528  Corporate Portfolio Strategy
that portfolio throughout its evolution. We then explore why diversification’s 
role in creating value is often misunderstood. The chapter concludes with 
a guide to systematic construction of a portfolio of businesses, using a case 
study of a company that applied the approaches we explain.
Bet on the Horse—or the Jockey?
Deciding what businesses to operate in is clearly one of the most important 
decisions executives make. As our colleagues’ research showed, it is a critical 
determinant of a company’s destiny. For example, a company that produces 
commodity chemicals is unlikely ever to earn as much return on capital as 
one that makes branded breakfast cereal can. That said, different owners and 
managers might be able to extract more or less value from the same business. 
So creation of the most value requires picking attractive businesses, combined 
with identifying the owner able to generate the greatest cash flows from each 
business.
In pointing out the importance of picking the right business, Kaplan, Sen-
soy, and Strömberg use the analogy of deciding at the racetrack whether to 
bet on the horse or the jockey.2 These researchers analyzed small start-up 
companies financed by venture capital firms, tracking whether the start-ups 
eventually grew large and successful enough to go public. They found that it 
was better to have a competitive advantage (horse) than to have a good man-
agement team (jockey). With a competitive advantage, the venture capitalists 
could always replace a weak management team. But even the best manage-
ment team might be unable to turn a nag into a sleek thoroughbred—a weak 
business into a winner. In other words, go with the horse, not the jockey. War-
ren Buffett made the same point in his own unique way: “When a management 
team with a reputation for brilliance joins a business with poor fundamental 
economics, it is the reputation of the business that remains intact.”
Although even great managers may find it impossible to salvage a poor or 
declining business, for any given business, different owners or management 
teams may extract higher levels of performance than others can and thus be 
better owners of that business at that time. For many years, businesses mak-
ing pharmaceuticals for animals were owned by companies that also made 
pharmaceuticals for people. Then, from 2009 to 2019, a massive restructuring 
transformed the animal health business. With different economics, sales, and 
distribution channels, five of the largest pharmaceutical companies—Bayer, 
Johnson & Johnson, Novartis, Pfizer, and Sanofi—sold or spun off their animal 
2 S. N. Kaplan, B. A. Sensoy, and P. Strömberg, “Should Investors Bet on the Jockey or the Horse? Evi-
dence from the Evolution of Firms from Early Business Plans to Public Companies,” Journal of Finance 
64, no. 1 (February 2009): 75–115.

What Makes an Owner the Best?  529
health businesses. Elanco, a division of Eli Lilly, bought six animal health com-
panies during this period and in 2019 was itself spun off as an independent 
company. During the same period, many large pharmaceutical companies (in-
cluding Johnson & Johnson, Merck, and Pfizer) sold off significant parts of 
their consumer businesses.
A classic example of the better-owner principle is General Mills’ 2001 pur-
chase of Pillsbury from Diageo. Shortly after buying Pillsbury for $10.4 bil-
lion, General Mills increased the business’s pretax cash flows by more than 
$400 million per year, increasing Pillsbury’s operating profits by roughly 70 
percent. Diageo’s core business is in alcoholic beverages, while General Mills 
and Pillsbury sell packaged foods. Under Diageo, Pillsbury was run entirely 
separately from Diageo’s core business, because the two companies’ manufac-
turing, distribution, and marketing operations rarely overlapped. In contrast, 
General Mills substantially reduced costs in Pillsbury’s purchasing, manu-
facturing, and distribution, because the two companies’ operations dupli-
cated significant costs. On the revenue side, General Mills boosted Pillsbury’s 
revenues by introducing Pillsbury products to schools in the United States, 
where General Mills already had a strong presence. The synergies worked 
both ways; for instance, Pillsbury’s refrigerated trucks were used to distribute 
General Mills’ new line of refrigerated meals.
Pillsbury represented value in at least two ways at the time of the sale: 
its value to General Mills and its value to Diageo. For General Mills to con-
sider the deal attractive, Pillsbury’s worth under General Mills’ ownership 
had to be greater than the $10.4 billion purchase price. For Diageo to consider 
the deal attractive, General Mills’ offer had to represent more than the value 
Diageo expected to create from Pillsbury in the future. From a value-creating 
perspective, General Mills was a better owner of Pillsbury than Diageo.
In practice, one can never pinpoint a company’s ideal owner, but only the 
best among potential owners in the given circumstances. In the Pillsbury ex-
ample, it is theoretically possible that some company could have generated 
even higher cash flows than General Mills as Pillsbury’s owner. But the change 
in ownership to General Mills illustrates that a different owner can make a 
huge difference in a company’s value: a 70 percent increase in this case.
Best ownership also helps the economy by redirecting resources to their 
highest-value use. Significant activities can be carried out at much lower cost, 
freeing up capital and human resources for other activities.
What Makes an Owner the Best?
To identify the best owner of a business in any given industry circumstances, 
you must first understand the sources of value that potential new owners 
might draw upon. Some owners add value by linking a new business with 
other activities in their portfolio—for example, by using existing sales channels