Portfolio Management
The business that make up a portfolio. See Multi-business firms Used with Relatedness and Growth to form a Corporate Strategy See Product Lifecycle Management
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.
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.
econd, 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.
