Five requirements for portfolio agility

When I ask executives to list examples of agile companies, they often mention firms such as Tesco, Southwest Airline, or Wal-Mart, which excel at operational agility–the ability to seize opportunities within a focused business model. Operational agility is important, but it is not the only way that firms can exploit changes in their environment. Diversified companies including Johnson & Johnson, Goldman Sachs, Samsung Electronics, and the Tata Group exemplify portfolio agility, or the the capacity to quickly and effectively shift resources, including cash, talent, and managerial attention out of less-promising opportunities and into more attractive ones.  Fluid reallocation of resources is necessary in turbulent markets, but many companies struggle to achieve portfolio agility.  Below are five prerequisites for portfolio agility.

1) Diversified portfolio. The broader the range of business units, geographies, or products a firm encompasses, the greater scope it will have for portfolio agility. The conventional wisdom holds that the disadvantages of diversification–including loss of focus, subsidization of under-performing units, organizational complexity, and potential for empire building by top executives-outweigh the advantages. Conglomerates, as a result, trade at a “diversification discount.” My last post argued that the benefits of diversification–protection against unexpected threats and exposure to growth opportunities–are more valuable in turbulent markets. Firms can gain the benefits of diversification while minimizing the costs in several ways: Firms can, as General Electric does, give business units a great deal of autonomy to achieve their profit and loss objectives.  Companies can also minimize complexity and maintain focus by diversifying around a set of core competencies, as Procter & Gamble does with multiple products that all draw on the company’s marketing expertise, or firms can stick to a core business but diversify across global markets.

2) Disciplined processes for revisiting investments. Portfolio agility requires a process to evaluate the existing portfolio of business units, regions, products, or customers on a regular basis to reallocate resources from less to more productive uses.  In turbulent markets, the relative attractiveness of opportunities shift more rapidly than in stable contexts, necessitating more frequent reviews.  A disciplined process is conducted by senior operating executives on a regular basis, using clear evaluation criteria and credible performance data to make difficult decisions when necessary. Many executives mistake process formality for discipline, but they are not the same thing. Despite an elaborate flow chart plotting their decision making process and a three-dimensional matrix to classify business units, executives in one large European manufacturing group consistently avoided difficult portfolio decisions.

3) Group control of resources. Re-distribution of cash, talent, and other resources from one business unit to another requires that these resources are controlled at the group, rather than business unit, level. Many organizations, however, run as loose affiliations of fiefdoms where feudal lords keep a tight grip on their best people and cash they generate. The strategy department of one large bank conducted a meticulous study profiling its various business units, and made a compelling argument to shift cash, managers, and IT resources from two of the established businesses into promising new ones. The bank, however, was a loose federation of units, and the group CEO lacked the power or precedent to reallocate resources across fiefdoms. The cash cows continued to hoard their resources, while the promising businesses withered for lack of resources.

4) Cadre of generalists. Cash is not the only, or even most critical, resource to reallocate across business units. Portfolio agility requires a cadre of general managers, sufficiently versatile to move from business to business as opportunities arise and decline in different parts of the business. Firms like HSBC (with its International Management career track), General Electric, and Mars invest heavily to develop general managers by giving them P&L responsibility early on, rotating them through functions and business units to expose managers to diverse a range of challenges and contexts, and providing ongoing leadership training. Goldman Sachs rose from a second-tier investment bank to a global leader, in part, through the creation of the Investment Banking Services (IBS), which consisted of generalists responsible for soliciting new business and maintaining client relationships, who could shift from a waning geography or sector into growing one. Portfolio agility does not require everyone in an organization become a general manager. In fact, generalists allow others to increase their specialization. Goldman research analysts and product specialists, for example, could build deeper expertise in a sector or financial instrument, because they knew IBS bankers could bridge their specialized expertise with the client’s needs.

5) Courageous leaders. Portfolio agility demands that leaders make difficult choices, particularly when removing resources from an established business or reversing past mistakes. The late Reginald H. Jones, Jack Welch’s predecessor as CEO of General Electric, had a formal framework to classify the company’s business units and a process for regular review, but avoided from some difficult decisions, such as exiting the Utah International mining company deal that he had advocated. Welch reversed some of his predecessor’s decisions, pruning the company’s portfolio in his early years as CEO. Welch was also willing to reverse his own decisions when they didn’t work out. Although Welch supported the acquisition of Kidder, Peabody & Company, he also sold the business when the acquisition failed to meet expectations. Welch allocated resources based on hard facts rather than petty politics. Although he did not always see eye-to-eye with the head of GE Capital, Welch oversaw a massive investment in that unit.

Leading in turbulent times

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Don Sull is professor of management practice in strategic and international management, and faculty director of executive education at London Business School. This blog is dedicated to helping entrepreneurs, managers, and outside directors to lead more effectively in a turbulent world.

Over the past decade, Prof Sull has studied volatile industries including telecommunications, airlines, fast fashion, and information technology, as well as turbulent countries including Brazil and China, and found specific behaviours that consistently differentiate more, and less, successful firms. His conclusion is that actions, not an individual’s traits, increase the odds of success in turbulent markets, and these actions can be learned.