Optimising the corporate portfolio

Corporate portfolio strategy decides which businesses should receive resources, be improved, partnered, acquired, separated or exited. The objective is not a prettier matrix; it is durable group value consistent with legal duties, strategy, stakeholders and execution capacity.

When to use it

Use portfolio tools during corporate strategy, capital allocation and major ownership reviews.

Origins

A famous historical example began when Peter Drucker asked incoming GE leader Jack Welch whether he would enter each business again and what he would do if the answer were no. In the early 1980s, Welch adopted the rule that businesses should be No 1 or No 2 in their markets or be fixed, sold or closed.

Reported market capitalisation increased dramatically over 23 years, but the strategy also cut a quarter of the workforce in its early years and institutionalised forced performance practices. A thirty-fold historical shareholder outcome does not settle causality or justify the human cost. Later reassessment of GE also cautions against treating this era as a timeless template.

What it is

Corporate strategy asks:

• Which businesses deserve scarce resources?
• Which businesses should be added, partnered, separated or divested?
• Which shared capabilities genuinely create more value together than separately?

Portfolio matrices originally used for product-market segments can be applied to businesses:

The Attractiveness/Advantage Matrix (GE/McKinsey) – The attractiveness/advantage matrix (GE/McKinsey)

The Growth/Share Matrix (BCG) – The growth/share matrix (BCG)

The Strategic Condition Matrix (Arthur D. Little) – The strategic condition matrix (Arthur D. Little).

These tools can structure discussion of investment, performance improvement, divestment and entry. They do not calculate the answer. Market attractiveness, competitive position, parenting advantage, cash needs, risk, interdependencies and timing require evidence.

The early 1980s GE ranking rule and its 23-year outcome also show how market boundaries can be manipulated to make a business appear stronger. Define markets independently.