Managing the Business Portfolio…Unfinished business?

Every organisation is distinctly unique and the fruit of its own particular history. In effect it is the sum of tangible and intangible assets it has accumulated over time, and of the values and aspirations of the people of whom it is comprised. That said, there are a series of problems common to many companies, irrespective of their size, or the sector in which they operate.

I would like to focus here on one such problem, namely, the difficulties which companies encounter in achieving success in each of the individual businesses when running ‘Multi-Businesses’ (i.e. more than two businesses). Obviously, there is not one sole reason for this situation, however, certain common patterns do seem to exist. Without wishing to be exhaustive, I would like to go over some of these.

Firstly, some management teams do not readily identify and distinguish the different business models which affect their portfolio; instead, they replicate their main business model in ‘cookie-cutter’ fashion when designing the others. They are not tuned-in to the particular needs of each individual business, and so they are unable to estimate the timescale of investment recoups, and truly comprehend the attributes valued by clients. Neither are they able to determine and guarantee the calibre and required profile of the workforce, nor the way in which the activity is best organised. All of these questions are of huge importance to their clients and have a negative effect on the business; what’s worse, though, is the damage felt even more acutely when the businesses in the Group are only tenuously connected to each other.

The second reason for failure occurs when a new business is created within the Group, and the business model on which it is founded is ill-informed and based on unrealistic predictions regarding such areas as expected volume and the capacity of the company to branch into new areas. This predicament leaves the company in unfamiliar territory, so to speak, with an unfounded optimism that the levels of activity and profitability will be similar to, or exceed those of their established, ‘familiar’ businesses.

Thirdly, on certain occasions, there is a lack of rigour when it comes to analysing results; in other words, the success of some business units can be used to cover up the worst shortcomings of another. Within the organisation, this can even lead to an attitude of resigned tolerance: conformity with an overall satisfactory result, but failing to seriously tackle the problems behind the underperforming ‘bad egg’.

Finally, though equally important, what I call the ‘junk box’ effect is a common occurrence in Multi-Business organisations. This vicious circle is a kind of race to the bottom whereby the poorly performing unit is dragged down further as resources towards it are reduced. The end result is a deteriorating business staffed by under-qualified or inexperienced workers, operating out of inadequate spaces with obsolete or outdated equipment.

In short, the reasons outlined above give a rough idea as to the kind of obstacles which Multi-Businesses come up against in the quest for success. The question then is obvious: What can we do to avoid these pitfalls?

Simply put, the answer is Strategy. Rigour must be applied when implementing an appropriate business portfolio strategy. It is crucial to begin with a thorough diagnostic of market potential and of the capacity of the organisation in each of its individual businesses, which would then provide the basis of an informed study. Furthermore, such a diagnostic would determine which businesses should receive more or less resources, which businesses the organisation should remain within, and which ones it should withdraw from. The key is to know when to withdraw investment from unpromising ventures, whose business models differ greatly from the main business and whose business requirements cannot be met by the organisation. Reasons could include inadequate knowledge in that area, or because the levels of investment required exceed company resources. In my experience, many companies unfortunately refuse to come to terms with the evidence and make these hard calls.

The business portfolio strategy should, first and foremost, consolidate the vision as a Group. Secondly, it should plan its actions around the harmonious and synergetic development of the businesses as a single entity. It is also hugely beneficial to incorporate some simple indicators to monitor progress vis-à-vis the financial and economic activity of each business. These would help assess the progress of the portfolio and would ascertain whether key milestones had been reached, or not.

In large part, these recommendations are just plain common sense. Nevertheless, experience tells us, that on this occasion at least, the popular saying is very much a propos: “Common sense is the least common of all the senses.”

Beatriz Tejedor

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