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.”
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?
Every leader wants to build a company that is simultaneously a great business and a great stock. Delivering on either of those aspirations is hard enough; delivering on both is a supremely difficult challenge. How do you do it? By crafting a comprehensive value creation strategy that aligns business strategy, financial strategy, and investor strategy.
The best way to develop a robust value creation strategy is to take a holistic approach that addresses three important areas of the company—business strategy, financial policies, and interactions with investors.
A company’s value creation strategy is only as strong as its value management capability, which drives a company’s processes and organizational culture. This is the foundation on which everything rests.
At many organizations, the typical planning process results in one-dimensional business plans that are extremely difficult for senior executives to understand and assess. They’re built on best-guess estimates with no transparency on how individual initiatives will contribute to overall results; little or no assessment of the risks inherent in the plan, and a weak link between operating targets and TSR.
The finance function has undergone a radical shift in the last decade. Investors are more demanding, pushing companies to maximize the value-creation potential of their investments. Inefficient capital allocation is becoming a competitive disadvantage. At the same time, big data, real-time data, and other technological advances are providing new tools for finance to track financial performance. They’re also raising the stakes for excellence in performance management.