Corporate Portfolio Management: Theory and Practice

Ever since BCG’s Bruce Henderson introduced the growth-share matrix in 1970, the concept of corporate portfolio management (CPM) has revolutionized how CEOs and corporate boards think about corporate strategy. Over the years, the discipline of CPM has evolved considerably, with the introduction of new concepts and criteria for portfolio management such as shareholder value maximization and parenting advantage.

But to what extent do today’s corporations actually apply these principles? More fundamentally, how do diversified companies analyze and manage their corporate portfolios? What processes have they established and who is responsible for them? Most important, how satisfied are today’s companies with their current approach to CPM?

To answer these questions, BCG, in collaboration with Freiberg University in Germany, recently conducted a comprehensive global survey on the practice of corporate portfolio management. We received responses from more than 200 CPM specialists representing 196 of the world’s largest global companies in 20 industries.

The results of the survey were recently published in the Journal of Applied Corporate Finance. (Download the pdf here.) Among the key findings are the following:

• Two-thirds of the participating companies apply CPM regularly. The vast majority (90 percent) of companies still focus on traditional criteria such as market attractiveness, competitive position, and financial performance when evaluating business unit performance. Other criteria such as parenting advantage, risk, and portfolio balance are considered important, but their application is hampered by the lack of quantitative metrics and easy-to-use analytical methodologies.
• Approximately 60 percent of the companies integrate CPM into their strategy development and long-term planning process. However, there is significantly less integration into investment budgeting and financial target-setting.
• In the majority of companies, CPM is driven from the top, with active involvement on the part of members of the executive team and corporate staff. Division and business unit staff are involved in CPM at less than half of the companies.
• About 80 percent of the participating companies use CPM primarily to create transparency across businesses and to identify a need for action at the individual business unit and overall portfolio level. And yet, only 40 percent of recent divestitures and 23 percent of recent acquisition decisions were trigged by portfolio considerations—a sign of a significant gap between the effort many companies put into CPM and its actual role in corporate decision-making.
• More than half of the participating companies claimed to be dissatisfied with their current approach to CPM—mainly because of the inefficiency of the process and the weak acceptance and support on the part of the business units.
• Those companies that reported high levels of satisfaction tend to have a more holistic perspective on their portfolio. They are more likely to consider—and quantify—the risk profile and overall balance of their portfolio, as well as the synergies between businesses. They also tend to integrate portfolio management into their other corporate processes.