I remember working at IPC in the late 1990s. Backed by private equity firm Cinven, it cherished expansionary ambitions: ‘100 magazines by the year 2000’ was the plan. In fact, despite a little fudging, that target was never quite reached, but by my calculations, the company once owned a remarkable 95 regular-frequency print publications. By last year, that figure had fallen to 85, so it came as a shock to many when the company announced that, following a review, it was considering divesting close to 40 of its remaining titles.
‘Following a review’ – three innocent little words that can change the fortunes of a company and affect the lives of hundreds of employees. So what does such an exercise entail, is it productive or destructive, and how can the thinking be adopted to the benefit of smaller publishers?
Some people use the terms ‘portfolio review’ and ‘strategy review’ interchangeably. They’re two subtly different things, and I’d argue that anyone that conducts the former without having first concluded the latter risks destroying a lot of shareholder value. So I’ll outline what I think a strategy review should be, and should aim to achieve, then will talk about the implications of this for a portfolio.
But first: is all this really necessary? Why not just bumble along as things are? The reason is simple: history is littered with examples of companies that failed to change as fast as the competitive environment, resulting in them being either shrunken or eliminated entirely. Spot both the threats to your business as it stands and the opportunities elsewhere in time and you could turn a potentially negative competitive environment into a positive one. But beware: a poorly conducted review can lead to perverse conclusions which, if acted upon, can destroy value.
1. SWOT analysis
I’ll kick off with a simple exercise that most readers will already know. SWOT stands for Strengths, Weaknesses, Opportunities and Threats. Generally presented in four quadrants, these represent the internal and external factors affecting a business, in its current form, at the current time and the foreseeable future.
The idea is to take a dispassionate look at the business and identify the factors both within the organisation and in the external environment that indicate how it may fare, without further management action. Most people – consultants included – use this model poorly, being subjective and anecdotal in their identification of these four factors. This can be avoided by combining it with two proven consulting devices – one internally, the other externally-focused.
* Resource-based view (RBV)
The internal part of the exercise corresponds to what is often known as the resource-based view of a firm, which is long-hand for identifying what a company is strong and weak at, and endeavouring to build a growth strategy around the former, while minimising the impact of the latter. Resources include both tangible things (say a unique piece of software that enables you to do something better, cheaper and quicker than anyone else) and intangibles such as particular expertise or a professional reputation that enables you to charge a premium or win business that others cannot compete for.
In particular, the aim of RBV is to focus on the resources that are valuable (can help to drive greater value creation than its competitors’), rare (not everyone has it, or something comparable), inimitable (rivals can’t copy it) and non-substitutable (they can’t replace it, or do it another way). These are your strengths. Weaknesses are the areas in which you face others who have superior resources, or where yours are flawed or lacking. Opportunities, from the internal perspective, are the as-yet unrealised areas in which strengths can be leveraged to create additional value, and threats are where others’ superior resources could be deployed to your disadvantage.
* Porter’s Five Forces
A popular way to analyse the external pressures on a firm is to employ Harvard Professor Michael Porter’s five forces model. This states that there are – count ’em – five external forces brought to bear on every business: competitive rivalry within the industry, threats from substitute products and new entrants, the bargaining power of suppliers and that of customers. This exercise can be conducted at an industry level – magazines, say – or at the level of the firm, or one of its products or sectors.
As before, an area in which the firm is well defended against external pressures counts as a strength; the reverse is a weakness; unrealised potential to exploit a strength is an opportunity and a weakness (or a competitor’s strength) that could cause you increasing harm in the future is a threat.
Armed with this information, it should be possible to construct a rigorous SWOT analysis. The opportunities and threats should flow from the strengths and weaknesses, not just vertically, but also diagonally; a great approach is to look for opportunities to overcome weaknesses and strengths that could result in threats, as well as leveraging existing strengths.
2. The Boston Matrix
Here’s another device that many readers will know. Devised by Bruce Henderson of the Boston Consulting Group, this tool invites managers to place each product or sector in which it competes on a grid whose axes are, horizontally, relative market share and, vertically, market growth. Each quadrant has a short-hand name, and a recommended course of action.
As you will appreciate, placing a title or portfolio (or even an entire business) in a particular quadrant implies how best to manage it. So the question of where the lines are drawn and what constitutes high or low market share or growth – all of which sounds pretty subjective – is crucial. There’s a risk that management will set the parameters to suit hoped-for outcomes or, worse, that bad decisions are made on the basis of arbitrary measures.
3. The Directional Policy Matrix (DPM)
You’ll gather I’m no fan of the Boston Matrix. Thankfully, there’s an evolution of it that is widely used in consulting: the Directional Policy Matrix. Developed by GE in the 1970s and honed by Professor Malcolm McDonald at Cranfield School of Management, it replaces the market share and growth parameters with the attractiveness of the market and the company’s strength within it, the idea being that preparatory work is undertaken objectively to quantify these two criteria before plotting products on the matrix, often also showing the relative size of the product or portfolio by adjusting the diameter of the circle used to represent it or using circle size to represent the size of the sector, then carving out a pie-slice to depict the company’s share. It can also be used to plot other companies competing in your market, or in one you are thinking of entering.
Quantifying the scores for a market and a company’s position within it can be a complex process, keeping armies of consultants in skinny lattés and iPads, but I’d suggest going with a mix of the purely numerical (market / sector size, growth trend, percentage share enjoyed by the firm, margins) and marks driven by the RBV and Five Forces models outlined above.
As with the Boston box, as it is colloquially known, each quadrant implies a course of action.
4. Ansoff’s Product-Market Growth Matrix
Named after a Russian émigré who, following a successful career as an applied mathematician, subsequently became a top management consultant, this tool helps managers decide how best to pursue the growth strategies they’ve identified.
As with the DPM, the key is to do some rigorous preparatory work to decide how best to grow. If a company has really good products, but its current market is getting more saturated, competitive or regulated, it may make sense to launch that product into a new market; conversely, if it operates in an attractive market but growth opportunities for its current products are limited, it may make sense to launch new products into that market. If the product and market are both good, and the SWOT analysis indicates further growth potential, the best option may be market penetration – in other words, increasing marketing activity to generate more sales of an existing product in an existing market.
I’ve shown diversification – a new product in a new market – in red, because the risks are much higher. As the resource-based theory has demonstrated, firms tend to generate success from the things they already do well. Launching or even acquiring a new product in a new market is risky. And if you look at most publishing companies that foray abroad for the first time, they often do it with an existing product; when they do it through acquisition, the risk of failure is much higher (witness the then Emap Consumer business’s purchase of what was then the Petersen magazine business in the States).
5. Putting it all together
I opened by saying it’s important to have a strategy, and for that to underpin any portfolio review. A company’s strategy should begin with a consideration of what the shareholders – the people whose capital is at risk, and that enables management and others to be employed – want the company to achieve, financially and otherwise. What growth do they want in assets per share, or the share price (if publicly quoted)? What is their view on dividends versus reinvestment, and what level of risk will they countenance?
Once these parameters are established, it’s important to evaluate what the company is good (and bad) at and what the environment looks like in its current markets and any prospective ones. Once this is done, it’s possible to begin the portfolio review by plotting its products on a directional policy matrix, which will reveal how each title or cluster should be managed. It’s my suspicion that an exercise of this sort drove IPC’s divestments, since most were in sectors in which the company experienced low market shares and which were small markets, better contested by low-cost independents rather than a corporate that can achieve very efficient large-scale manufacturing, distribution and agency advertising sales but imposes hefty central department recharges and overheads on low-turnover titles.
While reviews of this nature may appear to make the most sense for behemoths such as IPC that own many brands and contest many markets, the same thinking can be applied to a single-title publisher, and all points in between. Indeed, I’d argue that a single-market company should put more effort into optimising its strategy because an unexpected adverse occurrence in that sector could wipe it out, whereas judicious development could help it not only anticipate and avoid any such blows but also build a broader and more resilient portfolio over time.
