Dynamic Portfolio Management  535
Dynamic Portfolio Management
Applying the best-owner sequence, executives must continually identify and 
develop or acquire companies where they could be the best owner and must 
divest businesses where they used to be the best owner but now have less 
to contribute than another potential owner. Since the best owner for a given 
business changes with time, a company needs to have a structured, regular 
corporate strategy process to review and renew its list of development ideas 
and acquisition targets, and to test whether any of its existing businesses have 
reached their sell-by date. Similarly, as demand falls off in a mature industry, 
long-standing companies are likely to have excess capacity. If they don’t have 
the will or ability to shrink assets and people along with capacity, then they’re 
not the best owner of the business anymore. At any time in a business’s his-
tory, one group of managers may be better equipped to manage the business 
than another. At moments like these, acquisitions and divestitures are often 
the best or only way to allocate resources sensibly.
A McKinsey study of 200 large U.S. companies over a ten-year period 
showed that companies with a passive portfolio approach—those that didn’t 
sell businesses or only sold poor businesses under pressure—underperformed 
companies with an active portfolio approach.5 The best performers systemati-
cally divested and acquired companies. The process is natural and never ends. 
A divested unit may very well pursue further separations later in its lifetime, 
especially in dynamic industries undergoing rapid growth and technological 
change.
General Dynamics, the U.S. defense company, provides an interesting 
example of an active portfolio approach that created considerable value. At 
the beginning of the 1990s, General Dynamics faced an unattractive indus-
try environment. According to forecasts at that time, U.S. defense spending 
would decline significantly, and this was expected to hurt General Dynam-
ics, since it was a supplier of weapons systems. When CEO William A. An-
ders took control in 1991, he initiated a series of divestitures. Revenues were 
halved in a period of two years, but shareholder returns were extraordinary: 
an annualized rate of 58 percent between 1991 and 1995, more than double 
the shareholder returns of General Dynamics’ major peers. Then, starting in 
1995, Anders began acquiring companies in attractive subsectors. Over the 
next seven years, General Dynamics’ annualized return exceeded 20 percent, 
again more than double the typical returns in the sector.
For acquisitions, applying the best-owner principle often leads potential 
acquirers toward targets that are very different from those produced by tra-
ditional screening approaches. Traditional approaches often focus on finding 
5 J. Brandimarte, W. Fallon, and R. McNish, “Trading the Corporate Portfolio,” McKinsey on Finance 
(Fall 2001): 1–5.