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 ...
