1. Introduction
Companies are experiencing increased volatility, uncertainty, complexity and ambiguity (VUCA) in global markets. This is being driven by a wide variety of factors, including new regulations, changing consumer preferences and the Covid-19 pandemic. These market dynamics are having an enormous impact on corporate portfolios, and corporate decision-makers need to find new methods to successfully navigate these complex situations. Constantly adapting corporate portfolios to new market conditions and ensuring an optimal fit with corporate strategy will be crucial for long-term success.
PwC utilises a structured approach to portfolio optimisation to guide executives through volatile markets. This approach comprises five steps; executives can apply all five steps in order, or just some of them, depending on their requirements. Triggered by external or internal needs, the PwC portfolio optimisation approach starts by analysing the relevant market environment, reviewing the company’s competitive positioning in that market environment in form of the corporate portfolio, and assessing whether the corporate strategy is suitable to optimally exploit market opportunities and mitigate risks. Based on this baseline, the portfolio review stage reveals the “strategic fit” of the corporate portfolio, i.e., how well it delivers the corporate strategy. Finally, strategic measures are selected – on both corporate and business unit (BU) level – to optimise the corporate portfolio.
Fig. 1 • PwC portfolio optimisation approach
Source: Own illustration
2. Market environment
The constantly rising level of VUCA is being driven by a wide variety of factors, including new regulations, changing consumer preferences environmental risks, political tensions, technological innovations, and – as recent events have shown – pandemics. This is having a severe impact on fundamental elements of corporate planning, and top executives need to find ways to successfully navigate these VUCA waters. Forecasts are unanimous in predicting that the market environment will continue to become increasingly complex and opaque, and that unexpected, high-impact events will inevitably occur more frequently.1 Given that market environments will become more dynamic and volatile, the ability to quickly adapt corporate strategies to new market conditions and to make sure that corporate portfolios deliver strategic goals will be crucial for long-term market success.
Increased volatility means that corporate planning parameters will change more drastically and frequently. These planning parameters will thus need to be constantly monitored and analysed, because failure to adapt to external changes could easily lead to corporate strategy being undermined. Alongside routine, institutionalised reviews of the corporate environment, ad-hoc reviews may become necessary after unexpected events or during exceptional situations within the company (e.g. financial distress) to assess whether strategic repositioning is needed.
3. Corporate portfolio
A company’s corporate portfolio defines its competitive positioning, across three levels: operational footprint, capability profile, and products and services offered. All three levels are interconnected and entangled at the operational level, but these connections are often complex and opaque. An in-depth understanding of the corporate portfolio and its operational interconnections is essential for assessing the company’s exposure to market risks and its vulnerability to volatility.
In VUCA markets, corporate portfolios tend to shift away from efficiency and maximising profits to improving the reliability and robustness of the company’s operational backbone. Deliberately adding operational slack, duplicating critical processes or running them in parallel, and enhancing fallback procedures and safety protocols all help to accommodate the challenges of VUCA markets and protect the portfolio from volatility strikes.
4. Corporate strategy
Corporate strategy determines what market positioning the company should aim for, and addresses the corporate purpose, USP and governance structure at the corporate level. At the BU level, strategic goals focus more on operations, relating to the products, the channels, the markets and the capabilities required to satisfy customer needs.
Successful strategies require companies to be very reflective, and strategy will vary with different VUCA factors. The underlying strategic approach has changed: companies now need to be adapters, focusing on speed, flexibility, adaptability and risk reduction. This presents a contrast to the old approach of the preserver – focusing on detail, stability, and maximising profits. Strategies are also focusing on shorter timeframes to better account for dynamic environments.2
5. Portfolio review
In dynamic VUCA markets, regular portfolio reviews are becoming an increasingly important means of ensuring that the corporate portfolio is aligned with the corporate strategy as closely as possible. PwC research has shown that corporate approaches to portfolio management are not yet sufficiently mature – only around half of the decision-makers surveyed said that their companies had implemented structured, regular portfolio reviews.3
We recommend a standardised approach to portfolio optimisation, based on transparent and objective criteria and carried out on a regular basis. PwC’s tried-and-tested portfolio review methodology identifies the strategic fit of each BU against your strategic goals, and uses this to categorise each BU into future business, core business or non-core business.
Fig. 2 • Business maturity vs. cash flow circle
6. Portfolio optimisation
Following the portfolio review, strategic measures for optimising corporate portfolios are required. Future business areas need further development; core business areas must be nurtured and optimised; and non-core business areas should be divested to free up capital. Suitable strategic measures at the corporate level include portfolio or market valuation measures. At the BU level, organic measures (e.g. R&D, digitalisation, fit-for-growth strategy) and inorganic measures (e.g. acquisitions, divestitures, IPOs) will help to improve the strategic fit of the corporate portfolio. Organic measures utilise the company’s internal resources and limit risk exposure, while inorganic measures allow for bold, quick and high-impact strategic moves.
Ideally, executives should make use of both organic and inorganic measures to continuously improve their company’s competitive positioning, ensuring that corporate portfolios deliver the best possible returns and provide robustness against future volatility.
