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The most usual meaning of the term portfolio in a business context is the
collection of securities that we own. By extension, the term has also come
to mean a group of business units under one roof. It derives from the term
share portfolio, which refers to a stock market investment comprizing
shares of a number of different companies (spread investment).
By analogy, the term portfolio as used in business has come to mean a
more or less variegated group of business units or ﬁrms under the same
ownership, together constituting what in legal parlance is called a group
of companies. Other common terms are corporation, concern or
Portfolio structures can also be found outside the commercial sector. The
local authority for instance, constitutes what could be called a diversiﬁed
portfolio. It comprises a range of organizations unrelated to each other, such
as care for the elderly, schools, an engineering department, and so on. The
same thing applies to county councils and a host of other government agen-
cies, as well as to non-proﬁt organizations. Again, trade union organizations
often operate publishing businesses and training programmes.
A portfolio can come into being in many ways. Sometimes a new corpo-
rate mission arises out of an auxiliary function. Other business portfolios
are the offspring of a customer-supplier relationship; this is also called verti-
cal integration. A shipyard may buy a steelworks to make its structural
steel (backward integration), or it may buy a banana plantation or a coal
company to secure cargoes for its ships (forward integration).
A car manufacturer may buy a chain of dealerships or the factory that
makes its back axles. An airline may buy into the travel agency business,
maintain its own engines and operate hotels.
Yet another way in which portfolios can arise is through development of
related business to satisfy customers’ needs better. In the data consultancy
business, groups of business units have developed in symbiosis, each satis-
fying one kind of need and thus ﬁnding more ways to reach customers.
One example is e-learning.
A portfolio may thus be either diversiﬁed or synergistic. Intermediate forms
also exist, of course. In good times there is a tendency to overrate syner-
gies and cite them as a motive for acquisitions, even though the true motives
may be quite different.
Portfolios often become diversiﬁed because synergies, with time grow,
diffuse and eventually, meaningless. This means that a change in owner-
ship may have to be considered. A common pattern is that a portfolio which
has grown up on a basis of synergies in production gradually loses its syner-
gistic connections. Market relations are evolving into an entirely different
business situation. An example of this is the publishing industry, which
originally included ownership of presses, binding departments, typeset-
ting, etc. Commercial connections in business have gradually become
blurred to the extent that a daily newspaper, for instance, may only be one
of the owners of its printing press.
Managing and developing a portfolio is a matter of working with busi-
ness structures rather than business strategies. The chief executive of a
company or corporation that contains a large number of diverse business
units is in fact in the business unit industry. Since a company almost always
contains more than one business unit, its management must be able to:
•buy into new industries.
•strengthen business units, for example by acquisition
•withdraw from unwanted industries
•sell business units that can be better managed by others
•allocate resources in the form of capital and costs
•ensure that individual business units are strategically managed
•take advantage of synergies in the form of greater business
strength or more efﬁcientoperative management of business units.
When a company consists of several units with little or no synergy, discus-
sions of corporate mission are apt to be long and complicated.
Some thinkers have dubbed an intermediate form ’business areas’ by which
they mean synergistic portfolios where market synergies or similarities
of customers’ needs make it possible to ﬁnd some sort of common trade
If we are managing a portfolio that consists of a number of business units
with different corporate missions, one of our main problems will be that
of dismantling structures that do not ﬁt. Entrepreneurial managers will
disinvest without a qualm, but power-oriented managers seem to balk at
selling business units.
There are of course logical and justiﬁable reasons for the existence of port-
folios of disparate business units. These reasons include:
1. The dynamics of the business have generated organic growth,
as in the case of the Volvo Bus Corporation in the Volvo Group.
2. Technological skills have lead to the development of business areas
related to the original one only by technology.
3. The main business area has been highly proﬁtable but offered
no opportunities for new investment.
4. It is desirable to spread business risks.
5. Strong links exist between business units in terms of customer
needs or technology.
6. Costs or capital structures can be shared.
Mixtures of legal structure (companies or units with the same owner) and
business structure often occur. It is important, therefore, to recognize the
difference between legal and business structures.
A company’s portfolio strategy usually depends on cyclical conditions in
the market. In bad times companies want to reduce investment, whether
in products or staff, which generally means that the value of its business
units goes down. This might apply to both operating companies and admin-
istrating companies such as property companies or investment companies.
It is unfortunate for the many portfolios which develop quickly during the
good times that market prices fall when the economic situation worsens.
People involved in fast-growing portfolios may feel that it is unfair to
suddenly see the market value of their group reduced to perhaps a tenth
of what it was just a short time ago, when it was racing away from projected
At one moment everyone wants to buy and nothing is for sale; almost at
the very next, everything is for sale and nobody wants to buy. Many players
accustomed to moving in the fast lane are suddenly taken by surprise when
Seen over longer periods, it is possible to say that intensive accumulation
of capital during periods of healthy proﬁts creates pressure on manage-
ment to invest in good business opportunities: management preferences
tend towards breadth and depth in business.
Thus the value of business units, in the same way as with real and move-
able estate, tends to ﬂuctuate wildly from the development curve,
depending on the need to satisfy demand or the pressure to supply. Some
spectacular examples of market price shift were offered by the 2002 change
in the economic climate.
Two lines of thought are especially worthy of attention in respect of
1. All business is legitimate (except when it is strictly illegal, as in
the case of drug dealing), whether it is manufacturing, the
production of services, or trade.
2. The dangers inherent in moving from businesslike reasoning to
speculation are not generally noticed.
The ﬁrst statement can seem trivial. Yet it is interesting because at certain
times it has been much easier to make money through speculation – in
fact, trading – than through the hard work of producing goods or serv-
ices. It has not been the thing for economists and engineers to go into
industrial production, as it has been so much easier to be successful in
company trading, property, shares or options. A phrase like ’fast buck’
has led to the debasement of the transaction economy, at the same time
as it has represented the height of fashion for many years: an expecta-
tion that prices would rise or fall has been a basis for trading since time
immemorial. Still, it is a good idea to distinguish this from distribution,
a term that indicates a knowledge of suppliers and customers, of utiliz-
ing economies of scale and capital rationalization by optimizing batch sizes
from supplier to consumer.
A typology for business activity is given below (see also Business model).
All business is legitimate (except in such a strictly illegal activity as drug-
dealing) but the importance of different kinds of business activity may vary
from one time to another. The production and extraction of natural
resources have obviously had their golden age; trade and speculation
reached their latest peak in the 1990s, and ’knowledge business’ is now
Many business leaders do not realize it when they abandon business logic
for speculative thinking. This lack of insight means that they are unpre-
pared for the risk factors involved with speculation where the object in
question is concerned, whether it is shares, property or whatever.
Although mistakes may lead to ﬁnancial difﬁculties or bankruptcy, it is not
necessarily speculative thinking that is at fault but rather the lack of insight
into the different conditions and underlying risks that are inherent in such
Business units in a portfolio are run according to two ways of thinking,
exactly as the shares in a share portfolio:
1. Industrial logic in terms of net worth and proﬁts, as represented
2. Speculative logic based on assessments of future prices, such as
ticks (price movements).
Let us point out two problems that are very likely to lead to ﬁnancial risks
which players may not be aware of:
1. Diversiﬁcation generally occurs in times of prosperity.
2. There is usually a transition from business logic to the logic of
Diversiﬁcation seems to be a knee-jerk move in good times. The bound-
ary between diversiﬁcation and synergic acquisition is the same one that
separates what on the one hand does not give customers added value and
what on the other, does. The mood of business leaders at the peaks and
troughs of long periods of prosperity or recession tends to produce a
certain kind of behaviour that intensiﬁes the amplitudes of trends.
When we speak of synergy we usually mean the beneﬁt of shared costs
or greater value for customers. Synergy is actually a special case of other
concepts that we can group under the umbrella term ’complementariness’,
i.e. the extent to which different business units complement one another.
See also Synergy.
In upturn periods we tend to exaggerate our company’s capital many times
over, a psychological frame of mind that impels us to speculate. Business
leaders who in one industry turn into success stories overnight often ﬁnd
it difﬁcult to assess the risks when investing speculatively in other indus-
tries. Such people may be consummate managers within a certain
business framework but often ﬁnd themselves ill equipped to make the
decisions called for in a portfolio comprising units from different indus-
tries. The jump from being a unit manager to managing a portfolio is much
greater than they might have imagined. This can be reduced to the simple
question: what differentiates a company manager from the manager of
1.Michael S Allan, Business Portfolio Management: Valuation, Risk
Assessment, and EVA Strategies.
2.Robert D Buzzell and Bradley T Gale, The PIMS Principles: Linking
Strategy To Performance.
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