The Care and Feeding of Plus-Sized Portfolios

Recently, I watched an interview with Jeff Immelt, the CEO of General Electric, as he talked about the sale of GE's plastics unit to Saudi Basic Industries for $11.6 billion. On more than one occasion during the brief interview, Immelt talked about the sale as part of a move to rebalance the company's portfolio. In this instance, GE was moving away from a struggling, low-growth, plastics business to focus on higher-growth areas.

GE is not alone in their effort to rebalance their portfolio. Some do it as GE did, by exiting slow-growth or poorly performing businesses, while some aim to get into faster-growing or synergistic businesses. And, in some instances, companies do both.

Pepsi, for example, exited and entered businesses as they shed capital-intensive businesses such as restaurants (Pizza Hut, Taco Bell, etc.) and entered high-growth segments like sports drinks and bottled water and bought Quaker Oats, where they could leverage their distribution assets and competencies. News Corporation sought a similar portfolio shift by entering the high-growth, buzzworthy, social networking arena through their purchase of MySpace. While the postmortem on the Pepsi rebalancing has been positive, the verdict remains out on the News Corporation-MySpace pairing.

And then there are those instances where the rebalancing does not pan out as planned, e.g., AOL-Time Warner. Of course, there are numerous other examples of organizations attempting such "portfolio repositioning" -- some of which go well and some of which don't go so well. For businesspeople, strategies to rebalance the portfolio or reposition for growth do have an innate allure because they sound sexy and transformational and visionary.

And while this type of overall portfolio reexamination can make sense at times, it is merely one lever that companies have at their disposal to use for growth. But it is worth considering whether this is the best way to achieve an organization's growth objectives. By disaggregating the components of growth, it is possible to see and ascertain which dimensions of growth may be the most worthwhile to pursue.

Let us start by discussing market growth as well as inorganic/M&A growth. Some things should be readily apparent:

1. Market growth in the near term is really not under an organization's control. If you happen to be in an industry growing at double-digit rates, good for you. Conversely, if you are in an industry that is growing at a slow rate or even shrinking, too bad. The short of it in either case is that there is not much you can do in the immediate term to juice market growth. For example, the acquisition of MySpace will take some time to become material to News Corporation. So although you can think of entering segments that are growing faster, this rebalancing of your company's portfolio takes time. While sometimes critical, this is inherently risky and often expensive, as building or buying growth is not often cheap.

2. Inorganic/M&A growth is a strategy that some organizations and industries have pursued successfully to grow and that often accompanies portfolio rebalancing strategies. Overall, this is a strategy with a checkered past. Numerous studies and anecdotal evidence point to the uncertain results of M&As. While investment bankers may push M&As today only to later deconstruct those larger companies to "unlock value," this strategy to grow is far from a given when pursuing growth and profitability over the long term.

With two of the four levers (market growth and inorganic growth) not easy to control in the short term and far from conclusively successful, the two remaining levers focused on controlling attrition and growing organically are worth examination (see "The Levers of Revenue & Income Growth").

While these are not as glamorous as M&As or "positioning for growth" strategies, organizations that actively and appropriately manage these two dimensions can and do consistently grow and outperform their competition. Success in managing these two levers is a function of where a company allocates its resources. As a result, organizations that actively manage their resource allocation maximize their ability to deliver sustained growth. The other consequence of better resource allocation is that it gives shape to your true strategy, as strategy really is a function of where resources are allocated (and not a function of large strategic planning binders, PowerPoint presentations, or strategy platitudes by managers). In order to actively manage and optimize resource allocation, organizations should leverage an increasingly favored and impactful discipline known as corporate portfolio management.

Already, several companies have begun to think about -- and some have actually begun to deploy -- corporate portfolio management. However, as with many management practices that become en vogue, a host of consultants and software providers have also emerged -- many of questionable value. Just Google the term "corporate portfolio management," and you get almost 16,000 responses. That's a lot of information to sift through.