5Portfolio RationalizationDecide What Business You Should Be In

Strategic clarity and coherence set successful companies apart from their competitors. Coherent companies offer products and services that fit seamlessly with their value proposition and leverage the company's differentiating capabilities. At the corporate level, this often means disinvesting in—or exiting entirely—businesses that don't fit their chosen identity. This strategy is supported by the economic concept known as the conglomerate discount, which argues that managing a diverse set of businesses hampers focus, creates complexity, and makes it difficult to scale winning capabilities. As a result, conglomerates often generate lower returns than more focused companies.

The same logic applies throughout the company's portfolios of products, services, markets, and sales and distribution channels. As the portfolios become more diverse, complexity rises, driving up costs and creating ineffectiveness. Portfolio complexity usually increases as companies seek growth—as they look for new ways to satisfy customers, expand into new customer segments or geographies, address more specific consumer or customer needs and wants, or provide differentiated levels of service. As we noted in Chapter 4, decisions about the portfolio are fundamental to “what the company does” and cascade throughout the organization, making them a key element in the cost reduction framework. Rationalizing the portfolio is thus a powerful lever for ...

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