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Shifting your portfolio toward growth sectors can help you emerge stronger from the downturn
“Which business should we be in?”
Most CEOs have asked this question at least once. Now, our research shows that business leaders should be asking it regularly. A new analysis my colleagues and I recently conducted of 1,000 global companies’ performance over a decade—spanning downturn, recovery and growth periods—makes a compelling case for keeping your company’s business mix on the move.
Many CEOs understand in principle the value of shifting the corporate portfolio to address new growth opportunities. Yet we found that roughly half of our sample barely changed their business mix at all during the decade we studied. Those that did make deliberate and regular business shifts were rewarded with consistently higher returns and were less likely to be acquired or go bankrupt. Why? Because as the markets and trends changed, so did they.
Five key lessons emerged from the research, about which you can learn more here.
Keep the portfolio moving. There is an optimal rate to rotating the industries in which your company operates. Leading firms tend to rotate their portfolios steadily and almost never keep them fixed in place.
1. Move with the market, changing direction if you have to. Headwinds and tailwinds matter a lot. The best companies take note of how the winds are shifting and deploy resources aggressively to change course toward the best opportunities.
2. Use transactions to speed your way. Mergers, acquisitions and divestitures are often essential to make portfolio shifts in a timely manner.
3. Focus acquisitions at the perimeter of your portfolio. The odds of success are best when companies use M&A to accelerate a move toward new opportunities in existing but secondary businesses—that is, outside, but not too far outside, their core sectors.
4. Bottom performers face a unique dilemma. How you stack up against competitors affects how aggressively you need to manage your portfolio.
Making such shifts can be difficult, especially in the current economic conditions. Decision-making biases also conspire toward inertia. But while sitting still may seem like the safest bet, our research shows it’s often the worst choice you can make. In my next blog, I’ll run through some practices that can help you get your portfolio moving.
I am the co-author, with Sven Smit and Martin Hirt, of Strategy Beyond the Hockey Stick: People, Probabilities and Big Moves to Beat the Odds. Please connect with our practice on Linkedin.
Senior Partner at McKinsey & Company, leader of Strategy Practice in Asia
With thanks to my colleagues Sandra Andersen, Sri Swaminathan, and Andy West.
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