530  Corporate Portfolio Strategy to access additional customers or by sharing an existing manufacturing infra- structure. Others add value by applying distinctive skills such as operational or marketing excellence, by providing better governance and incentives for the management team, or by having better insight into how a market will develop. Still others add value by more effectively influencing a particular market’s critical stakeholders—for instance, governments, regulators, or cus- tomers. Let’s examine these sources of value one at a time, understanding that in some cases, the best owner may be able to draw on two or more sources at once. Unique Links with Other Businesses The most direct way that owners add value is by creating links between busi- nesses within their portfolio, especially when only the parent company can make such links. Suppose a mining company has the rights to develop a coal- field in a remote location far from any rail lines or other infrastructure. An- other mining company already operates a coal mine just ten miles away and has built the necessary infrastructure, including the rail line. The second min- ing company would be a better owner of the new mine because its incremental costs to develop the mine are much lower than anyone else’s. It can afford to purchase the undeveloped mine at a higher price than any other firm in the market and still earn an attractive return on invested capital (ROIC). Such unique links can be made across the value chain, from R&D to manu- facturing to distribution to sales. For instance, a large pharmaceutical com- pany with a sales force dedicated to oncology might be the best owner of a small pharmaceutical company with a promising new oncology drug but no sales force. Distinctive Skills Better owners may have distinctive functional or managerial skills from which the new business can benefit. Such skills may reside anywhere in the business system, including product development, manufacturing processes, and sales and marketing. But to make a difference, any such skill must be an important driver of success in the industry. For example, a company with great manu- facturing skills probably wouldn’t be a better owner of a consumer packaged- goods business, because the latter company’s manufacturing costs aren’t large enough to affect its competitive position. In consumer packaged goods, distinctive skills in developing and market- ing brands are more likely to make one company a better owner than another. Take Procter & Gamble (P&G), which in 2013 had 180 brands, including 23 billion-dollar brands in terms of net sales—almost all of which ranked first or second in their respective markets—and 14 half-billion-dollar brands. Its brands were spread across a range of product categories, including laundry What Makes an Owner the Best?  531 detergent, beauty products, pet food, and diapers. As of 2013, some brands, including Tide and Crest, had been P&G brands for decades. The company added newer brands to its portfolio in different ways: for example, it acquired Gillette and Oral-B, while it developed Febreze and Swiffer from scratch. In 2014, P&G determined that its distinctive skills were best applied to very large brands. It announced that it would discontinue or divest 90 to 100 of its brands, focusing its energy on the brands that remained. Another example of distinctive skills is Danaher, a diversified company with revenues of $19 billion. What makes Danaher successful is its well-known Danaher Business System. Danaher makes acquisitions only where it believes it can apply its management approach to substantially improve margins. By applying this strategy over the past 25 years, Danaher has consistently in- creased the margins of its acquired companies. These include Gilbarco Veeder- Root, a leader in point-of-sale solutions, and Videojet Technologies, which manufactures coding and marking equipment and software. Both companies’ margins improved by more than 700 basis points after Danaher acquired them. As Danaher’s activities grew in size and complexity, it also began to di- vest or spin off some of the businesses that were large enough to stand on their own. For example, in 2016, it spun off its professional instrumentation and industrial technologies businesses. Fortive, the spun-off company, included Gilbarco Veeder-Root and 21 other businesses that Danaher had acquired and whose performance it had improved. Danaher also announced the spin-off of its dental business in 2018 (the spin-off was not yet completed at the time of this writing). Better Governance Regardless of whether owners are running day-to-day operations, better own- ers can add value through their overall governance of a business. They pro- vide better governance through the way they (or their representatives) interact with the management team to create maximum value in the long term. For example, the best private-equity firms don’t just recapitalize companies with debt; they improve the companies’ performance through better governance. Two of our colleagues analyzed 60 successful investments by 11 leading private-equity firms. They found that in almost two-thirds of the transac- tions, the primary source of new value was improvement in the operating performance of the company, relative to peers, through fruitful interaction between the owners and the management team.3 The use of financial leverage and clever timing of investments, often cited as private-equity firms’ most important sources of success, were not as important as improved governance. 3 C. Kehoe and J. Heel, “Why Some Private Equity Firms Do Better,” McKinsey Quarterly, no. 1 (2005): 24–26.