Partner & Director, BCG Henderson Institute Fellow
Corporations undertake a strategic restructuring of their business portfolio to reinvent themselves and achieve a competitive advantage. Whether the objective is diversification or refocusing on the core business, restructuring often lies at the heart of corporate strategy.
Despite its importance, the strategic process of business portfolio restructuring has received surprisingly little attention from researchers. To fill this gap and increase our understanding of the key motivations and success factors for restructuring, The Boston Consulting Group and Technical University Bergakademie Freiberg investigated the portfolio development of the 100 largest corporations in Europe and North America, respectively, from 1998 through 2010.
We sought to understand whether portfolio transformations are rare events or more regular instruments of corporate strategy for large multibusiness companies. We investigated the extent to which transformations have been motivated by excessive diversification or poor performance (as postulated by prior research) and how successful the transformations have been in addressing these shortcomings. We also analyzed the characteristics and patterns of the underlying transformation processes to understand issues relating to their magnitude, speed, and sequencing.
Our research confirmed that poor performance and excessive diversification are key motives for portfolio restructuring. This holds particularly for companies that used transformations to refocus on the core business. These companies succeeded in significantly reducing their diversification and improving performance. In contrast, we found that companies seeking greater diversification initially had average diversification levels and above-average returns. Their transformations were apparently motivated by below-average growth rates. These companies succeeded in improving their growth trajectory by increasing their diversification, but only at the expense of lower returns and weaker capital-market performance. We found that companies with transformations aimed at competitive repositioning typically started from a very high level of diversification among unrelated businesses in their portfolios. Although companies succeeded in reducing their levels of such unrelated diversification, these repositioning transformations were the most difficult to implement. On average, companies started with significantly weaker performance than their nontransforming peers, but they could not improve their performance during the transformation.
These findings underscore the importance of recognizing the challenges to achieving favorable outcomes from a major business portfolio restructuring, especially when pursuing a diversifying or repositioning transformation. Our study also points to specific recommendations that companies can apply to increase the odds of a successful restructuring.
The original version of the article was published in the Journal of Business Strategy.