For companies with multiple businesses, developing a value creation strategy requires a clear portfolio strategy and active portfolio management. How can you estimate the value creation potential of the company’s business units and gauge the impact of strategic moves?
What is the fundamental strategic potential of the business? A business with a poor competitive position that is active in a relatively unattractive market will have less potential than a business that is a market leader in an attractive market. Therefore, it will need different objectives, different capital allocation, and different key performance indicators.
What is the current financial health of the business? What is its potential to create value in the future? The answers to these questions also will determine the criteria for success in the business.
Are we the best owner for this business? How well are we able to realize its inherent value? Does the business have important synergies with other businesses in the portfolio? Are there alternative ownership models that could create greater value in the marketplace?
Taking a more careful look at the business from these angles will help a company determine the specific role that each business should play in the overall portfolio—and whether it should remain in the portfolio at all.
The outcome of the Portfolio X-Ray is a differentiated view of the roles that various businesses should play in the corporate portfolio. Each unit has a unique starting position and specific goals, and it should be treated individually.
Instead of making the common mistake of allocating capital according to each business’s size, set investment budgets for each business based on its role in the overall portfolio. Should the business unit be a priority for growth or managed for returns? Or is it a candidate for divestiture?
Establishing specific roles for each of the businesses in the portfolio is a critical step in maximizing the value the company as a whole can create.