November 2010
Intermediate to advanced
272 pages
6h 47m
English
12
The Business Portfolio
Deciding what businesses to be in is clearly one of the most important decisions executives make. In fact, to a large extent, the businesses a company is in represent its destiny. For example, a company that produces commodity chemicals is unlikely to ever earn as much return on capital as a branded breakfast cereal company can.
Kaplan, Sensoy, and Strömberg use the analogy of whether to bet on the horse or the jockey.1 They analyzed small start-up companies financed by venture capital firms, tracking whether they eventually grew large and successful enough to go public. Their finding was that it was better to have a competitive advantage (horse) than to have a good management team (jockey). With a competitive advantage, the venture capitalists could always replace a weak management team, but even the best management team might not be able to salvage a weak business. In other words, bet on the horse, not the jockey.
Warren Buffett said it in his compelling way: “When a management team with a reputation for brilliance joins a business with poor fundamental economics, it is the reputation of the business that remains intact.”
Although the best management team may not be able to salvage a poor or declining business, different owners or management teams may extract different levels of performance from a given business. This is the best-owner principle that we discussed in Chapter 5.
But even if one company is the best owner of a business today, that doesn't ...
