation

Moderate diversification

Opportunistic liberation

Focus on delivery

Dynamic portfolio reshaping


28

. . . and requires aggressive management of entity boundary

Definition Negative pattern

Rapid culling

• Rapidly exit when detect early signs of potential failure

• Hold on to under-performing businesses too long

• Divest only when faced with significant market pressure

Early liberation

• Separate from new 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

Active trading

• Actively trade portfolio on a continuous basis and have an M&A program that is balanced over time and programmatic

• Passively manage the portfolio; do not constantly reevaluate M&A and divestiture opportunities

Proactivity

• Actively seek to match ongoing internal scan for capabilities that can be applied in new related areas with external search for discontinuities

• Relentlessly stick to core business or

• Diversify in reaction to under-performance, 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


DCO-ZZU433-20040728sushPP1 29

Corporate portfolio diagnostic can help assess starting point

Performance and prospects

Synergies

Capabilities

•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

Focus

Step

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

4. Identify potential synergies yet to be captured between BUs, on a preliminary basis

• Revenue based • Cost based • Asset based

5. Scan for emerging capabilities and new areas

of expertise potentially applicable to adjacent business spaces

Implications

• Understand at a high level where value is created

• Understand where greatest value creation potential and growth opportunities are likely to be

• 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

Source: Focus is not enough: Shaping the Corporate Portfolio for Sustained Value Creation; Neil Harper, Patrick Viguerie


30

Ratings

• List businesses in portfolio ( use a product driven approach to define businesses)

• Obtain segment operating performance data from annual reports, SEC filings and analyst reports

• For each business create the ROIC tree to identify the key value levers; disaggregate sufficiently until the real sources of performances is reached

• Compute WACC for each BU using peer group unlevered beta of each business; subtract WACC from ROIC to derive the spread

• Assess historical performance in NOPLAT growth and spread for the last five to ten years

Steps Sample end product for one BU

Step 1 – Evaluate BU performance at high level

ROIC

Pre tax ROIC

1 – tax rate

Operating margin

SG&A

Capital turnover

COGS/ revenue

Spread

WACC

NOPLAT growth

Rating: Rationale: High operating margins coupled with sustained revenue growth for the past ten years

High growth, highly profitable business Very low growth, unprofitable business

WORK IN PROGRESS



31

Step 2 – Identify S-curve positions of BUs in business mix evolution

Stream-line

Change business mix

Position for growth

• Acquired Auxton computers and Vanguard Technologies to grow the customer care and billing business (1983)

• Formed telemarketing division (1989)

• Spun off telemarketing, customer care, and billing business after fully exploiting the synergies (1998)

EBITDA CAGR Excess returns

1983-97 Proactive search

1% 4%

1998-1999 Early liberation

-19% 35%

• Formed a JV with AT&T to provide wireless services (1998)

• Acquired IXC Communications to enter the broadband business (1999)

-

• Identify the major transition periods in corporate scope during the last decade

• Measure the EBITDA growth and excess returns relative to the industry for each major period

• Identify the major business mix evolution events in each period

• Plot each BU’s life cycle stage on company S-curve for each period

• Characterize each period with the dominant scope management characteristics demonstrated during the period

Steps

Local phone ($ 590 M)

Customer care and billing ($ 288M)

Telemarketing ($ 85M)

Local phone ($ 718 M)

Wireless ($ 91 M)

1991 1998

Moderately diversified into non-telephony

Streamlined businesses

Customer care and billing ($ 548M) Telemarketing

($ 448M)

BROADWING

Sample end product

Analysis highlights comparative performance for every corporate

scope period determined by where each BU stood in its life

stage


WORK IN PROGRESS


32

Low uncertainty, high expected growth business High uncertainty, low expected growth business

Ratings

• Obtain expected segment operating performance data from analyst reports

• Interview industry experts to check reasonableness of forecasts and make necessary adjustments

• For each business, create the expected ROIC tree to identify the key value levers; disaggregate sufficiently until the real sources of performances is reached

• Compute WACC for each BU using peer group unlevered beta of each business; subtract WACC from ROIC to derive the spread

• Assess expected performance in NOPLAT growth and spread for the foreseeable future years; rate overall attractiveness

Steps Sample end product for one BU

Step 3 – Evaluate growth potential and future profitability of BUs

Expected ROIC

Pre tax ROIC

1 – tax rate

Operating margin

Capital turnover

Rating: Rationale: High expected ROIC due to capital turnover improvements coupled with with high growth relative to the industry

Spread

NOPLAT growth

WACC

BU Market share

Industry growth

Relative growth

Riskiness

1 3% Medium High Low 2 15% High Low High 3 30% Low Low Low



33

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

Step 4 – Identify potential synergies yet to be captured amongst BUs

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

Ratings

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

Overall attractiveness

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)

Consolidate for higher prioritization (change in business mix)

WORK IN PROGRESS



34

Informed point of view on emerging technologies and business models: major players, opportunities and barriers, likely success, and threats/opportunities to core businesses

Ratings

New technologies and business models

Sample end product Steps

• Identify who in organization is responsible for systematic scanning of periphery (if possible, estimate headcount relative to competitors).

• Interview strategic planning, BU heads, to assess degree of knowledge of periphery

– Emerging technologies and business models

– Major players in each technology/business

– Opportunities and risks/barriers to success

– Competitor bets

– Expected success

– Assessment of threats/opportunities posed to core businesses

• Benchmark client view against McKinsey practice experts, literature searches, industry and analyst reports*

• Tap employees who are alumni of competitors

1 2 3 4 5

Players

A

B

C

D

Opportunities/ barriers

Competitor bets

Likelihood of success

Threats/ opportunities to core

* For complete methodology of periphery scan, see Creative Destruction EM Guide to Creation

Ratings based on ability to complete matrix below

Minimal understanding of emerging technologies or business models and how they impact core businesses

Step 5 – Assess the capabilities for scanning the periphery


WORK IN PROGRESS


35

Exit/ownership restructuring options should follow from this systematic diagnostic

* 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

control; c) greater management focus; d) improved management incentivization

Greater value to another

player?

Consider sale

Keep and improve

IPO possible?

Consider carve out then spin-off***

Material synergies with

other BUs?*

Value of mkt-based

mgmt incentives high?

Consider tracking stock

Keep

No

Yes

No No No

Yes

Yes Yes Yes

No

Consider full spin-off***

Value with

improvement** >current

value

Can be achieved by

current mgmt?


WORK IN PROGRESS


36

* 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”

Source: Proactive Divestiture: Selling ‘Good’ Businesses, Lee Dranikoff, Tim Koller, Sam Lee, Becca O’Brien, Antoon Schneider, Brian Williams

Value of $100 invested from Jan 1990-Dec 1999*

$353

$459

Passive portfolios

Active portfolios

Average number of transactions**

2 15

Companies that actively manage their portfolios create more value than those that do not

30%


37

A majority of divestitures, which are an important part of active portfolio management, are only made in reaction to pressure

Reactive

Pressure due to corporate parent underperformance (35%)

Pressure due to business unit underperformance – or both parent and business unit (41%)

Proactive divestitures for strategic reasons with no evidence of performance decline

* Based on analyst reports, press articles and financial analysis of all divestitures mentioned in the WSJ during 4 one-month periods


Proactive vs. reactive divestitures* % of deals

100% = 49

Proactive divestitures probably even fewer; benefit of the doubt was

given when no evidence of pressure was found

Proactive

76

24


38

Thus, most divestiture decisions are delayed for a significant period


Timeliness of reactive divestitures % of deals

76%

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

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

100% = 37

65

35


39

Hanging on to business units too long can impose three types of costs on the corporation

Hidden costs of ownership imposed by BU on its parent

Costs imposed by wrong parent on BU

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

Value decline due to unmet expectations

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



40

Over time, business units impose substantial but largely hidden costs on their parent

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

1. Culture and skill

Explanation

Stable operating units, while potentially important for cash management, can remove the impetus to create; without an “emergency,” incremental improvements triumph over substantial change

2. Imperative to create

Scarce management time can be diverted into operating a business unit that is not part of the future of the company

3. Management time

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

Potential costs



41

Potential types of sales Rationale

Selling cash cows By definition, cash cows have high market shares in stable industries

As a result, they have low market headroom and low ability to surprise the market

They also may present substantial downside risk if market share unexpectedly declines

And they are likely to impose hidden costs of ownership on 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

As with cash cows, high-market-share businesses have low market headroom and may present a risk if market share unexpectedly declines

Selling business even if industry has significant remaining growth potential

If growth is positive, but declining, the market may be disappointed, leading to lower shareholder returns

Sell profitable businesses If a business is profitable but imposes hidden costs on the

parent, it may require sale

Due to these factors, selling ‘good’ businesses should be considered in managing the company’s portfolio



42

An ongoing proactive divestiture program requires 3 important elements

Comments

• 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

• 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 to make the case for divestitures at every level of the organization, i.e., board, top management, and operating management

Simple communication strategy

Forcing mechanisms

Talent



43

Proactive divestiture decision tree: 3 steps to divesting a business

Divestiture candidates

Exit feasibility, method and timing

Overall portfolio assessment

2. Would what’s left make sense? ?

1.

Which businesses should be divested?

?

?

? ? ? ?

?

?

3. Can it be done, how and when?

X



44

In summary, top performers in portfolio management excel in a specific set of dimensions

Define an appropriate level of portfolio complexity 1

2

3

4

Best practices

Leverage truly distinctive corporate competencies and synergies

Selectively build growth opportunities

Proactively trade the portfolio and re-allocate resources

Source: New Frontiers in Portfolio Management, Abengoeachea, et. al.

GE BUSINESS SCREEN CELLS - STRATEGIES

STRATEGY

BUSINESS

PROSPECTS

COMPETITIVE

COMPATIBILITY

RECOMMENDED STRATEGY

LEADER

TRY HARDER

DOUBLE OR QUIT

GROWTH

CUSTODIAL

PHASE WITHDRAWAL

CASH GENERATION

DISINVEST

HIGH

HIGH

HIGH

AVERAGE

AVERAGE

LOW

LOW

LOW

AVERAGE

MEDIUM

WEAK

AVERAGE STRONG

AVERAGE

AVERAGE

STRONG

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

LEADER TRY HARDER

DOUBLE or QUIT

LEADER GROWTH

CUSTODIAL HASED WITHDRAWAL

CASH GENERATION

PHASED WITHDRAWAL

DISINVEST ATTRACTIVE

AVERAGE

ATTRACTIVE

STRONG AVERAGE WEAK

UNITS COMPETITOR POSITION

SHELL’S DIRECTIONAL POLICY MATRIX

SEC

TOR

AL

PR

OSP

ECTS

portfolio management

Business

selling good businesses

moderately diversified companies

analyzing current sbus

low market headroom

patrick viguerie dco

business unit

portfolio management

business portfolio