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Managing business portfolios in German companies
Managing Business Portfolios in German Companies* Thorsten van der Velten and H. Igor Ansoff
IN AN ATTEMPT
TO IMPROVE the performance of the corporate office, top managers have been searching for appropriate methods and techniques to cope with the problems of managing business portfolios. The speed of change and the unpredictability of the business environment has made the management of business portfolio increasingly complex. Also the concept of corporate strategy for diversified firms evolved through several stages, each offering solutions for a different aspect of the problem and, so, adding complexity to the problem of portfolio management.’
Historical Portfolios
Development
of Business
After World War II, many corporate offices were established. The growing size of the typical business firmwhich began to operate in different product markets and diverse geographic locations-resulted in the need for decentralization and delegation of decisionmaking authority to middle management. To avoid overload at the center, divisional structures were introduced that separated corporate strategy from business-unit decisions. The phenomenal success of divisionalization in firms such as General Motors, Du Pont, Standard Oil, and Sears made divisional structures extremely popular.’ Later, these divisionalized firms encountered decreasing growth and profitability in their traditional businesses. To counter slowing growth
* PhD dissertation: The relationships between corporate general management behavior and the success of strategic portfolio management in German business firms. Unpublished Doctoral Dissertation, United States International University, San Diego, USA (1997).
Pergamon PII: s0024-6301(99)00098-3
study analyzes the behavior of top I This managers in managing their firms’ business
portfolios. A review of the existing literature provides a conceptual framework for a research design combining quantitative and qualitative techniques. Data were collected through interviews with 35 top managers of well-known German business firms and the findings of this study translated into guidelines for managers. The results suggest that successful top managers should be concerned with the social relationships and management processes within the corporate office, as well as with their use of management concepts in managing the business portfolio. 8 1998 Elsevier Science Ltd. All rights reserved
rates-and to spread business risks across different sectors-many firms started to diversify. Rather than improving the performance in their original, core businesses, they entered international markets, introduced new technologies and developed new products and servicese3 In the next phase, top managers realized that they lacked the necessary techniques to manage a portfolio of different businesses. The firm’s corporate office had to make decisions regarding a variety of business environments, various time horizons, competitive positions, and risk profiles. It was impossible to apply common systems and procedures across a wide variety of business operations and still achieve a high performance. To facilitate resource allocation across different organizational units, major corporations and Long Range Planning, Vol. 31, No. 6, pp. 879 to 885, 1998 0 1998 Elsevier Science Ltd. All rights reserved Printed in Great Britain 0024-6301/98 $19.00+0.00
consultancies introduced a new analytical technique: Business Portfolio Analysis. General Electric, the Boston Consulting Group, McKinsey, and others developed matrices in many versions that helped top managers to compare individual businesses and classify them in terms of their competitive position and market attractiveness. These planning methods, however, were heavily criticized. Corporate raiders began to acquire diversified companies to demerge them into smaller operations, and they realized good profits by selling them as separate businesses. The raison d’6tre of the corporate office, i.e., to use portfolio management to guide and control a large number of different businesses, was challenged and the fashion for diversification was reversed. Divestment from unrelated businesses, corporate restructuring, and a focus on core competencies became the central issues for management. But, despite this move away from broad-scale diversification, some of the most successful multinational corporations continue to do business in many different business areas. These companies prove that portfolio management in diversified companies can be successful because it provides a firm with a spread of risk and a range of business opportunities. Today top managers are still searching for approaches which will enable them to manage a diversified business successfully.
Past Prescriptions The management of business portfolios is still a central area of research in strategic management. Studies of diversification and the diversity of business port-
folios constitute “one of the unique cores of the growing literature in this relatively young discipline.“4 Five years before Chandler’ published his seminal works on diversified companies, Ansoff’ developed his proposals for diversification strategies. Following these groundbreaking efforts, diversity and other aspects of portfolio management have been studied by numerous researchers from a variety of academic fields and disciplines covering a wide range of research questions and issues. However, the widespread criticism of existing studies on portfolio management suggests that there is a need for a common theory. As practising managers frequently point out, a synthesis of diverse streams of research on portfolio management requires a multi-disciplinary perspective.
Success in Managing Portfolios
Business
This study was conducted to identify those top management behaviors that lead to success in managing a firm’s business portfolio. In particular, the following question was asked: ‘What is the relationship between the behavior of top managers and their success in managing a firm’s business portfolio?”
Table 1 shows how this issue was divided into a number of detailed research questions. By comparing successful with less successful approaches to managing a firm’s business portfolio, we tried to identify those behaviors of top managers which can be associated with the success or failure in managing the firm’s portfolio of businesses. The qualitative research of this study consisted of
TABLE1. The rehselearch quwtions What is the relationship between the following features of Top Management (I) Trust for one another and the performance of the corporate office? (2) Group decision-making and the performance of the corporate office? (3) Search for relevant strategic information and the performance of the corporate office? (4) Use of relevant information and the performance of the corporate office? (5) Participation in the development and analysis of decision alternatives and the performance of the corporate office? and their interest in establishing synergies among the firm’s SBUs, the (6) Approach to portfolio management, turbulence levels of SBAs in the firm’s portfolio, the diversity in SBA performance prospects, and the performance of the corporate office? (7) Sharing of a corporate vision and the performance of the corporate office? (8) Commitment to an explicit corporate mission and the performance of the corporate office? (9) Commitment to explicit corporate objectives and the performance of the corporate office? (IO) Commitment to an explicit corporate strategy and the performance of the corporate office? (11) The impact of all these factors on the firm’s performance?
Managing
Business
Portfolios
in German
Companies
TABLE2. Business areas in the corporate portfolio Smallest contribution of an individual business area to firm’s sales Largest contribution of an individual business area to firm’s sales Average contribution of an individual business area to firm’s sales Smallest number of business areas in a portfolio Largest number of business areas in a portfolio Average number of business areas in a portfolio
personal interviews with 35 top managers of large and medium-sized German corporations in which the managers were asked to describe their behaviors in managing a firm’s business portfolio. Upon completion of the interviews, content analysis was used to categorize the responses by top managers, and qualitative data were prepared for statistical analyses to test our hypotheses.
The Findings Table 2 describes the number and size of businesses in the portfolios which we analyzed. The practical findings of this study fall into four distinct classes: top managers’ social dynamics and management processes, their approaches to portfolio management as well as the use of diverse management concepts in managing a business portfolio.
Social Dynamics The results of the study indicate that a high level of mutual trust among top managers is essential for their success in managing a firm’s business portfolio. In numerous interviews, many of the more successful top managers stressed the importance of trusting one another within the corporate office and even the entire firm. Mutual trust was considered essential for an organization to achieve above-average performance. The top manager has to make sure that a sufficient level of trust among top managers exists and that the group can function as a team. The foremost concern of every senior manager must be the performance of the corporation as a whole rather than the success of an individual division and/or function for which he/she is personally responsible. However, some top managers emphasized that too much trust could have negative effects too. They feared that a high level of trust could result in inferior performance of the corporate office due to the lack of a critical dialogue among top managers. These managers stressed the need to keep a balance between trust and harmony among top managers on one side and constructive criticism within the corporate office on the other side. Yet, in most of the cases where top managers did not believe that a high level
1% 38% 9% 5 300 58
of mutual trust was critical to their firm’s success, the later analyses revealed that these companies were rather unsuccessful in managing their business portfolios. In addition to the trust component, the process of group decision-making within the top management team must be considered a major aspect of the social dynamics among top managers. While earlier studies provided inconclusive results, the findings of this study indicate that top managers who attempt to reach a consensus within the corporate office, but, failing consensus, delegate decision-making power to the top manager, are the most successful. They perform much better in managing their firms’ business portfolios than those managers who either make decisions only by absolute consensus within their management team, or let the top manager make final decisions alone without attempting to reach a consensus. To overcome these difficulties of decision-making within a group that consists of individuals with different responsibilities, opinions, backgrounds, and preferences, successful top managers aim for unanimous decision-making. Yet, they also recognize the necessity to make a decision when a consensus cannot be reached. In these cases, top managers rely on the firm’s CEO to make sure that a decision is being made. As the “primus inter pares”, i.e., the first among equals, a firm’s top manager must have the necessary charisma, competence, and experience to coordinate and integrate the-sometimes conflicting-interests of individual senior managers.
Management
Processes
Among the numerous management processes of top managers, the acquisition and utilization of information as well as the development and analysis of decision alternatives are the most critical elements for the success of a firm’s portfolio management. The findings of this study show that top managers who proactively search for strategic information relevant to their decision-making are more successful in managing their firm’s business portfolio than managers who are rather passive in data-gathering activities. The study’s empirical results indicate that top managers who are very actively involved in the acquisition of novel information exhibit higher perLong Range Planning Vol. 31
December 1998
formance than those managers who wait for new information to have an impact on the firm. Thus, top managers must search for information on a continuous and systematic process. They themselves have to acquire information both external and internal to the organization, and integrate different types of information from a variety of sources. Successful top managers must have an “ear on the marthe behaviors of ket”; they have to understand numerous, diverse groups, such as customers, competitors and employees. Therefore, they cannot rely on one source of information alone and have to utilize numerous means of acquiring information. The personal involvement of top managers in scanning activities is crucial to the success of a firm. Furthermore, top managers have to actively participate in the acquisition of information since they use specific models to decide which type of information is relevant to their decision-making. They cannot expect middle management or staff personnel to always know what kind of information is needed. Although a company’s scanning and planning units can help in data-gathering activities, the information they provide must be continuously tested for accuand relevance to a particular racy, completeness, decision. In addition to top managers’ acquisition and utilization of information, top management’s early and active engagement in the policy-making process is essential to a firm’s success in managing its business portfolio. Top managers must proactively participate in the development and analysis of decision alternatives. They should not make final decisions by selecting one of several alternatives they let staff personnel develop. Since top managers would not know whether all relevant facts were considered in preparing the alternatives, they cannot expect to achieve superior performance in managing a firm’s business portfolio by letting middle management or staff personnel do the groundwork, and then only picking the alternative top management likes best. It is a wrong assumption to believe that for a top manager to be efficient, he/she can delegate all preparatory work to middle management or staff personnel without further control. Even in highly decentralized corporations, with strategic business units (SBUs) all over the world, offering numerous products and dealing with many different customers, top managers cannot exclusively rely on division managers and department heads to propose several alternate feasible solutions. Although top management cannot be involved in all the details of a decision, they must always make sure all relevant facts were considered in analyzing and developing decision alternatives. Strategic Portfolio Management The planning and control influence which agers exert on the strategic decision-making Managing Business
Portfolios
top manof indi-
in German Companies
vidual SBUs can be considered the core process of managing a firm’s business portfolio. Top management’s role in coordinating and controlling the activities of several divisions and departments is contingent upon certain conditions. In particular, the appropriateness of an approach to strategically manage a firm’s business portfolio depends on: whether top managers are interested in establishing synergies among the firm’s SBUs; whether all business areas in the firm’s portfolio are at extrapolative levels of environmental turbulence, i.e., whether trends in these business areas are somewhat predictable; and whether all business areas in the firm’s portfolio offer comparable performance prospects in terms of growth and profitability. There are three basically different approaches of strategic portfolio management available to top managers. Management by exception is described as the approach in which SBU managers are responsible for the development and implementation of their own strategic plans, as long as they produce satisfactory financial results. Top managers intervene only when an SBUs results turn unsatisfactory. This approach works best when all of the following conditions are met: 1. all business areas offer comparable performance prospects; 2. top management is not interested in establishing synergies among the firm’s SBUs; and 3. it is safe to assume that no major surprises will occur in the firms’ business areas. Using the portfolio balancing approach, top managers periodically examine the performance forecasts of individual SBUs. Additional resources are allocated to promising business areas, whereas from areas, which will become unprofitable, is divested. Portfolio balancing has to replace management by exception when the firm’s business areas do not offer comparable growth and profitability prospects. Portfolio optimization is the third and most complex way to manage a business portfolio. Following this approach, top managers must be closely involved with SBU managers in the formulation of strategies and plans. Typically, cooperation and coordination among SBUs is encouraged, and-on major decisions-SBU managers have to seek a consensus with the corporate office and other affected units. The role of top management is to help the SBUs arrive at better strategies and to develop new businesses for the corporate portfolio. Furthermore, top managers formulate a corporate strategy specifying the evolution of the firm’s business portfolio over time; the addition of potentially new business areas as well as the possible divestment from others have to be
delineated. when:
This
approach
is the most
appropriate
top managers are not willing to accept the sum total of the business areas’ prospects as the corporate goal; top managers seek synergies among the firm’s SBUs; and the environment of the firm’s business areas is unpredictable.
Management
Concepts
There is a vast literature on corporate vision and strategies, mission statements, goals and objectives. Numerous companies employ these concepts in their daily operations. Yet no consistent terminology has evolved, and the benefits of these concepts in managing a firm’s business portfolio is not clear. This study examined the value of these management concepts in portfolio management by analyzing four elements. The corporate vision was defined as top shared description of the firm’s future managers’ environment, i.e., their grasp of the central issues which the firm must address in the future. A corporate mission was considered an explicit statement of the scope of the firm’s activities in terms of customer types, geographic regions, and societal needs served by the firm as well as technologies used by the firm to serve these needs. Corporate objectives were described as explicit yardsticks by which the present and future performance of the firm as a whole was measured; i.e., the criteria by which a firm’s success or failure was determined. Finally, a corporate strategy was defined as an explicit statement of the logic of evolution of markets, products, services, and technologies of the firm as a whole. The results of this study indicate a positive relationship between the degree to which top managers share
a description of the future environment and theirperformance in managing a firm’s SBA portfolio. The better top managers address the central issues which their firms will have to address in the future, the more successful they are in managing a firm’s business portfolio. Annual or bi-annual meetings of managers from all different hierarchical levels-discussing potential future developments in the firm’s environmentseem to be necessary to jointly develop a corporate vision which can help top management in managing a business portfolio.
Top managers must be committed to an explicit corporate mission. The higher the degree of top managers’ commitment to an explicit statement defining the scope of the firm’s activities in terms of customer types, geographic regions, and societal needs served by the firm as well as technologies used by the firm to serve these needs, the more successful they are in managing a business portfolio. For the performance of any diversified firm, it is crucial to determine what
the company stands for, who the principal customers are, and where the primary markets are. Although commitment to a corporate mission statement is difficult to gain-especially since it is virtually impossible to measure-it is essential for a firm’s success in managing a business portfolio.
Top managers must be committed to explicit yardsticks by which the present and future performance of the firm as a whole is measured. Both corporate objectives and business unit goals are equally important in managing a diversified form. To rely on SBU objectives alone, and/or to consider the sum of these as the objectives for the corporation as a whole, results in inferior performance. An iterative “top-down” and “bottom-up” negotiation process-determining corporate and SBU objectives-is necessary to gain commitment, benefit from the advantages of explicitly yardsticks, and be more successful in managing the firm’s business portfolio.
Top managers must be committed to an explicit corporate strategy. A high degree of commitment to a firm’s statement defining the logic of evolution of markets, products, services, and technologies, results in superior performance. Similar to the concepts of corporate mission and objectives, two important aspects need to be considered. Any diversified corporation must have a favorable corporate strategy and have a certain commitment to it; one without the other does not work. Yet, a corporate strategy should not be a hampering corset, limiting a firm’s options so far that it misses out on opportunities. In particular, in rapidly changing environments, a corporate strategy has to be somewhat like a flexible guideboard. It has to be continually reevaluated in order to make sure that the corporation is still in tune with the markets.
Implications
for Managers
The findings of this study offer important insights into the portfolio management of business firms. They have considerable implications for both practising managers and the consulting communities by providing an overall behavioral profile of a successful top manager and his or her role in managing a firm’s business portfolio. Tables 3 and 4 summarize the actions that have been proven to add substantially to top managers’ success in portfolio management. These actions can be used as guidelines to -aid the practising manager in managing a diversified firm.
Conclusions This study was designed to identify what kind of top manager behavior leads to successful portfolio management. The results were achieved through the development of a theoretical framework and the Long Range Planning Vol. 31
December
1998
[
884
\
They develop a high level of mutual trust for one another and, therefore, facilitate group management team. They attempt to reach a consensus within their management team. Failing consensus, decisions to the top manager. They actively search for strategic information relevant to their decision-making. They external scanning to detect threats and opportunities early. They make sure that all relevant information is used in their decision-making. In particular, by staff personnel or external consultants for adequacy and comprehensiveness. Theyparticipate active/yin the developmentandanalysis ofdecision alternatives. They do decision alternatives and make final decisions by selecting one of these alternatives.
decision-making however,
within
their
they delegate
final
use continuous they evaluate not let corporate
internal
and
data provided staff develop
They are closely involved with SBlJ teams in the formation of a corporate portfolio strategy, provide a clear overall sense of direction, and take the lead on selected corporate development initiates when: (a) they are interested in establishing synergies among the firm’s SBUs; or (b) the firm’s portfolio includes SBAs at discontinuous turbulence levels. They share a corporate vision of the firm’s future environment. They specify a description of the environment by developing a grasp of the central issues which the firm will have to address in the future. They are committed to an explicit corporate mission. They define a scope of the firm’s activities in terms of customer types, geographic regions, societal needs, as well as technologies to serve these needs. They are committed to explicitcorporate objectives. They define yardsticks by which the present and future performance of the firm as a whole is measured. They are committed to an explicit corporate strategy. They define a future evolution of markets, products, services, and the technologies of the firm.
design of a research instrument using the terminology and concepts of practising managers. The findings add to the understanding of top managers’ roles in managing a firm’s business portfolio and they also provide practical management tools that can be used to improve: 1. the diversity of a firm’s business portfolio; 2. the portfolio management approach which top managers should use depending on the portfolio’s diversity; 3. the behavior of top managers to achieve success in managing the firm’s portfolio. Thus, the study serves the needs of top managers and their advisers. In addition, this study has made a contribution to
the research methodology for studying top managers. The combination of quantitative and qualitative research proved to be an effective approach for analyzing general management behavior. The results validated the initial hypotheses and the research instrument which was used. Recognizing that the behavior of top managers is likely to influence the outcome of the process, we examined individual, group, and organizational elements. Also, in contrast to many previous studies, we examined the strategic implications of managing a business portfolio. The authors would like to thank Patrick A. Sullivan, Peter H. Antoniou, Heribert Meffert, and Werner Kirsch for their valuable support of this study.
References I. M. Goold, A. Campbell, and M. Alexander, Corporate-level Multibusiness Company, Wiley, New York (1994). 2. A. D. Chandler, Strategy and Structure: Chapters Enterprise, MIT Press, Cambridge, MA (1962).
in the History
3. H. I. Ansoff, Strategies for Diversification, (1957).
Harvard
Managing
Companies
Business
Portfolios
in German
Strategy:
Business
Creating
of the American
Value in the
industrial
Review, September-October
4. V. Ramanujam Strategic
and P. FL Varadarajan, Research Management Journal, 10 (1989).
5. A. D. Chandler, Strategy and Structure: Chapters Enterprise, MIT Press, Cambridge, MA (1962). 6. H. I. Ansoff,
A Model
for Diversification,
on Corporate in the History
Management
Diversification:
A Synthesis,
of the American
Industrial
Science 4 (1958).
Thorsten van dar, V&en is Mar jrg’* Manager, Corporate Strategy Group at Otto Versand, Hamburg, Germany.
Dr H. fgor AnsoW is Distingukhe of Strategic nt at the College of Business Administration, United States International University, San Diego, California, USA.
Long Range Planning Vol. 31
December
1998
IN AN ATTEMPT
TO IMPROVE the performance of the corporate office, top managers have been searching for appropriate methods and techniques to cope with the problems of managing business portfolios. The speed of change and the unpredictability of the business environment has made the management of business portfolio increasingly complex. Also the concept of corporate strategy for diversified firms evolved through several stages, each offering solutions for a different aspect of the problem and, so, adding complexity to the problem of portfolio management.’
Historical Portfolios
Development
of Business
After World War II, many corporate offices were established. The growing size of the typical business firmwhich began to operate in different product markets and diverse geographic locations-resulted in the need for decentralization and delegation of decisionmaking authority to middle management. To avoid overload at the center, divisional structures were introduced that separated corporate strategy from business-unit decisions. The phenomenal success of divisionalization in firms such as General Motors, Du Pont, Standard Oil, and Sears made divisional structures extremely popular.’ Later, these divisionalized firms encountered decreasing growth and profitability in their traditional businesses. To counter slowing growth
* PhD dissertation: The relationships between corporate general management behavior and the success of strategic portfolio management in German business firms. Unpublished Doctoral Dissertation, United States International University, San Diego, USA (1997).
Pergamon PII: s0024-6301(99)00098-3
study analyzes the behavior of top I This managers in managing their firms’ business
portfolios. A review of the existing literature provides a conceptual framework for a research design combining quantitative and qualitative techniques. Data were collected through interviews with 35 top managers of well-known German business firms and the findings of this study translated into guidelines for managers. The results suggest that successful top managers should be concerned with the social relationships and management processes within the corporate office, as well as with their use of management concepts in managing the business portfolio. 8 1998 Elsevier Science Ltd. All rights reserved
rates-and to spread business risks across different sectors-many firms started to diversify. Rather than improving the performance in their original, core businesses, they entered international markets, introduced new technologies and developed new products and servicese3 In the next phase, top managers realized that they lacked the necessary techniques to manage a portfolio of different businesses. The firm’s corporate office had to make decisions regarding a variety of business environments, various time horizons, competitive positions, and risk profiles. It was impossible to apply common systems and procedures across a wide variety of business operations and still achieve a high performance. To facilitate resource allocation across different organizational units, major corporations and Long Range Planning, Vol. 31, No. 6, pp. 879 to 885, 1998 0 1998 Elsevier Science Ltd. All rights reserved Printed in Great Britain 0024-6301/98 $19.00+0.00
consultancies introduced a new analytical technique: Business Portfolio Analysis. General Electric, the Boston Consulting Group, McKinsey, and others developed matrices in many versions that helped top managers to compare individual businesses and classify them in terms of their competitive position and market attractiveness. These planning methods, however, were heavily criticized. Corporate raiders began to acquire diversified companies to demerge them into smaller operations, and they realized good profits by selling them as separate businesses. The raison d’6tre of the corporate office, i.e., to use portfolio management to guide and control a large number of different businesses, was challenged and the fashion for diversification was reversed. Divestment from unrelated businesses, corporate restructuring, and a focus on core competencies became the central issues for management. But, despite this move away from broad-scale diversification, some of the most successful multinational corporations continue to do business in many different business areas. These companies prove that portfolio management in diversified companies can be successful because it provides a firm with a spread of risk and a range of business opportunities. Today top managers are still searching for approaches which will enable them to manage a diversified business successfully.
Past Prescriptions The management of business portfolios is still a central area of research in strategic management. Studies of diversification and the diversity of business port-
folios constitute “one of the unique cores of the growing literature in this relatively young discipline.“4 Five years before Chandler’ published his seminal works on diversified companies, Ansoff’ developed his proposals for diversification strategies. Following these groundbreaking efforts, diversity and other aspects of portfolio management have been studied by numerous researchers from a variety of academic fields and disciplines covering a wide range of research questions and issues. However, the widespread criticism of existing studies on portfolio management suggests that there is a need for a common theory. As practising managers frequently point out, a synthesis of diverse streams of research on portfolio management requires a multi-disciplinary perspective.
Success in Managing Portfolios
Business
This study was conducted to identify those top management behaviors that lead to success in managing a firm’s business portfolio. In particular, the following question was asked: ‘What is the relationship between the behavior of top managers and their success in managing a firm’s business portfolio?”
Table 1 shows how this issue was divided into a number of detailed research questions. By comparing successful with less successful approaches to managing a firm’s business portfolio, we tried to identify those behaviors of top managers which can be associated with the success or failure in managing the firm’s portfolio of businesses. The qualitative research of this study consisted of
TABLE1. The rehselearch quwtions What is the relationship between the following features of Top Management (I) Trust for one another and the performance of the corporate office? (2) Group decision-making and the performance of the corporate office? (3) Search for relevant strategic information and the performance of the corporate office? (4) Use of relevant information and the performance of the corporate office? (5) Participation in the development and analysis of decision alternatives and the performance of the corporate office? and their interest in establishing synergies among the firm’s SBUs, the (6) Approach to portfolio management, turbulence levels of SBAs in the firm’s portfolio, the diversity in SBA performance prospects, and the performance of the corporate office? (7) Sharing of a corporate vision and the performance of the corporate office? (8) Commitment to an explicit corporate mission and the performance of the corporate office? (9) Commitment to explicit corporate objectives and the performance of the corporate office? (IO) Commitment to an explicit corporate strategy and the performance of the corporate office? (11) The impact of all these factors on the firm’s performance?
Managing
Business
Portfolios
in German
Companies
TABLE2. Business areas in the corporate portfolio Smallest contribution of an individual business area to firm’s sales Largest contribution of an individual business area to firm’s sales Average contribution of an individual business area to firm’s sales Smallest number of business areas in a portfolio Largest number of business areas in a portfolio Average number of business areas in a portfolio
personal interviews with 35 top managers of large and medium-sized German corporations in which the managers were asked to describe their behaviors in managing a firm’s business portfolio. Upon completion of the interviews, content analysis was used to categorize the responses by top managers, and qualitative data were prepared for statistical analyses to test our hypotheses.
The Findings Table 2 describes the number and size of businesses in the portfolios which we analyzed. The practical findings of this study fall into four distinct classes: top managers’ social dynamics and management processes, their approaches to portfolio management as well as the use of diverse management concepts in managing a business portfolio.
Social Dynamics The results of the study indicate that a high level of mutual trust among top managers is essential for their success in managing a firm’s business portfolio. In numerous interviews, many of the more successful top managers stressed the importance of trusting one another within the corporate office and even the entire firm. Mutual trust was considered essential for an organization to achieve above-average performance. The top manager has to make sure that a sufficient level of trust among top managers exists and that the group can function as a team. The foremost concern of every senior manager must be the performance of the corporation as a whole rather than the success of an individual division and/or function for which he/she is personally responsible. However, some top managers emphasized that too much trust could have negative effects too. They feared that a high level of trust could result in inferior performance of the corporate office due to the lack of a critical dialogue among top managers. These managers stressed the need to keep a balance between trust and harmony among top managers on one side and constructive criticism within the corporate office on the other side. Yet, in most of the cases where top managers did not believe that a high level
1% 38% 9% 5 300 58
of mutual trust was critical to their firm’s success, the later analyses revealed that these companies were rather unsuccessful in managing their business portfolios. In addition to the trust component, the process of group decision-making within the top management team must be considered a major aspect of the social dynamics among top managers. While earlier studies provided inconclusive results, the findings of this study indicate that top managers who attempt to reach a consensus within the corporate office, but, failing consensus, delegate decision-making power to the top manager, are the most successful. They perform much better in managing their firms’ business portfolios than those managers who either make decisions only by absolute consensus within their management team, or let the top manager make final decisions alone without attempting to reach a consensus. To overcome these difficulties of decision-making within a group that consists of individuals with different responsibilities, opinions, backgrounds, and preferences, successful top managers aim for unanimous decision-making. Yet, they also recognize the necessity to make a decision when a consensus cannot be reached. In these cases, top managers rely on the firm’s CEO to make sure that a decision is being made. As the “primus inter pares”, i.e., the first among equals, a firm’s top manager must have the necessary charisma, competence, and experience to coordinate and integrate the-sometimes conflicting-interests of individual senior managers.
Management
Processes
Among the numerous management processes of top managers, the acquisition and utilization of information as well as the development and analysis of decision alternatives are the most critical elements for the success of a firm’s portfolio management. The findings of this study show that top managers who proactively search for strategic information relevant to their decision-making are more successful in managing their firm’s business portfolio than managers who are rather passive in data-gathering activities. The study’s empirical results indicate that top managers who are very actively involved in the acquisition of novel information exhibit higher perLong Range Planning Vol. 31
December 1998
formance than those managers who wait for new information to have an impact on the firm. Thus, top managers must search for information on a continuous and systematic process. They themselves have to acquire information both external and internal to the organization, and integrate different types of information from a variety of sources. Successful top managers must have an “ear on the marthe behaviors of ket”; they have to understand numerous, diverse groups, such as customers, competitors and employees. Therefore, they cannot rely on one source of information alone and have to utilize numerous means of acquiring information. The personal involvement of top managers in scanning activities is crucial to the success of a firm. Furthermore, top managers have to actively participate in the acquisition of information since they use specific models to decide which type of information is relevant to their decision-making. They cannot expect middle management or staff personnel to always know what kind of information is needed. Although a company’s scanning and planning units can help in data-gathering activities, the information they provide must be continuously tested for accuand relevance to a particular racy, completeness, decision. In addition to top managers’ acquisition and utilization of information, top management’s early and active engagement in the policy-making process is essential to a firm’s success in managing its business portfolio. Top managers must proactively participate in the development and analysis of decision alternatives. They should not make final decisions by selecting one of several alternatives they let staff personnel develop. Since top managers would not know whether all relevant facts were considered in preparing the alternatives, they cannot expect to achieve superior performance in managing a firm’s business portfolio by letting middle management or staff personnel do the groundwork, and then only picking the alternative top management likes best. It is a wrong assumption to believe that for a top manager to be efficient, he/she can delegate all preparatory work to middle management or staff personnel without further control. Even in highly decentralized corporations, with strategic business units (SBUs) all over the world, offering numerous products and dealing with many different customers, top managers cannot exclusively rely on division managers and department heads to propose several alternate feasible solutions. Although top management cannot be involved in all the details of a decision, they must always make sure all relevant facts were considered in analyzing and developing decision alternatives. Strategic Portfolio Management The planning and control influence which agers exert on the strategic decision-making Managing Business
Portfolios
top manof indi-
in German Companies
vidual SBUs can be considered the core process of managing a firm’s business portfolio. Top management’s role in coordinating and controlling the activities of several divisions and departments is contingent upon certain conditions. In particular, the appropriateness of an approach to strategically manage a firm’s business portfolio depends on: whether top managers are interested in establishing synergies among the firm’s SBUs; whether all business areas in the firm’s portfolio are at extrapolative levels of environmental turbulence, i.e., whether trends in these business areas are somewhat predictable; and whether all business areas in the firm’s portfolio offer comparable performance prospects in terms of growth and profitability. There are three basically different approaches of strategic portfolio management available to top managers. Management by exception is described as the approach in which SBU managers are responsible for the development and implementation of their own strategic plans, as long as they produce satisfactory financial results. Top managers intervene only when an SBUs results turn unsatisfactory. This approach works best when all of the following conditions are met: 1. all business areas offer comparable performance prospects; 2. top management is not interested in establishing synergies among the firm’s SBUs; and 3. it is safe to assume that no major surprises will occur in the firms’ business areas. Using the portfolio balancing approach, top managers periodically examine the performance forecasts of individual SBUs. Additional resources are allocated to promising business areas, whereas from areas, which will become unprofitable, is divested. Portfolio balancing has to replace management by exception when the firm’s business areas do not offer comparable growth and profitability prospects. Portfolio optimization is the third and most complex way to manage a business portfolio. Following this approach, top managers must be closely involved with SBU managers in the formulation of strategies and plans. Typically, cooperation and coordination among SBUs is encouraged, and-on major decisions-SBU managers have to seek a consensus with the corporate office and other affected units. The role of top management is to help the SBUs arrive at better strategies and to develop new businesses for the corporate portfolio. Furthermore, top managers formulate a corporate strategy specifying the evolution of the firm’s business portfolio over time; the addition of potentially new business areas as well as the possible divestment from others have to be
delineated. when:
This
approach
is the most
appropriate
top managers are not willing to accept the sum total of the business areas’ prospects as the corporate goal; top managers seek synergies among the firm’s SBUs; and the environment of the firm’s business areas is unpredictable.
Management
Concepts
There is a vast literature on corporate vision and strategies, mission statements, goals and objectives. Numerous companies employ these concepts in their daily operations. Yet no consistent terminology has evolved, and the benefits of these concepts in managing a firm’s business portfolio is not clear. This study examined the value of these management concepts in portfolio management by analyzing four elements. The corporate vision was defined as top shared description of the firm’s future managers’ environment, i.e., their grasp of the central issues which the firm must address in the future. A corporate mission was considered an explicit statement of the scope of the firm’s activities in terms of customer types, geographic regions, and societal needs served by the firm as well as technologies used by the firm to serve these needs. Corporate objectives were described as explicit yardsticks by which the present and future performance of the firm as a whole was measured; i.e., the criteria by which a firm’s success or failure was determined. Finally, a corporate strategy was defined as an explicit statement of the logic of evolution of markets, products, services, and technologies of the firm as a whole. The results of this study indicate a positive relationship between the degree to which top managers share
a description of the future environment and theirperformance in managing a firm’s SBA portfolio. The better top managers address the central issues which their firms will have to address in the future, the more successful they are in managing a firm’s business portfolio. Annual or bi-annual meetings of managers from all different hierarchical levels-discussing potential future developments in the firm’s environmentseem to be necessary to jointly develop a corporate vision which can help top management in managing a business portfolio.
Top managers must be committed to an explicit corporate mission. The higher the degree of top managers’ commitment to an explicit statement defining the scope of the firm’s activities in terms of customer types, geographic regions, and societal needs served by the firm as well as technologies used by the firm to serve these needs, the more successful they are in managing a business portfolio. For the performance of any diversified firm, it is crucial to determine what
the company stands for, who the principal customers are, and where the primary markets are. Although commitment to a corporate mission statement is difficult to gain-especially since it is virtually impossible to measure-it is essential for a firm’s success in managing a business portfolio.
Top managers must be committed to explicit yardsticks by which the present and future performance of the firm as a whole is measured. Both corporate objectives and business unit goals are equally important in managing a diversified form. To rely on SBU objectives alone, and/or to consider the sum of these as the objectives for the corporation as a whole, results in inferior performance. An iterative “top-down” and “bottom-up” negotiation process-determining corporate and SBU objectives-is necessary to gain commitment, benefit from the advantages of explicitly yardsticks, and be more successful in managing the firm’s business portfolio.
Top managers must be committed to an explicit corporate strategy. A high degree of commitment to a firm’s statement defining the logic of evolution of markets, products, services, and technologies, results in superior performance. Similar to the concepts of corporate mission and objectives, two important aspects need to be considered. Any diversified corporation must have a favorable corporate strategy and have a certain commitment to it; one without the other does not work. Yet, a corporate strategy should not be a hampering corset, limiting a firm’s options so far that it misses out on opportunities. In particular, in rapidly changing environments, a corporate strategy has to be somewhat like a flexible guideboard. It has to be continually reevaluated in order to make sure that the corporation is still in tune with the markets.
Implications
for Managers
The findings of this study offer important insights into the portfolio management of business firms. They have considerable implications for both practising managers and the consulting communities by providing an overall behavioral profile of a successful top manager and his or her role in managing a firm’s business portfolio. Tables 3 and 4 summarize the actions that have been proven to add substantially to top managers’ success in portfolio management. These actions can be used as guidelines to -aid the practising manager in managing a diversified firm.
Conclusions This study was designed to identify what kind of top manager behavior leads to successful portfolio management. The results were achieved through the development of a theoretical framework and the Long Range Planning Vol. 31
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1998
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They develop a high level of mutual trust for one another and, therefore, facilitate group management team. They attempt to reach a consensus within their management team. Failing consensus, decisions to the top manager. They actively search for strategic information relevant to their decision-making. They external scanning to detect threats and opportunities early. They make sure that all relevant information is used in their decision-making. In particular, by staff personnel or external consultants for adequacy and comprehensiveness. Theyparticipate active/yin the developmentandanalysis ofdecision alternatives. They do decision alternatives and make final decisions by selecting one of these alternatives.
decision-making however,
within
their
they delegate
final
use continuous they evaluate not let corporate
internal
and
data provided staff develop
They are closely involved with SBlJ teams in the formation of a corporate portfolio strategy, provide a clear overall sense of direction, and take the lead on selected corporate development initiates when: (a) they are interested in establishing synergies among the firm’s SBUs; or (b) the firm’s portfolio includes SBAs at discontinuous turbulence levels. They share a corporate vision of the firm’s future environment. They specify a description of the environment by developing a grasp of the central issues which the firm will have to address in the future. They are committed to an explicit corporate mission. They define a scope of the firm’s activities in terms of customer types, geographic regions, societal needs, as well as technologies to serve these needs. They are committed to explicitcorporate objectives. They define yardsticks by which the present and future performance of the firm as a whole is measured. They are committed to an explicit corporate strategy. They define a future evolution of markets, products, services, and the technologies of the firm.
design of a research instrument using the terminology and concepts of practising managers. The findings add to the understanding of top managers’ roles in managing a firm’s business portfolio and they also provide practical management tools that can be used to improve: 1. the diversity of a firm’s business portfolio; 2. the portfolio management approach which top managers should use depending on the portfolio’s diversity; 3. the behavior of top managers to achieve success in managing the firm’s portfolio. Thus, the study serves the needs of top managers and their advisers. In addition, this study has made a contribution to
the research methodology for studying top managers. The combination of quantitative and qualitative research proved to be an effective approach for analyzing general management behavior. The results validated the initial hypotheses and the research instrument which was used. Recognizing that the behavior of top managers is likely to influence the outcome of the process, we examined individual, group, and organizational elements. Also, in contrast to many previous studies, we examined the strategic implications of managing a business portfolio. The authors would like to thank Patrick A. Sullivan, Peter H. Antoniou, Heribert Meffert, and Werner Kirsch for their valuable support of this study.
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Thorsten van dar, V&en is Mar jrg’* Manager, Corporate Strategy Group at Otto Versand, Hamburg, Germany.
Dr H. fgor AnsoW is Distingukhe of Strategic nt at the College of Business Administration, United States International University, San Diego, California, USA.
Long Range Planning Vol. 31
December
1998