What is corporate portfolio management

Since Bruce Henderson introduced the growth-share matrix in 1970, corporate portfolio management (CPM) has significantly influenced corporate strategy. Over time, CPM has evolved with new concepts like shareholder value maximization and parenting advantage, enhancing the understanding of corporate strategy among CEOs and boards.

The study explores the extent to which today’s corporations apply corporate portfolio management principles, the processes they establish, the responsibility of those responsible, and their satisfaction with their current approach to CPM.

BCG and Freiberg University conducted a global survey on corporate portfolio management, involving over 200 specialists from 196 of the world’s largest companies across 20 industries, to gather insights into the practice of CPM.

The survey results, published in the Journal of Applied Corporate Finance, reveal several key findings.

• Two-thirds of participating companies use CPM regularly, with 90% focusing on traditional criteria like market attractiveness, competitive position, and financial performance. Other important criteria like parenting advantage, risk, and portfolio balance are considered but hampered by lack of quantitative metrics and easy-to-use analytical methodologies.

• Around 60% of companies incorporate CPM into strategy development and long-term planning, but less than that in investment budgeting and financial target-setting.

• Most companies have a top-down approach to CPM, with executive team and corporate staff actively involved, while less than half of division and business unit staff participate in CPM.

• About 80% of companies use Corporate Performance Management (CPM) to enhance transparency and identify action needs, yet only 40% of recent divestitures and 23% of acquisition decisions were influenced by portfolio considerations, indicating a significant gap between the efforts companies invest in CPM and its actual role in corporate decision-making. What is corporate portfolio management

• Over half of the participating companies expressed dissatisfaction with their current CPM approach due to inefficiency and weak business unit acceptance and support.

• High-satisfaction companies have a holistic view of their portfolio, considering risk profile, balance, and business synergies. They integrate portfolio management into other corporate processes and quantify risk profiles, ensuring a balanced approach to their investments.

The question explores whether finance can effectively serve as a strategic partner to a business

Finance organizations have been suggested as potential strategic partners with businesses, but traditional solutions like frameworks and performance indicators have not significantly improved their ability to become strategic business partners. These efforts have led to a cycle of energy and resources being spent on addressing the issue, ultimately failing to address the root cause. Therefore, if finance organizations are seeking a quick solution to this issue, they should stop reading.

The finance-business chasm has been a topic of discussion for some time, but it has been largely overlooked. The link between finance and business can be bridged through corporate portfolio management, which focuses on optimizing an organization’s resource allocation as a portfolio of discretionary investments. This discipline helps finance develop a bridge between finance and strategy.

Finance plays a crucial role in optimizing resource allocation in corporate portfolio management, as they are at the intersection of information and data needed for this process. This is particularly important for companies that allocate resources, as few companies optimize their allocation. Other terms like IT, enterprise, product, and project portfolio management are also subsets of corporate portfolio management.

The text focuses on the transition from resource allocation to strategy.

Resource allocation and strategy are intertwined, as the location of resources is the basis of an organization’s strategy. While PowerPoint presentations, speeches, and strategy bullets may be useful, they are not the same thing. For example, if a company’s stated corporate strategy is to have loyal customers, but all investment is directed towards acquiring new ones, the strategy is actually focused on customer acquisition. This highlights the distinction between stated and real strategies.

The Harvard Business Review article “How Managers’ Everyday Decisions Create – or Destroy – Your Company’s Strategy” highlights the connection between resource allocation and strategy and emphasizes the need for a corporate portfolio management discipline.

Modern Portfolio Theory (aka the process

• Investment valuation :- An investment encompasses not just capital expenditures (capex) but also operating expenses (opex), with 25-40% of an organization’s discretionary expenses being investments. Consistency in valuation methodology is crucial, requiring driver-based models for projections and past NPVs and ROIs to consider strategy and other qualitative aspects driving investment value.

• Portfolio allocation:- To allocate investment, determine strategic priorities and allocate funds accordingly. For example, 25% in customer acquisition, 20% in IT, and 55% in customer retention. Allocation should also consider the risk profile of investments, with 60% in low risk, 30% in medium risk, and 10% in high risk.

• Portfolio optimization:- The strategy involves selecting suitable investments for portfolio allocation and regularly rebalancing the portfolio to maintain consistency, with the goal of maximizing strategic and financial return per unit of risk.

• Performance measurement :- Successful corporate portfolio management involves capturing actual investment results to compare promise vs. performance, enabling organizations to improve ongoing investment valuation and rebalance portfolios based on performance achieved.

The discussion of corporate portfolio management often assumes that people behave according to a theoretical construct, but this is not always the case. Experts often suggest that individuals should manage their company’s investments like they manage their own, but this overlooks the fact that many individuals may not manage their own personal portfolios as well.

Organizational behavior is a crucial aspect of corporate portfolio management, as it involves considering the behavior of hundreds or thousands of people, often leading to astray decisions due to emotions, intuition, and other external influences. This behavior is often overlooked in personal portfolios and can lead to astray decisions in an organizational setting.