Building an advantaged portfolio

Perspectives

Building an advantaged portfolio

The crux of corporate strategy

​One of the central objectives of corporate strategy is for executive management to think holistically about a company’s portfolio of businesses–conceiving and spearheading ways to make the aggregate value of a company’s holdings durable over time, and greater than the sum of its parts. This vital mission comprises two central questions: In which businesses should we participate? And, how do we create value within and across our businesses? In other words, where will we play and how will we win, at the portfolio level?

Framework of an advantaged portfolio

​Monitor Deloitte has found that the most successful portfolios exhibit three broad characteristics: They are strategically sound, value-creating, and resilient. Perhaps this seems obvious. But in our experience—maybe because it requires consideration and testing across a wide range of attributes—companies seldom apply this tripartite “advantaged portfolio” approach.

In this white paper, we explore the characteristics of an advantaged portfolio and the trio of attributes that constitute each (figure below). These attributes in aggregate are needed to fully assess, assemble, and maintain a top-performing corporate portfolio. A company may need to include additional company-specific criteria to meet its specific goals and aspirations, and the specific weighting of attributes will vary by company. But the nine attributes noted in the figure below are “default” criteria that will be relevant in a wide range of portfolio contexts.

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Characteristics of an advantaged portfolio

Three features of successful portfolio design

​Executives, academics and consultants have devised numerous frameworks for building and sustaining the optimal corporate portfolio. Our experience suggests that any successful portfolio design framework (as distinct from the portfolio itself) has to have three important features. To begin with, the portfolio framework must be multi-dimensional in its criteria, because portfolio evaluation and construction cannot be reduced to a simple 2 x 2 matrix; it must focus on the performance of the portfolio as a system, i.e., how the parts interact, and not just on the individual components; and it must be tailorable to the company in question, since each company has different goals and aspirations. Advantaged portfolios is a framework designed to meet these criteria.

Designing requires hard work

​In reality, developing an advantaged portfolio is more about creativity and optimization than linear calculation. It requires viewing portfolio options through a wide array of lenses, as well as evaluating both individual and system effects. And it requires using criteria tailored to the company at hand. Most of all, however, designing advantaged portfolios requires hard work: the hard work of wrestling with data, making trade-offs, and making tough choices.

In fact, in our view, management must be prepared to hold challenging, data-rich, iterative discussions about what to do (as well as what not to do) when creating an advantaged portfolio. Because at the end of the day, good strategy is all about choices. And making the right choices is fundamental to sustaining growth and competitive advantage over the long term.

In the context of strategy, a portfolio is the collection of businesses that an organization chooses to own. In a corporate-level portfolio, the unit of analysis is the “strategically distinct business” (SDB). SDBs have distinct competitors, bases of competition or geographies. SDBs may or may not correspond to a company’s organizational business units or reporting units. But portfolios can exist at multiple levels within a company—not just at the corporate level. For example, they can exist within a business unit, a division or even a product line.

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