Bet on your Future

Volume 10 Letter 5

Business is always evolving. Since strategy is always situation specific a good strategy today may be an awful strategy tomorrow. As any good strategist knows it’s important to keep trimming back the weak and underperforming businesses so the stronger ones can survive and thrive. It’s called Portfolio management and when it’s not done or done poorly bad things happen.

Bethlehem Steel was a company started back in 1857. It survived two world wars, a major depression and numerous economic downturns and business cycles. In the end, however, it could not survive a poor strategy finally closing its doors in 2001.

The Second World War had largely destroyed foreign competition leaving firms like Bethlehem a wide open market. Through the late 50’s and 60’s Bethlehem made obscene amounts of money. Bethlehem bought into the idea of vertical integration and invested heavily in everything from coal mining to manufacturing uranium rods to rail cars and ship building but failed to invest in modernizing core manufacturing processes.

By the 1970’s foreign competitors started to re-emerge with modern manufacturing processes like continuous casting making foreign steel cheaper than USA domestic steel. A decade later Bethlehem reported losses of over 1 billion per year. In the 1990’s as losses continued, Bethlehem jettisoned various businesses in a vain attempt to save itself but by then it was too late.

Every company needs to develop and execute strategies that leverage the forces influencing the future of their industry. The process always begins with a portfolio review – an objective review matching company capabilities with attractive market opportunities. Here’s how it works:

  1. Draw an simple X Y graph
  2. Label the origin of each axis “0” (unattractive) and the distal axis “10” (very attractive)
  3. The X axis is your “Business Strength” ie your ability to compete. The Y axis is the “Market Attractiveness”
  4. Rank the Business Strength: High rankings are businesses that have one or more of the following: patent protection, unique access to customers, are a low cost supplier, have own unique processes that customers’ value.
  5. Rank the Market Attractiveness: Highly attractive markets; are large, fast growing, have high margins and low competition
  6. Match the market attractiveness with the business strength (see diagram)
  7. The key is to be objective and transparent.

Figure 1 Portfolio Analysis

Attractive opportunities will be in the top right hand corner. Invest in and focus on these attractive markets where you have or can build differentiated capabilities. Nurture your best assets – get ahead and invest to stay there. For business opportunities that are top middle or top left purchase expertise or JV with other experts to gain needed skills in attractive markets where you don’t have a competitive advantage. For businesses operating in the lower left hand corner (close to the two axis origins), divest or shut down. Underperforming assets suck resources from projects that could better use them.

Bethlehem Steel’s portfolio management process was either nonexistent or tainted, leading to many bad business bets as leaders tried to vertically integrate the company. However, the bet they failed to make was to reinvest in modernizing their core steel making processes. In what can only be described as an ironic twist of fate, a casino now sits on the Bethlehem Steel property. Hopefully people are making better bets today!

For the full story see The Sinking Of Bethlehem Steel A FORTUNE autopsy By Carol J. Loomis April 5, 2004

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