Portfolio Strategy and Capital Allocation

One of the best ways for companies to create superior value is by excelling in portfolio strategy—that is, investing capital across its businesses, products, and initiatives to maximize returns. Companies that don’t systematically allocate capital to their most attractive opportunities risk falling off a “valuation cliff.”

Qualities of an Effective Portfolio Strategy

A good value creation strategy depends on a clear portfolio strategy and active portfolio management. These require the company to:

  • Define the value creation roles of the different businesses in the corporate portfolio. Each business in a portfolio has a unique role to play. Do you know which businesses will be your future growth engines? Which will mainly supply cash for other businesses to invest? Which will you need to turn around or consider selling?
  • Allocate capital differentially across the corporate portfolio. A clear portfolio strategy has an investment thesis for each business unit. Capital allocation depends on the unit’s current performance, future potential, and role in the portfolio. Try viewing it from the perspective of a long-term investor: Will this business be worth more in the future, and what can we do to maximize our return on investment?
  • Shape and reshape the business portfolio over time through M&A and divestiture. M&A and divestiture are critical parts of active portfolio management. Acquisitions are an important way to strengthen existing businesses or expand into new ones. Meanwhile, selling businesses that no longer fit in the portfolio can improve the value creation potential of the entire portfolio.

Featured Experts

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