To invest or divest: creating an advantaged portfolio

One of the cornerstones of corporate strategy is making choices about what to invest in, what to maintain and what to strategically divest. Leaders must regularly undertake a review of the corporate portfolio, to ensure it remains aligned to the overarching corporate strategy, is coherent in its composition, and is appropriately balanced to diversify both performance and risk. In doing so, these leaders are taking the necessary steps toward creating an advantaged portfolio.
“What makes for an advantaged corporate portfolio?”:
  1. Strategically sound: it fosters a strong competitive position, supports multiple levels of  innovation, and creates synergy so that the value of the portfolio is greater than the sum of the parts. In essence, the portfolio composition reinforces itself through the diversity of its component parts.
  2. Value-creating: an advantaged portfolio creates more value than alternative portfolio options. Value-creating portfolios maximise their intrinsic value, address market value and find the right owner.
  3. Resilient: Leaders too often overlook matters of risk and resilience when evaluating corporate strategy and the corporate portfolio. Resilient portfolios can survive a variety of plausible future scenarios, provide options for the business and allow leaders to weigh up feasibility versus risk.

 

In conducting a strategic portfolio assessment, the following should be considered:
1. Review and validate the winning aspiration

The first step of a portfolio review is to validate your company’s aspiration at a corporate level. In order to have a competitive corporate portfolio, an organisation must seek to ‘win’ in specific markets and in a particular way, translating an abstract, positive future into a defined ‘winning aspiration’.

A good example of a winning aspiration is how Nike aspires to “bring inspiration and innovation to every athlete in the world”, adding “if you have a body, you’re an athlete”.

2. Assess where to play

With a clear aspiration, the portfolio must define its specific ‘where to play’ choices. The assessment of ‘where to play’ choices should start with defining criteria for assessing the most attractive markets to compete in that will support the achievement of the aspiration. Consideration should be given to identifying target segments, particular customers, markets, geographies, product and/or service types and aspects of the ecosystem or value chain in which the organisation operates in.

Among other factors, market attractiveness criteria could include:

 

 

Natural skincare and beauty brand Jurlique, for example, began to assess attractive markets to play in outside of Australia. Originally founded in Adelaide, South Australia, Jurlique experienced net losses during 2008 despite being a leading brand in the Australian beauty and health market. After selling to a Japanese-listed beauty group, and as part of its overseas expansion strategy, Jurlique explored expansion to the Asian market due to its high market attractiveness and competitive advantage above mainstream brands. This market assessment led them to invest in a successful 20 concept stores in Hong Kong and a larger presence in China.

3. Assess ability to win of existing portfolio

Having reviewed the ‘where to play’ choices, an assessment should be made of how well the existing portfolio, and the strategic capabilities that it contains, is positioned to win in those chosen markets. It is important to identify and understand any relative competitive deficiencies in the portfolio, as well as any opportunity to enhance the cross-portfolio performance through integrating aspects of the portfolio (e.g. moving all portfolio businesses onto a common digital platform to drive economies of scale and aggregate data across the portfolio for mutual benefit).

Areas to review when evaluating the portfolio’s ability to ‘win’ might include:

  1. Relative market share
  2. Customer satisfaction scores
  3. Competitive ranking
  4. Price competitiveness
  5. Customer loyalty
  6. Brand strength
  7. Product stickiness
  8. Sales effectiveness

Inditex, the Spanish multinational clothing company behind the global fast fashion retailer Zara, has leveraged a common digital and analytics platform across its portfolio to ensure a tightly managed supply chain and ability to give customers exactly what they want. Every item of Inditex clothing is tagged with an RFID microchip before it leaves a centralised warehouse, which enables them to track that piece of inventory until it is sold to a customer. The data about the sale of each SKU, inventory levels in each store, and the speed at which a particular SKU moves from the shelf to the POS is sent on a real time basis to Inditex’s central data processing center. This center is open 24 hours a day and collects information from all 6000+ Inditex stores across 80+ countries and is used by teams for inventory management, distribution, design and customer service improvements. This creates a defensible competitive advantage and ability to win across the portfolio by leveraging real-time data driven insights from a common digital platform.

4. Assess whether value is being created or destroyed

Ultimately, an advantaged portfolio will be judged on its ability to provide the highest return possible on invested capital, and create economic value, not destroy it. If capital is being invested in the portfolio where a minimal or negative return is being realised, that capital would most likely be more effectively deployed elsewhere.

Assessing whether value is being created or destroyed within a portfolio requires looking at two critical drivers of intrinsic value: the revenue growth and the return on invested capital (ROIC) of each component business and as a collective portfolio. The value creation matrix below is a useful visualisation to identify where value destruction is occurring, and the path towards maximising value creation.

 

 

Amazon, for example, was able to expand their portfolio into areas like Amazon Web Services, Amazon Prime Video and the Amazon Alexa due to the higher return on invested capital in the company’s more mature businesses. When core products within the portfolio are generating high return on invested capital, the additional cash-flow generated can and should be invested in adjacent and transformational innovations. Amazon is also a good example of a company that is comfortable moving quickly on products or business that are value eroding, evidenced by the decision to pull back from Amazon Fire Phone and Amazon Destinations.

In addition to consideration of the return on invested capital, synergies where the value of combined businesses, products, services or capabilities within the portfolio are greater than the sum of the parts, should also be considered.

5. Consider future scenarios

Assessing the resilience of the portfolio against plausible future scenarios is an important activity in creating an advantaged portfolio. Organisations can use scenario modelling and simulations to better understand how the portfolio will respond to a range of potential scenarios. Through these simulations, adjustments in the portfolio mix and investments can be considered and action taken.

The example below highlights that the Status quo portfolio appears to do well in only one scenario (Scenario D). It is thus less robust than alternative options.

 

Shell was a corporate pioneer of scenario planning when it began an activity called “Long-Term Studies” in 1965. The initiative involved defining future state scenarios by identifying drivers, uncertainties, enablers and constraints, and unearthing potential issues and their implications. This has helped Shell plan and adapt to decades of oil crises and economic turmoil. Most importantly, the Shell Scenarios team is able to use the research and scenarios compiled by the team to inform strategic decisions on their portfolio mix across lines of business, products, geographies and future investments.

6. Take action – invest, maintain or divest

The final step in creating an advantaged portfolio is to categorise all businesses, products and services, using a matrix as illustrated below.

Based on the insights gathered during the portfolio review process, action must be taken by leadership to enhance the portfolio. These actions can often result in a short term revenue reduction, but if done effectively, the return on invested capital across the portfolio will improve, leading to a more sustainable, advantage portfolio in the longer term.

A key consideration at this stage is assessing whether lower value assets within the company could be higher value assets to other owners, not an easy decision for leaders to make given the growth mindset instilled in many corporate leaders.

Australian banks have effectively identified and executed divestment opportunities over the past few years, including the ANZ and the NAB’s divestments of their life insurance businesses. In both cases, the divested portfolio assets were of greater value to the purchasers, and it allowed the banks to simplify and leverage their strengths as a distributor of insurance products alongside core banking products, not as the primary insurance underwriter.

Regularly reviewing and making choices across your corporate portfolio are essential to creating an advantaged portfolio

Maintaining a winning corporate portfolio, one that is strategically sound, value-generating and resilient, is at the heart of every successful company.

And although the use of advanced analytics and insight to support portfolio choices is critical, we believe a healthy inject of creativity and critical thinking is essential to the final judgement. A methodical, analytic corporate portfolio review should be undertaken regularly, presenting leaders with necessary insight to inform the choices for creating advantage.


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