The Ashridge Portfolio Matrix

Growth by acquisition is the ambition of many businesses - regardless of their size. Acquisition offers the opportunity to make huge jumps in terms of market, geography and profitability in a relatively short period of time, and at a lower risk than prolonged internal investment. Identifying potentially suitable targets is the key to improving your chances of acquiring a value-enhancing, strategically relevant business.

A business wanting to pursue the route of acquisition might find it beneficial to take on the role of ‘parental developer’ in the first instance. In other words, the parent business uses its own competencies to add value to the target business through the application of specific skills, such as financial management or research and development. In which case, the parent needs to have a clear understanding of their own capabilities and the needs of the target.

The Ashridge Matrix, developed by Michael Goold and Andrew Campbell, evaluates the suitability of a potential acquisition target for the parent organisation. The matrix is made up of only two variables - according to which the target is judged. These are ‘Benefits’ and ‘Feel’. In practise, however, other variables might come into play, such as previous experience, management attitudes and the culture of the business in question. All relevant factors should be considered before any action is taken.

Benefits

This is the value that the parent business can add to its target. The parent business might have many resources and capabilities, but only those that the potential target business actually requires for growth can be considered ‘benefits’. Strictly speaking, benefits are opportunities to help. The more that the parent business can help, the more it can add value. If the parent has a strong finance department, for example, it can provide a value-adding service to the target in this area.

Feel

‘Feel’ describes the similarities between the parent business and its target. Similarities can be determined by industry, the structure and culture of the organisation and the law.

Many other aspects might also need to be considered. ‘Feel’ centres around the critical success factors (CSF) related to these aspects. CSFs refer to the limited number of areas in which satisfactory labour will ensure competitive performance. If the parent business thoroughly understands the target’s CSF, it can use its resources and capabilities more effectively. The parent business needs to know, for example, how financial services are provided within the context of that particular industry.

The combination of ‘Benefits’ and ‘Feels’ gives the following types of business acquisition targets. These vary in attractiveness according to the circumstances:

Alien Business:

This is a business target outside of the industry of the business that is considering takeover or merger proposal. The parent, thereby, has very limited knowledge of internal and external factors affecting the target business. The lack of understanding surrounding the critical success factors establishes the low ‘feel’. There are also no opportunities for the parent to add value to the business because the target already possesses the skills necessary for its success and so, the target has low ‘benefits’.

Value Trap Business:

This is also a business outside the industry of the business considering takeover or merger proposal and, for the same reasons as the ‘Alien Business’, it has a low ‘feel’. Opportunities exist, however, for the parent to add value to the business because it possesses resources and capability in areas the acquisition target requires for success. This therefore shows a high level of ‘benefits’.

Ballast Business:

This is a business in the same industry as the business considering takeover or merger proposal. Its high ‘feel’ owes to the parent’s understanding of critical success factors within the industry. There are no opportunities, however for the parent to add value to the business because the target already possesses the skills necessary for its success and so, the target has low ‘benefits’.

Heartland Business:

This is a business in the same industry as the business considering takeover or merger proposal and, for the same reasons as the ‘Ballast Business’, it has a high ‘feel’. Opportunities exist for the parent to add value to the business because it possesses resources and capability in areas in which the acquisition target requires for success. This shows a high level of ‘benefits’.

The Ashridge Portfolio Matrix is a simple and effective tool for evaluating the attractiveness of a potential aqcusition target. The matrix ensures a business has a clear understanding of its own capabilities and the needs of its target, using only two variables. The matrix can determine whether or not a takeover or merger would be a smart business move.