Of all the levers that a CEO can pull to achieve superior performance, managing a corporation's scope may offer the greatest potential to generate strong shareholder returns. Economic cycles and other factors that contribute to a company's fortunes or misfortunes may be beyond even the boss's control, but among the activities that he or she can influence, adjusting the breadth of a corporate business portfolio represents a significant portion of the company-specific drivers of shareholder returns.1
It is therefore odd that so little consensus exists on the topic. True, long-standing conventional wisdom maintains that "focus is the answer." Volumes of finance theory argue, correctly, that investors allocate capital among diverse businesses more efficiently than corporations do and that good projects can typically attract funding in public or private capital markets. Conversely, markets are quicker than ever to discount the valuations of diversified companies as a result of their perceived shortcomings, including the cross-subsidization of financially unattractive projects and difficulties in aligning the management incentives of diverse business units with the fortunes of the corporation at large.
And yet . . . every CEO knows that no matter how focused his or her business is, at some point diversification...