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Few major corporations are single business entities; rather, they are organizations that target manyproduct-market combinations. Although academia has shown great interest in diversification and mergersand acquisitions, the management of multi-business portfolios, also known as corporate portfolio management (CPM), has received considerably less attention since the 1980s. This raises the question of why.Reviewing the scholarly literature on CPM we investigate the reasons for th
  • A R T I C L E S

    Corporate Portfolio Management:Appraising Four Decades of Academic Researchby Michael Nippa, Ulrich Pidun, and Harald Rubner

    Executive OverviewFew major corporations are single business entities; rather, they are organizations that target manyproduct-market combinations. Although academia has shown great interest in diversification and mergersand acquisitions, the management of multi-business portfolios, also known as corporate portfolio manage-ment (CPM), has received considerably less attention since the 1980s. This raises the question of why.Reviewing the scholarly literature on CPM we investigate the reasons for this disinterest and suggest afuture research agenda for management scholars in this important domain.

    Despite the ongoing academic drumbeat callingfor the breakup of diversified corporations,multi-business firms remain the most preva-lent form of organization around the world. This istrue for both mature and emerging economies(Chakrabarti, Singh, & Mahmood, 2007). Thedominance of multi-business firms, however, fliesin the face of theoretical models and empiricalstudies asserting that corporate diversification de-stroys value (e.g., Berger & Ofek, 1995; Lang &Stulz, 1994; Lyandres, 2007; Rajan, Servaes, &Zingales, 2000). This inconsistency pushes schol-ars to better understand multi-business firms andhow they are managed. Rather than focusing onlyon business strategies that deal with gaining com-petitive advantage within a particular industry ormarket, strategic management research should putmore emphasis on investigating corporate strategy

    as a means to add value to a number of differentbusinesses held by a corporation.

    Corporate portfolio management (CPM)which should not be limited to simple matrices orother instruments for managing the corporateportfoliois at the center of corporate strategy. Itcomprises key corporate-level strategic decisions,such as entry into new businesses, allocation ofscarce resources to different business units, andliquidation of value-destroying divisions. CPMshould thus be highly relevant for executives andinvestors as well as for strategic managementscholars. A recent study of leading multi-businessfirms worldwide proves that top management per-ceives CPM to be highly relevant and important(Pidun, Rubner, Kruehler, Untiedt, & Nippa,2011). However, in academia, a comprehensivereview reveals only a few, often outdated, studies

    *Michael Nippa ([email protected]) is Chair of Management, Leadership, and Human Resources, Faculty of Business Adminis-tration, Technische Universitt Bergakademie Freiberg, Germany, and Adjunct Professor of Management, Lee Kong Chian School ofBusiness, Singapore Management University, Singapore.Ulrich Pidun ([email protected]) is Associate Director, Corporate Development, The Boston Consulting Group, GmbH, Frankfurt,Germany, and Visiting Professor for Strategic Management in the Resource Industry, Technische Universitt Bergakademie Freiberg,Germany.Harald Rubner ([email protected]) is Senior Partner and Managing Director, The Boston Consulting Group, GmbH, Cologne,Germany, and a BCG fellow.

    50 NovemberAcademy of Management Perspectives

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  • that focus predominantly on CPM and the processof analyzing, reviewing, and actively managingthe corporate portfolio. Most research contribu-tions focus on related but specific issues, such asdiversification strategies (David, OBrien, Yo-shikawa, & Delios, 2010; Hoskisson & Johnson,1992), mergers and acquisitions (Chatterjee,1992; Trautwein, 1990), or parenting advantage(Campbell & Luchs, 1992; Goold, Campbell, &Alexander, 1998).

    Hence, the objectives of this paper are toaddress the apparent gap between the practicaland theoretical importance and the ongoingacademic disregard of CPM, and to subsequentlyderive promising fields of future research. Threemotivations guided our critical appraisal of fourdecades of academic research: (a) the apparentneed to systematically assess the intellectualground and scholarly debate regarding CPM andCPM instruments, (b) the wish to uncover andto clarify common misbeliefs about CPM, and(c) our intention to elaborate interesting re-search questions that will help close the iden-tified gaps.

    The paper starts by briefly outlining impor-tant shifts in the approach to corporate strategyand CPM caused by major changes in the com-petitive environment and dominant scholarlyparadigms over the last decades. Central to thequestion of whether scholars acknowledge theimportance and relevance of CPM is the over-riding economic rationale supporting whether,and under what conditions, diversification addsvalue to or destroys value within the firm (i.e.,whether external market coordination of busi-nesses outperforms internal, hierarchical coor-dination). Hence, our review distinguishesamong three interrelated research streams thatmirror the scholarly debate of CPM: (a) theeconomic valuation of diversification strategiesat large as a sine qua non of any CPM activity,(b) research applying and assessing CPM instru-ments, particularly criticism regarding promi-nent decision-support matrices, and (c) studiesthat focus on CPM practices (i.e., the process ofmanaging the corporate portfolio). Finally, wepropose promising fields of future research.

    Our research contributes to the field of stra-

    tegic management research in three ways. First,it demonstrates how the understanding of CPMis influenced by academic hearsay, perpetua-tion, and paradigms that hamper objective anal-yses and methodological advancements. Sec-ond, we highlight the need for substantialtheory development and lay out an agenda forfuture research in this important domain ofcorporate strategy.

    TheRiseandFall of CPM in StrategicManagement Thinking

    Centuries ago, the Fugger banking family dy-nasty, which dominated Europe in the 15thand 16th centuries, and the East India Com-pany, the powerful megacorporation that had anear-monopoly on all commerce in India andChina between the 17th and 19th centuries, wereaware of the need to successfully manage differentbusiness activities, such as expanding into newventures, allocating scarce resources, closing downunprofitable branches, and dealing with dissentinggovernors. The same is true for large companiesthat emerged during the industrialization era inthe late 19th century, such as General Electricand Siemens. However, multi-business firms be-came more prevalent and a subject of major schol-arly interest only in the decade after the SecondWorld War (Rumelt, 1974, 1982). In those earlydays, three important paradigms emerged thatshaped strategic management thinking for almostthree decades and subsequently fostered corporatediversification activities.

    First, firm growth was seen as the most impor-tant driver of profitability and success. The war-time economy (e.g., Liberty ships and B-24s) hadproven that high-volume production offered manycost advantages, gained primarily through learn-ing, specialization, and economies of scale. Con-sequently, scale growthgaining market sharethrough organic growth or acquisitionsbecamethe dominant strategy. In addition, resurging mar-kets offered many opportunities for internationaland product diversification.

    Second, it was believed that a corporate econ-omy, or hierarchical coordination, would outperforma market economymainly due to transaction

    2011 51Nippa, Pidun, and Rubner

  • costs (Williamson, 1975) and the supposed inher-ent advantages of strategic planning and resourceallocation (Galbraith, 1952). This belief wasbased on theoretical reasoning and empirical ev-idence that proved corporate headquarters to bemore efficient than external capital markets whenit came to resource allocation and the steering ofstrategic business units.

    Third, the development of, and belief in, gen-eral management skills and universal principles ofmanagement (e.g., Drucker, 1954) bolstered theidea that managers educated at leading businessschools were optimally qualified to manage multi-business firms efficiently (Grant, 2010). Manage-ment scholars tried to identify and describe basicprinciples of management and to develop manage-ment methods and tools to apply in various indus-tries and businesses (Goold & Luchs, 1993). Con-sequently, it was perceived that managementelites should be able to successfully lead a set ofdifferent strategic business units.

    Propelled by these paradigms, diversificationstrategies became the norm between 1950 and1970 (Rumelt, 1982). Diversification strategiesacross different industries showed comparable pat-terns, and investors appeared to reward expandeddiversification (Shleifer & Vishny, 1991). Al-though diversification in related businesses dom-inated from the late 1950s through the mid-1960s,diversification into weakly and non-related con-glomerate businesses came into favor soon after.In the wake of a general quest for growth, con-glomerates with unrelated business units and highprice/earnings multiples (such as Transamerica,ITT, and Hanson) became the darlings of thestock markets and received cheap capital thatenabled them to continue to grow through theacquisition of additional businesses.

    This shift toward diversifying into unrelatedconglomerate businesses had a significant impacton management. Management of diversified cor-porations had to formulate and implement effi-cient corporate strategies to generate and allocatefree cash flow, exploit synergies, identify newgrowth opportunities, and/or decide whether tosell low-performing businesses.

    From a financial perspective, managing differ-ent businesses of a corporation resembles manag-

    ing a portfolio of assorted investments that varywith regard to profit or return expectations,growth potential, and risk. Therefore, applyingand transferring the concept of portfolio manage-ment from finance theory (Markowitz, 1952;Sharpe, 1963) to the real economy was logical.

    At the time, the name most clearly attached tothis emerging portfolio approach was that of BruceD. Henderson, founder of the Boston ConsultingGroup (BCG). In the late 1960s he systematizedand simplified a process for evaluating the differ-ent products or business units of a corporation inrelation to their cash flow generation and con-sumption. The portfolio composition is a func-tion of the balance between cash flows, he wrote.High-growth products require cash to grow. Low-growth products should generate cash. Both kindsare needed simultaneously (Henderson, 1970, p.1). Thus, market growth (as proxy for cash de-mand) and relative market share (as proxy for cashgeneration via an experience curve effect) consti-tuted the basic dimensions of the CPM conceptthat became known as the BCG growth-sharematrix. Responding to its success and marketneeds, other management consultants, such asMcKinsey (Wind, 1974) and A. D. Little(Wright, 1978), developed similar CPM matrices.These became very popular among corporatemanagement, were used by many large companies(Bettis & Hall, 1981; Haspeslagh, 1982), andquickly found their way into many strategic man-agement textbooks of the time.

    By the 1980s, however, the pendulum of stra-tegic management thinking started to swing backtoward more focused corporate portfolios. Thiswas accompanied by a major paradigm shift withinthe field of strategic management. A new domi-nance of theory-based beliefs in the superiority ofmarkets (invisible hand) over corporations (visi-ble hand) built on theories of core competenciesor capabilities-oriented corporate strategy (Collis& Montgomery, 1995; Prahalad & Hamel, 1990;Stalk, Evans, & Shulman, 1992). In turn, externalforces established a market for corporate controlthat stimulated company restructuring, corporatespin-offs, and increasingly more focused compa-nies (Goold & Luchs, 1993). More and moreeconomists argued that increasingly efficient fi-

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  • nancial markets were better at allocating capitalthan managers of multi-business firms and, conse-quently, should outperform organizational ar-rangements.

    It followed logically that if corporate diversifi-cation strategies are per se inefficient and value-destroying (Jensen, 1989; Wernerfelt & Mont-gomery, 1988), then CPM and CPM tools, too,were dispensable and scholars should not squandertheir efforts there. The predominance of an eco-nomic paradigm that denies the pertinence ofcorporate diversification may be the reason forscholars diminishing interest in CPM: If there isno economic rationale whatsoever for corporatediversification, research on how to effectivelymanage a corporate portfolio also loses its attrac-tiveness.

    Our investigation of the status of corporateportfolio management research thus started with aquestion: How relevant is CPM as a key disciplineof corporate strategy given the alleged economicinferiority of corporate diversification in contrastto market-based diversification? In the subsequentsection we investigate the major causes of schol-arly criticism of CPM and how valid they are. Andfinally, we provide answers to the question of towhat extent scholars have systematically investi-gated actual CPM practices and implementationof CPM instruments.


    The diversification-performance link has been in-tensively studied by management researchers fromvarious disciplines since the late 1980s (e.g.,Chatterjee & Wernerfelt, 1991; Goold & Luchs,1993; Hitt, Tihany, Miller, & Connelly, 2006;Palich, Cardinal, & Miller, 2000; Ramanujam &Varadarajan, 1989). Advancing Palich et al.(2000), rationales and empirical evidence can beorganized into three categories: value creationfrom diversification, value destruction from diver-sification, or an inverted U form (see Table 1). Foreach category one finds theoretical justificationsas well as empirical support.

    Theoretical Models of the Diversification-Performance Link.Value-enhancing models propose a consistentlypositive relationship between diversification and

    corporate performance. They draw mainly on ar-guments from market power theory, internal cap-ital market efficiency reasoning, transaction coststheory, portfolio theory, industry or product lifecycles, and taxation advantages (Gomes & Liv-dan, 2004; Grant, 2010; Lubatkin & Chatterjee,1994; Markides & Williamson, 1996). For exam-ple, significant advantages of corporate diversifi-cation are said to derive from economies of scaleand scope, smart allocation of capital based onsophisticated knowledge about businesses, explo-ration of new business opportunities while simul-taneously exploiting mature businesses, and taxbenefits of profit retention. Consequently, inves-tors should prefer diversified over less diversifiedmulti-business firms, leading to a diversification orconglomerate premium (Palich et al., 2000).

    Advocates of value-destroying models referpredominantly to internal transaction costs andprincipal-agent reasoning, and argue that the costof increasing bureaucracy and subsequent coordi-nation and governance costs exceed the economicbenefits of diversification, such as exploitingeconomies of scope (Denis, Denis, & Sarin, 1997;Jones & Hill, 1988; Lu & Beamish, 2004), leadingto a decrease in profitability or a lower economicvalue of corporate diversification compared to amarket-based diversification (Markides, 1995).The more efficient the external capital market,the lower the market-based transaction costs com-pared to internalization. Empirical findings show-ing that conglomerates trade at a discount, rela-tive to a portfolio of comparable stand-alonefirms, reinforced researchers belief that diversifi-cation destroys value (Gomes & Livdan, 2004).

    Authors advocating inverted-U models arguethat there is an optimal level of diversificationthat is, that moderately diversified firms outper-form both single-business firms and limited diver-sifiers on one hand and highly diversifiedcorporations on the other. In particular, someargue that there is a trade-off between benefits andcosts of diversification. Multi-business firms thatare engaged in related markets (related diversifi-ers) are able to benefit from synergies or the le-verage of resources at reasonable coordinationcosts, leading to an increase in profitability com-pared to focused firms and limited diversifiers (Lu-

    2011 53Nippa, Pidun, and Rubner

  • batkin & Chatterjee, 1994). These businesses alsomay be able to explore and exploit parentingadvantages (Goold, Campbell, & Alexander,1994, 1998).

    The more a multi-business firm diversifies inless-related businesses, the more coordinationcosts (e.g., increased monitoring, bureaucracy, re-source allocation, conflict) soar and benefits de-cline, leading to decreasing profitability (Jones &Hill, 1988; Nayyar, 1992). Consequently, any ad-ditional diversification beyond the optimal diver-sification level reduces the overall profitabilityand value of the corporation (Gomes & Livdan,

    2004; Palich et al., 2000; Singh, Gaur, & Schmid,2010; Tallman & Li, 1996).

    Empirical Evidence for These Models. Our focused reviewreveals that there is no clear empirical proof of anunconditional economic disadvantage of corpo-rate diversification. There are a few studies thatsupport value-enhancing models (Schoar, 2002;Yan, 2006) as well as some studies that appear toprove value-destroying models (Berger & Ofek,1995; Servaes, 1996). To date, inverted-U modelsseem to have the most support in empirical studiesand meta-analyses (Hoskisson & Hitt, 1990;

    Table1GenericModelsandEmpirical Evidenceof theDiversification-Performance Link*

    Value-Enhancing Models Inverted-U Models Value-Destroying Models

    THEORETICAL RATIONALE Market power advantages such as cross-

    subsidization Economies of scale and scope regarding

    multiple-use resources Capital market advantages and more

    efficient allocation Corporate diversification reduces risk, or

    volatility in rates of return

    Synergies and parenting advantage can beexploited to only a certain degree ofdiversification

    Competitive advantages restricted to relateddiversification

    The less related the diversification the morecosts outlast benefits

    Internal power struggles increaseinfluence costs

    Inefficient internal capital markets Inappropriate expansion due to agency


    EMPIRICAL EVIDENCEProfitability increase -Shape run of profitability Profitability decrease Schoar (2002) Mathur, Singh, and Gleason (2004)

    Rumelt (1974, 1982) Itami, Kagono, Yoshihara, and Sakuma (1982) Grant, Jammine, and Thomas (1988) Hoskisson and Hitt (1990) Palich and colleagues (2000) Singh and colleagues (2010)

    Berger and Ofek (1995) Rajan and colleagues (2000) Maksimovic and Phillips (2002)

    Diversification premium Contingent market value Diversification discount Jandik and Makhija (2005) Yan (2006)1 David and colleagues (2010)

    Wernerfelt and Montgomery (1988) Palich and colleagues (2000) Villalonga (2004)

    Lang and Stulz (1994) Berger and Ofek (1995) Servaes (1996) Denis, Denis, and Yost (2002) Best, Hodges, and Lin (2004)

    Substantially modified from Palich and colleagues (2000).Key: *selection; meta-analysis; 1for costly external capital markets only.

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  • Palich et al., 2000; Rumelt, 1974; Santalo &Becerra, 2008; Singh et al., 2010). There is ampleevidence that corporate diversification pays aslong as the benefits deriving from factors predom-inantly subsumed under relatedness are not over-compensated by escalating internal coordina-tion costs.

    After more than 40 years of research, there isthus no clear understanding of whether corporatediversification adds or destroys value. Several au-thors have pointed out that comparisons and con-clusions are impeded by the different concepts,assumptions, variables, measures, and methodsemployed (Hitt et al., 2006; Robins & Wiersema,2003). For example, there is little differentiationbetween relatedness and the extent of diversifica-tion (Bettis & Hall, 1983) and/or product, market,or international diversification. As there is nopredominant empirical proof of the economic su-periority of market-based diversification over cor-porate diversification, the more interesting ques-tions may be how diversification can increase thevalue of a company and how a corporation shouldmanage its diversified portfolio.

    WhatAre theMajor Causesof Scholarly CriticismofCPM,andHowValidAre They?

    As mentioned above, CPM frameworks and in-struments have been developed to help executivesof diversified corporations make strategic deci-sions. Whereas the original BCG growth-sharematrix quantifies market attractiveness and com-petitive position based on single proxies (marketgrowth in contrast to relative market share),frameworks such as the GE/McKinsey industryattractiveness-business strength matrix aggregatemultiple parameters (Bettis & Hall, 1981; Wind& Mahajan, 1981). Although some traditionalcorporate portfolio instruments consider differentvariables, they ultimately modify only two dimen-sions: market conditions (the attractiveness di-mension) and company potential relative to com-petitors (the competitive position dimension;Hambrick & MacMillan, 1982, p. 85).

    While practitioners perceive CPM matrices asuseful and intelligible tools for corporate planningand particularly resource allocation (Day, 1977;Hax & Majluf, 1983a; Hedley, 1977; Pidun et al.,

    2011; Seeger, 1984), reception and assessment byacademia have been overwhelmingly negative.However, a closer look reveals some interestingpatterns over time (see Figure 1). Research-ori-ented journals rarely published articles that ex-plained and demonstrated methodologies and in-struments (Propositions of CPM tools inFigure 1). Rather, once the CPM matrices hadfound broad acceptance in the corporate worldand business schools alike, they were put to thetest (Evaluation of CPM tools, predominantly inthe early 1980s). At the same time a few research-ers conducted surveys that investigated differentaspects of the use of CPM in large multi-businessfirms (Surveys on CPM implementation, Bettis& Hall, 1981; Haspeslagh, 1982). Surprisingly,although CPM methods are still taught at businessschools around the world, research interest seemsto have vanished after the mid-1980s, apart fromsome rare exceptions in the 1990s. This raises aninteresting question: what causes this apparentscholarly neglect in light of CPMs ongoing prac-tical use? The first thought is that the academicassessment and fierce criticism of CPM matrices(Day, 1977; Wensley, 1981; Wind, Mahajan, &Swire, 1983) led researchers to claim their generalinferiority and/or potential harm to the firmfrom CPM.

    Before detailing the criticism, however, we willelaborate on important aspects and streams ofcriticism. As there is not one single CPM matrixbut different, partly competing ones (Wind et al.,1983), scholars need to recognize which model isbeing criticized, although all of them compare aninternal dimension (mission, capabilities) with anexternal one (market, environment) (Davis &Devinney, 1997). While most criticism centers onthe traditional BCG growth-share matrixprob-ably because of its widespread use, success, andpictorial labelingsome authors (e.g., Slater &Zwirlein, 1992) address other matrices or the port-folio approach in general (e.g., Devinney & Stew-art, 1988). Furthermore, there is almost no devel-opment of criticism; with rare exceptions thedifferent authors do not build on previous contri-butions, although they refer to them. Finally,there is disagreement among critics with regard toapplied methods, reliability, and generalizability

    2011 55Nippa, Pidun, and Rubner

  • of findings and conclusions (e.g., Armstrong &Brodie, 1994a, 1994b, in contrast to Wensley,1994). The following review of the criticism ofCPM instruments makes use of broad categoriesthat show up in the overall picture: on one hand,scholarly contributions that emphasize conceptualand methodological deficiencies, and on theother, those that focus on shortcomings and prob-lems with regard to application, implementation,and outcomes (see Table 2).

    Criticism Regarding the Basic Concept and Operationalization ofCPM Matrices. Many authors question whether CPMmatrices are appropriate models for strategy for-mulation and decision making at the corporatelevel. Some question whether management withinmulti-business firms can make reliable decisionsbased on just two variables and a single objec-tivethat is, cash flow balance (Ansoff, Kirsch,& Roventa, 1982; Seeger, 1984; Wensley, 1981,1982)while others emphasize the virtue of thissimplicity (Day, 1977; Derkinderen & Crum,1984; Wensley, 1994). Other approaches, such asthe industry attractiveness-business strength ma-trix that aggregates a variety of variables into two

    dimensions, may avoid the problem of relying onjust one measure at the cost of becoming lesstransparent and prone to manipulation (Hax &Majluf, 1983b; Wensley, 1981; Wind et al., 1983).Accordingly, CPM matrices are frequently markedas oversimplified methods that will most likelylead to inferior strategic decisions (Armstrong &Brodie, 1994a; Seeger, 1984; Slater & Zwir-lein, 1992).

    Beyond pointing to the risk of oversimplifica-tion, critics challenge some fundamental assump-tions of the original CPM matrices, such as theobjective of maintaining a balanced portfolio interms of internal cash flows, the positive correla-tion between market share and profitability, andthe superiority of investments in industry growth.

    According to Henderson (1970), the preferredcorporate portfolio should be balanced with regardto internal cash flows. Even in times of ratherinefficient external capital markets, scholars havequestioned this assumption, criticizing that thecapital market as a source of funds seems to bealmost ignored in some approaches (Wensley,1981, p. 176). A similar opinion is expressed byHax and Majluf (1983a), who argued that exter-

    Figure1Main Scholarly-OrientedPublicationsonCPMIssues

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  • Table2Important Scholarly CriticismRegardingCPMMatrices

    Category ofCriticism Primary Foundation

    Author(s) Journal F M A O conceptual empirical Criticism/Proposals for Improvement1 Day (1977) Journal of


    Wrong assumptions regarding generalizability ofmarket share profitability link; other firmobjectives than cash balance; measures;unanticipated consequences.

    2 Christensen and colleagues(1981)

    Academy ofManagementProceedings

    J J

    Inappropriateness of strategic prescriptions forcorporate dog divisions; invalid or too narrowassumptions that need careful verification in aparticular context.

    3 Wensley (1981) Journal ofMarketing

    Preference for high market growth (e.g., fasterpayoff) and cash balance (e.g., disregard ofexternal capital market and risk) empiricallyand theoretically not justified.

    4 Hambrick and MacMillan(1982)


    J J

    Use of PIMS data to prove performancepredictions of BCG matrix; results challenge thedictum that all dogs are rather worthless;proposal for further strategic analyses.

    5 Hambrick, MacMillan, andDay (1982)

    Academy ofManagementJournal


    Empirical test and extension of the BCG productportfolio matrix. Result: expandedunderstanding of the strategic profile of eachtype of business.

    6 MacMillan, Hambrick, andDay (1982)

    Academy ofManagementJournal

    J J

    Empirical analysis of the association between thestrategic attributes and profitability of SBUs inthe four cells of the BCG matrix. Challengesome early strategic prescriptions.

    7 Ansoff and colleagues (1982) IndustrialMarketingManagement


    Challenge point hypothesis, i.e., determinationof a certain location of each SBU; formulate aneed for area hypothesis and proposedispersed positioning of SBUs.

    8 Wensley (1982) StrategicManagementJournal


    Criticizes very unrealistic competitive responsesand overemphasis of economics and costadvantages; questions link between marketshare and growth and profitability.

    9 Barksdale and Harris (1982) Long RangePlanning


    Definitional problems (e.g., SBUs or product/market groups; standardized market growthrates); incompleteness (pioneering products,negative growth); offer own model.

    10 Bettis and Hall (1983) Long RangePlanning


    Basic model is inappropriate for most largediversified firms, i.e., there is no clear divisioninto a reasonable number of independentSBUs (disregards relatedness).

    11 Hax and Majluf (1983a,1983b)


    J J J

    Popular labels; measuring market share at theconsumer end; SBUs not independent; validityof share and growth; profitable portfoliosdo not have to be cash flow balanced.


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  • nal capital markets are often more efficient thaninternal ones, and that other rationales and plan-ning tools to support decision making about ac-

    quiring, maintaining, and selling strategic businessunits (SBUs) are therefore needed.

    As a heuristic regarding the cash flow of a product


    Category ofCriticism Primary Foundation

    Author(s) Journal F M A O conceptual empirical Criticism/Proposals for Improvement12 Wind and colleagues (1983) Journal of

    MarketingJ J

    Inconsistencies with respect to classification ofSBUs within portfolio due to equivocaloperational definitions and weightings ofvariables, division rules applied, and modelused.

    13 Derkinderen and Crum(1984)

    Long RangePlanning

    J J J

    Share/growth portfolio techniques disregardsubtle but strategically important situationalcharacteristics, and therefore can lead toproblematic recommendations.

    14 Seeger (1984) StrategicManagementJournal


    Problem of oversimplification and stereotypingleading to wrong decisions by naive users;dangerous misapplication if model seen as aprescription of norm strategies.

    15 Devinney and Stewart (1988) ManagementScience


    Referring to limitations of traditional CPM andproject selection models, an advanced model isproposed that accounts for different forms ofrisk, interdependencies, etc.

    16 Proctor and Kitchen (1990) MarketingIntelligence andPlanning


    Mainly repetition of what is already known, e.g.,univariate measures (market growth andshare); high growth markets may beinattractive; disregard of capabilities.

    17 Morrison and Wensley (1991) Journal ofMarketingManagement


    Review of the history of the BCG matrix andfurther advancements; systematization ofestablished criticism (e.g., focus, assumptions,definitions, politicking, implementation).

    18 Slater and Zwirlein (1992) Journal ofManagement

    Investment decisions based on prescriptions fromGE-/McK industry attractivenesscompetitive position matrix may lead to valuedestruction instead of value creation.

    19 Armstrong and Brodie(1994a)

    InternationalJournal ofResearch inMarketing

    Laboratory experiments with 1,000 subjects(not specified) showed that those who knew orused the BCG matrix were misled and chose aninferior investment decision.

    20 Armstrong and Green (2007) InternationalJournal ofBusiness

    Paper does not focus on CPM, but on competitorand market share orientation (key for CPMmatrices); result: competitor-oriented objectivesespecially market share are harmful.

    F FundamentalM ModelA ApplicationO Outcome Issue is central to the paper

    J Issue mentioned, but not major focus of paper

    58 NovemberAcademy of Management Perspectives

  • or business, Henderson (1970, p. 1) originallyproposed that [m]argins and cash generated are afunction of market share. High margins and highmarket share go together. This is a matter ofcommon observation explained by the experiencecurve effect. Challenging this assumption, Day(1977) highlighted the fact that the economicvalue of market share differs significantly fromindustry to industry. Apparently, important con-tingencies such as technology and sourcing mod-erate the relationship of market share and profit-ability; thus, firms that make increasing relativemarket share a strategic priority may neglect otherimportant drivers of profitability (Hax & Majluf,1983a). More generally, Armstrong and Green(2007) reviewed and summarized studies thatproved, from their point of view, that pure com-petitor-oriented objectives, especially increasingmarket share, come at costs that in most casesreduce rather than increase profitability.

    The final challenge, the superiority of invest-ments in industry growth, was addressed by Haxand Majluf (1983a, p. 56) when they asked: Isindustry growth really the only variable that fullyexplains growth opportunities? This is particu-larly relevant to the BCG growth-share matrixwith its emphasis on industry and business growth.Wensley (1981) argued that there is no empiricalevidence that expanding market share in rapid-growth markets is economically easierthat is,more profitablethan in low-growth markets.Consequently, the assumption that free cash flowshould be directed from mature or slowly growingmarkets toward high-growth markets appears to beunfounded.

    Besides challenging these assumptions, scholarsfrequently criticized the lack of clear definitions,criteria, and metrics, particularly with regard tothe definition of the relevant markets and SBUsor the scales and dividing lines of the portfoliomatrices (Ansoff et al., 1982; Christensen, Coo-per, & de Kluyver, 1981; Day, 1977; Morrison &Wensley, 1991). Wind and colleagues (1983)demonstrated how variations of definitions of ma-trix dimensions and boundary lines lead to signif-icantly different conclusions and how [i]t is quitesurprising . . . that most of the portfolio literaturehas focused on the selling of specific approaches

    and discussions of the strategic implications . . .rather than on the fundamental measurement andvalidation issues involved (Wind et al., 1983, p.90). There is no consistency among critics regard-ing how to overcome the vagueness and ambigu-ity. Some scholars demand more rigorous rules,measures, and quantification (Armstrong & Bro-die, 1994a; Derkinderen & Crum, 1984; Wind etal., 1983), while others argue that there is aninherent vagueness in determining future strate-gies and propose replacing single-point position-ing of business units with dispersed positioningbased on estimated probabilities of applied evalu-ation criteria (Ansoff et al., 1982).

    The lack of important variables that influencethe process of defining efficient frontiers or man-aging multi-business firms at large is frequentlyaddressed (Barksdale & Harris, 1982; Derkinderen& Crum, 1984; Proctor & Kitchen, 1993; Wens-ley, 1981), yet only a few scholars propose a con-ceptual alternative other than modulating andsophisticating the basic scheme. Devinney andStewart (1988) pointed out that the products (orSBUs) in a corporate portfolio can be consideredas alternative investments competing for scarceresources, much like financial products. However,the straight application of portfolio models andinstruments that have been designed for financialmarket investments is limited by imperfect mea-surement and trading, the need to account formanagerial knowledge and control, external in-vestment alternatives, specific production econo-mies (especially interdependencies), and morecomplex risk-return relationships.

    The authors further emphasized that internalcorporate diversification is justified only if eco-nomically positive interdependencies exist, buteven in this case these synergies bear costs interms of higher risk (Devinney & Stewart, 1988,p. 1084). They pointed out that products are riskyassets that are not traded currently but could betraded if their external value exceeded the inter-nal value potential. Based on these clarificationsthey developed, operationalized, and conceptuallytested a sophisticated multi-product investmentmodel that built on a theory of traded and non-traded assets. This theory-based comprehensiveoperational guide for decision making in multi-

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  • business firms offers a promising research directionfor advancing CPM.

    Criticism Regarding Misapplication and Outcomes. Criticismof traditional CPM instruments highlights prob-lems, deficiencies, and errors associated with theapplication of CPM methods resulting from (a)inadvertent or deliberate misapplication of theinstrument, (b) blind implementation of the pre-scriptive strategies that follow from the analysis,or (c) the general inferiority of strategic conclu-sions from CPM matrices.

    First, critics often cite the inadequate appli-cation of CPM instruments. Particularly whenapplying semi-quantitative, multidimensionalmeasures as in the case of the GE/McKinseyindustry attractiveness-business strength ma-trix, the wide scope of interpretation regardingkey elements and measurements creates manyopportunities for pursuing individual interestsat the cost of overall corporate objectives (Day,1977; Hax & Majluf, 1983b). Managers maychoose just those market definitions, boundarylines, and evaluation data that support theirgeneral beliefs or interests, resulting in a morefavorable (or unfavorable) position of the re-spective SBU in the grid system.

    Second, some critics question whether pre-scriptive strategies, especially concerning dogbusinesses, are appropriate and feasible (e.g.,Christensen et al., 1981). Applying Profit Impactof Market Strategy (PIMS) data, Hambrick andMacMillan (1982) and Hambrick, MacMillan,and Day (1982) proved empirically that dog busi-nesses are not worthless to the corporation be-cause they often generate unexpected positivecash flows that can nurture at least one questionmark business. Among others, Seeger (1984)pointed out that unintended misinterpretationscombined with blind adherence to normativestrategy recommendations lead to wrong decisionsthat can jeopardize the whole corporation, just asmuch as deceptive behavior by different interestgroups.

    Third, a different stream of criticism claimsthat even the correct and unbiased applicationof CPM matrices may lead to inferior decisionsand value destruction because SBUs are classi-

    fied into a limited number of categories withspecific strategic recommendations based ononly few simplistic criteria (Haspeslagh, 1982;Hax & Majluf, 1983a). An often-cited exampleis the work of Wind and colleagues (1983), whocompared standardized portfolio models empir-ically and reported striking differences in theclassification of 15 SBUs of a large Fortune 500multinational industrial firm. They concludedthat it might be desirable to avoid using asingle portfolio model and instead to integratethe various models to take advantage of theirunique capabilities (Wind et al., 1983, p. 98).

    Assuming that portfolio planning concepts areconsistent with modern finance theory, Slater andZwirlein (1992) tested whether respective pre-scriptions lead to superior corporate performanceby analyzing reporting data from 129 multi-busi-ness firms in a seven-year time frame. Their resultsshowed that an investment that is consistent withthe normative recommendations of the industryattractiveness-business strengths matrix is notonly not positively associated with creation ofshareholder value, it appears to be associated withvalue destruction (p. 729). Finally, Armstrongand Brodie (1994b) conducted laboratory experi-ments with 1,015 subjects from several countriesthat provided experimental evidence that knowl-edge and actual application of the BCG matrixhas a tendency to mislead individual decisionmakers into selecting the apparently inferior in-vestment decision. Hence, they concluded: Untilcontrary evidence is produced, we advise againstusing matrix methods under all circumstances(p. 84).

    HaveScholars Systematically InvestigatedActualCPMPracticesand Implementation?

    Many, even fierce critics of CPM, admit thatinappropriate application of CPM concepts andmisuse of its matrices is not inherent to the meth-ods, but the result of how they are actually appliedby management. Thus, one would assume thatthere would be plenty of studies focusing on theformal and informal processes of managing corpo-rate portfolios, and particularly on the practicalapplication of the above-mentioned CPM matri-ces to verify and substantiate pitfalls and draw-

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  • backs. However, there are relatively few studies,and these are mostly outdated survey-based inves-tigations.

    The few empirically based analyses of howCPM tools are used within the strategic planningprocesses of corporations (see Figure 1) showedessentially that:

    Firms, or their strategists, apply a wide vari-ety of concepts of CPM. While some useCPM matrices as strategic management toolsonly in special situations, others develop anintegrated portfolio management system(Bettis & Hall, 1981; van der Velten & An-soff, 1998).

    The type of diversification a firm is aiming forand maintaining has a significant impact onthe way CPM is implemented. Portfolio man-agement systems are widely used by dominantvertical and related diversified firms, whereasconglomerates andrather self-evidentlysingle-business firms make little or no use ofCPM (Bettis & Hall, 1981).

    Too little growth (i.e., performance problems),too much growth (i.e., capital constraints), anda lack of strategic thinking motivate managersto adopt CPM (Bettis & Hall, 1981; Haspe-slagh, 1982).

    Defining appropriate SBUs based on clear cri-teria and different perspectives (e.g., headquar-ters versus business units) is a key success factorfor the efficient use of CPM instruments (Bettis& Hall, 1983).

    CPM is a valuable concept and/or tool forestablishing an accepted framework for strate-gic control and for managing the inherent ten-sion of centralization versus decentralizationwithin multi-business firms (Haspe-slagh, 1982).

    The most important contribution portfolioplanning can add is to the management pro-cess. The essence of managing diversity is thecreation in each business of a pattern of influ-ence that corresponds to the nature of thebusiness, its competitive position, and its stra-tegic mission (Haspeslagh, 1982, p. 73).

    Social dynamics, especially a high degree ofmutual trust among managers, play an impor-

    tant role in the success of CPM approaches(van der Velten & Ansoff, 1998).

    There is a need to actively seek and acquirerelevant information based on adequate orga-nizational structures and sophisticated manage-ment processes (van der Velten &Ansoff, 1998).

    ProposingaResearchAgenda forAdvancingCPM

    Our review has uncovered a broad need foradditional research for advancing corporateportfolio management. Future research onCPM should examine a rich set of issues. First, weneed to address criticism of existing CPM instru-ments, from disagreement about the relevance ofcorporate diversification at large as well as fromgaps in the existing theory. Additionally, we needto investigate the application of CPM methods aspart of strategic management processes.

    ResearchNeedsResulting FromanAssessmentoftheValidityof CPMCriticism

    Strategic decisions are widely believed to havesignificant impact on the potential success of anorganization. Methods and instruments employedby firms to support strategic decision making needto consider the inherent uncertainty, dynamism,and complexity of the strategic setting. Criticizingstrategic management tools such as CPM matricesbecause of oversimplification requires a clear dis-tinction between instrumental simplification andmisleading, logical, or methodological oversimpli-fication. Ultimately, oversimplification is more amatter of how managers apply strategic planningtools than the tools themselves, as these managershave to decide whether additional information isnecessary to substantiate decisions (Day, 1977;van der Velten & Ansoff, 1998). Therefore, schol-ars need to develop more sophisticated CPMmethods that integrate important decision vari-ables (e.g., risk, synergies, locus of control in cap-ital markets) and moderators (e.g., relatedness ofSBUs, industry characteristics, market institu-tions) to generate greater insight.

    In addition, scholars need to explore whetherCPM relevance differs around the world. Today,the economic and competitive environments of

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  • emergent economies may in fact reflect the orig-inal assumptions about CPM. In contrast, theexternal capital markets in developed countries inthe last two decades have shown a high degree ofefficiency and call for different CPM approaches.However, if we understand CPM more generallyas an attempt to substantiate the economicallyoptimal combination of multiple businesses underone corporate umbrella, the question of efficientcapital allocation is supplemented by other deter-minants. Therefore, there is the need to under-stand the impact of CPM in different institutionalsettings.

    Existing CPM instruments have also been crit-icized for giving no guidance regarding the defini-tion of strategic business units as planning objects,and their ambiguity with respect to dimensions,border lines, and measures. However, this rathergeneral criticism is as right as it is wrong, as onehas to take differences of existing CPM instru-ments into account. Whereas, for instance, thegrowth-share matrix relies mainly on two metrics,the industry attractiveness-business strengths ma-trix aggregates multiple parameters. Accordingly,challenges do not question the validity of thegeneral concept, but call for attentive applicationand further improvements of existing instruments.

    Moreover, some critics have highlighted theadvantage of not trying to calculate uncertain-ties inherent in strategic decision making andclaim that vagueness is a distinct advantage ofCPM matrices: Indeed, the danger would begreatest if we employed some standardized ap-proach to derive market share and thereforeavoided directly assessing the alternative interpre-tations (Wensley, 1982, p. 155). Instead ofthrowing out the baby with the bathwater, futureresearch should focus on two things: (a) develop-ing instruments that support decision makers inbetter defining markets, scales, and multiple map-ping to reduce ambiguity and arbitrariness and (b)providing managers with guidelines on importantcontingencies that affect the appropriateness andapplicability of these measures.

    FurtherProbing theRelevanceof CPMResearch

    Our review of the diversification literature did notproduce unanimous theoretical evidence that

    market diversification generally outperforms cor-porate diversification. Even in developed coun-tries, multi-business firms prevail. Empirical evi-dence supports the assumption that relateddiversification offers economic advantages oversingle-business firms. Furthermore, a recent globalsurvey on the CPM practices of leading corpora-tions, which we conducted in response to the lackof such studies, reveals that CPM concepts andinstruments are still widely applied and consideredas highly relevant (Pidun et al., 2011). As a result,scholars should investigate the reasons for theenduring ambiguity and discrepancies in the re-sults of studies of the diversification-performancelink. Future research on diversification strategiesshould specifically focus on important contingen-cies already highlighted by some studies of thediversification-performance link, such as differentforms of relatedness, market conditions, or indus-try characteristics (Santalo & Becerra, 2008).Suitable studies will contribute to answering oneof the key questions of strategic management:what type and degree of diversification is adequateunder which circumstances? The advancement ofconcepts such as synergies, parenting advantage,and additional moderators (e.g., ownership struc-ture) can add important building blocks.

    Need for TheoryDevelopment

    The most striking gap we found with regard to thescholarly debate about CPM is the lack of con-ceptual approaches, theory-based advancements,and development of specific theories in this im-portant field of corporate strategy. If corporatediversification pays off mainly for related diversi-fication, the concept of synergies or frameworks ofcorporate ownership, such as the parenting advan-tage approach (Campbell, Goold, & Alexander,1995; Campbell & Luchs, 1992), should play amore prominent role in advancing our under-standing of CPM.

    Exploring ways to use real options reasoning inthis special field of corporate strategy is anotherarea for further theory development. Assessingand quantifying growth options or holding op-tions, for example, may help to better capture thestrategic value of single business units as part ofthe corporate portfolio.

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  • Another key issue within theory developmentwas highlighted by Kale and Singh (2009), whoargued that managing strategic alliances as a port-folio is a conceptual approach that is promisingbut unexplored. Specifically, scholars predomi-nantly addressed single alliances and their under-lying motives, success factors, and required capa-bilities. However, selecting and maintaining aportfolio of strategic alliances requires on onehand different management skills than managinga single alliance and on the other hand othermethods and measures than those required formanaging a traditional corporate portfolio.

    Theoretical models of the portfolio problembased on risk and return reasoning (e.g., Devinney& Stewart, 1988) offer a promising starting pointfor developing concepts that integrate corporaterisk management and corporate strategic planning(for an early attempt see Cardozo & Wind, 1985).However, they have to account for significantdifferences between financial and corporate port-folio characteristics (Devinney, Stewart, &Shocker, 1985). More specifically, investments inbusinesses are structurally different from invest-ments in financial markets, leading to technicallimitations of applying financial portfolio tech-niquesespecially the capital asset pricing model(Devinney & Stewart, 1988). Financial marketsdefine risk as the systematic deviation of returns.Arbitraging unsystematic risks is a fundamentalassumption of efficient investment strategies infinancial markets, but cannot be directly appliedto the variance of accounting-based return met-rics. Moreover, the risk of a business investmentvaries with the product life cycle, which is notfeatured in current financial portfolio techniques.These challenges and open questions offer inter-esting future research opportunities.

    Scholars should also focus on the followingquestions: What constitutes a good corporateportfolio? Should a good portfolio be balancedwith regard to certain factors (e.g., cash flows, asimplied in the original growth-share matrix, orexploitation versus exploration of corporate capa-bilities), or is there a target function that shouldbe maximized (as implied in the industry attrac-tiveness-business strength matrix)? It may turn outthat it is not an either/or decision but rather an

    issue of distinct contingencies. Determining dif-ferent forms of balance and respective measuresmay complement this research field.

    Understandingand ImprovingCPMImplementation

    Although misapplication of CPM instruments hasbeen frequently criticized, scholarly knowledgeabout CPM implementation and related strategicdecision-making processes has been proven to bemeager and outdated. It is clearly necessary toconduct empirical studies that analyze how man-agers of multi-business firms manage their corpo-rate portfolios. Such studies should investigatehow satisfied decision makers are with their ap-proaches to CPM and what is needed to fill ap-parent deficiencies and gaps, including new chal-lenges to CPM that are not covered by existingconcepts and instruments. In addition, analyzingpossible biases introduced by applying certainCPM tools as well as highlighting important con-tingencies may help to develop more appropriatemethods. To distinguish good CPM practices fromless effective ones, future research may comparethe CPM approaches and processes of successfulmulti-business firms with those of their less suc-cessful peers. Such research initiatives should beable to identify important key success factors forapplying corporate portfolio management.

    Future research should also focus on organiza-tional capabilities and management skills that arerequired to effectively implement CPM, includingthose that have to be embedded within the busi-ness units to create value for the corporation atlarge. For example, the field may benefit stronglyfrom studies that address organizational ambidex-terity, to better understand the positive impact onthe corporate portfolio of balancing businessesthat exploit existing capabilities with others thatexplore new opportunities.


    The objectives of this paper were to appraise thecurrent state of research into corporate portfo-lio management as a major strategic manage-ment task of multi-business firms, to prove andchallenge its value for practitioners and scholars,

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  • and to direct future research and theory develop-ment.

    For the most part, inappropriate applications ofCPM matrices stem from the mistaken belief thatthey lead to definite strategic prescriptions ornorm strategies. Portfolio analysis and the result-ing positioning of SBUs should be considered ahelpful diagnostic technique that inspires ques-tions and debates among managers. They shouldalso be used with care and discipline (Morrison& Wensley, 1991, p. 127) and combined withother qualitative and quantitative analyses. Crit-ics often forget that the basic intention of CPMmatrices was to help managers ask the right ques-tions, not to provide deterministic answers andprescriptions of normative strategies (Morrison &Wensley, 1991; Proctor & Kitchen, 1993). Theyoffer rough guidelines rather than strict rules anddo not entrench strategies. In other words, CPM ismeant to support strategic thinking, not to replace it.

    Paradoxically, strategic management researchoffers few insights into methods for effectivelyorganizing and managing multi-business portfo-lios, which is of vital relevance for almost anymedium-sized or large corporation. Academic re-search has not kept up with the realities and needsof the corporate world, and in particular withCPM practices, thereby largely leaving the field toconsultants. While quite willing to criticize theapproaches developed by these consultants, schol-ars have done a rather poor job of creating alter-natives for what is clearly a critical corporateneed. Future research should accept the challengeand start by better understanding which struc-tures, processes, and instruments of CPM are ap-plied by multi-business firms. This will be the basisfor developing the theoretical and methodologicalapproaches that advance current CPM conceptsand instruments to address the important gaps andshortcomings both in terms of strategic manage-ment theory and management practice.

    AcknowledgmentsThe authors would like to acknowledge Robert Untiedt andMatthias Krhler for the support they provided on earlierversions of this paper as well as Timothy Devinney, GarryBruton, and anonymous reviewers for their valuable com-ments and suggestions.


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