When Second-Best is Best
It may seem counterintuitive, but there are situations where you don’t want everyone to be the best of the best. In portfolio management of a business, in particular, being second best is sometimes the optimal strategy. Particularly in high-growth situations where resources or time are scarce, and it’s not possible to maximize investment in all areas.
For example, Gartner has it’s Magic Quadrant to rank competitors in various IT industries. Each year competitors find their ranking position through a series of these quadrants. Clients and prospects use these to select vendors. Each manager of a line of business wants to be in the top-most right-most position as proof of being the best of the best.
The portfolio manager sees lines of business spread over several of these quadrants. Ideally, each line of business of the portfolio should loiter as a lower leader, sometimes challenger, and occasionally visionary. When one line of business is the top of an industry, it does so often at a cost to the other lines of business in the portfolio. Adjusting resources across the portfolio prevents a line of business from falling into the non-referencable zone.
This is a general rule. There are cycles involved, often around three years, to balance investments to run a consistent and positive portfolio. There are also specific reasons to be the top leader in some lines of business for a while, as there are reasons to close-out areas with low returns. The risks to mitigate relate to market changes that cannot be fully anticipated. Those too high in the leader quadrant for too long over time can become optimized for a market that may eventually end.
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