When I ask executives to list examples of agile companies, they often mention firms such as Tesco, Southwest Airline, or Wal-Mart, which excel at operational agility–the ability to seize opportunities within a focused business model. Operational agility is important, but it is not the only way that firms can exploit changes in their environment. Diversified companies including Johnson & Johnson, Goldman Sachs, Samsung Electronics, and the Tata Group exemplify portfolio agility, or the the capacity to quickly and effectively shift resources, including cash, talent, and managerial attention out of less-promising opportunities and into more attractive ones. Fluid reallocation of resources is necessary in turbulent markets, but many companies struggle to achieve portfolio agility. Below are five prerequisites for portfolio agility.
1) Diversified portfolio. The broader the range of business units, geographies, or products a firm encompasses, the greater scope it will have for portfolio agility. The conventional wisdom holds that the disadvantages of diversification–including loss of focus, subsidization of under-performing units, organizational complexity, and potential for empire building by top executives-outweigh the advantages. Conglomerates, as a result, trade at a “diversification discount.” My last post argued that the benefits of diversification–protection against unexpected threats and exposure to growth opportunities–are more valuable in turbulent markets. Firms can gain the benefits of diversification while minimizing the costs in several ways: Firms can, as General Electric does, give business units a great deal of autonomy to achieve their profit and loss objectives. Companies can also minimize complexity and maintain focus by diversifying around a set of core competencies, as Procter & Gamble does with multiple products that all draw on the company’s marketing expertise, or firms can stick to a core business but diversify across global markets.
2) Disciplined processes for revisiting investments. Portfolio agility requires a process to evaluate the existing portfolio of business units, regions, products, or customers on a regular basis to reallocate resources from less to more productive uses. In turbulent markets, the relative attractiveness of opportunities shift more rapidly than in stable contexts, necessitating more frequent reviews. A disciplined process is conducted by