Managing Director & Partner, BCG Henderson Institute Fellow
New research from The Boston Consulting Group and HHL – Leipzig Graduate School of Management demonstrates that diversified companies perform as well as focused companies but have a measurable financial advantage during economic crises. More critically, the top diversified companies turn this financial edge into a competitive advantage that enables them to outperform their peers and recover rapidly from crises.
These insights, which are based on an analysis of more than 1,100 diversified and focused companies, build on previous findings from BCG’s research into diversified companies. In a December 2006 report, Managing for Value: How the World’s Top Diversified Companies Produce Superior Shareholder Returns, BCG showed that applying the conglomerate discount diversified companies is often unwarranted.11 Notes: 1 The conglomerate discount refers to the undervaluation of diversified companies caused by the perception that corporate diversification destroys shareholder wealth. In the academic literature, the discount is commonly derived by comparing a diversified company’s actual corporate value with the value of a matched portfolio of focused companies. The latest research from BCG and HHL shows not only that this discount is shrinking, indicating that the market is viewing diversified companies more favorably, but also that diversity can provide significant benefits, particularly in times of crisis.
Given today’s uncertain economic climate, all companies should learn from the experience of the top diversified companies and prepare to turn future crises to their advantage.
Market sentiment has swung in favor of diversified companies, which is reflected in the steady decline of the conglomerate discount.
Diversified companies’ superior risk profile gave them a financial edge during the market turmoil.
The top diversified companies turned their financial advantage into a competitive edge.
To excel in the next crisis, companies should follow four key lessons from the top diversified companies.