Unearthing the sources of value

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Unearthing the sources of value hiding in your corporate portfolio
Executives who rely on high-level metrics to manage will miss potential sources of value creation. A finer-grained look can help.

Marc Goedhart,
Sven Smit, and
Alexander Veldhuijzen

The senior leaders of a diversified global

the company identify a more significant set of

industrial company recently got a major shock

opportunities to reallocate resources and

when they took a more fine-grained look at

stimulate value creation than anything that had

corporate performance. Rather than viewing the

been on the table previously.

company through the usual lens of the topline growth, economic profit, and return on

The problem of averages hiding outliers is

invested capital (ROIC) of its four divisions, the

a common one, and it frequently undermines

members of the top team broke things down

the corporate center’s ability to take a strategic

much further—into 150 business segments.

look across the organization and make

Two-thirds of those segments were falling so short

selective course corrections or trade-offs between

of their economic-profit targets that they alone

investments. That companies struggle with

would have made the company overall miss

this is clear from the typical annual budgeting

its targets by 40 percent. The rest, however, were

process, when many routinely allocate their

outperforming by enough to skew the averages

capital, R&D, and marketing budgets to the same

for the company and each division, giving the

activities year after year, regardless of their

appearance of only a 7 percent shortfall.

relative contribution to performance and growth.

Recognizing the performance disparities helped

The cost is high, since those that more actively

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reallocate resources generate, on average,
30 percent higher total returns to

shareholders.1

For example, when we analyzed four divisions within a corporate group in a consumerdurable-goods company, we found that all