February 14, 2018
By Barrett Shipman, PwC Deals Partner
The beginning of a new year is a good time to assess your current situation and find things you’d like to improve. This is true for people, but also companies. I recommend that my clients do a thorough portfolio assessment every year. Like any fitness routine, there are several steps you can follow to improve your current situation.
First step: Understand your portfolio of businesses
Virtually all companies are comprised of lines of business that have a lifecycle: startup, growth, maturity and decline. You can sustain success, relevance, and competitive advantage throughout this lifecycle by balancing the competing needs of business continuity and renewal. Striking the right balance between these needs is necessary in order to stay ahead of competitors, regulatory changes, industry convergence and other external factors that will impact your core business.
When assessing your portfolio, it’s important that you are resolutely focused on the way your company creates shareholder value, its integrated set of capabilities that provide a competitive advantage, and the products and services that allow you to win in the markets. It’s often harder to recognize when it is time to divest and monetize a high growth business that is growing beyond your core competencies versus letting go of a struggling, underperforming business. An objective view of what made your company successful in the past, how its core competencies are changing over time, and what is required to be successful in the future requires asking some key questions for each business line.
Second step: Do a deep-dive on capabilities
Asking the correct questions involves doing a deep-dive on capabilities. Capabilities are the interconnected people, knowledge, IT, tools, and processes that enable you to execute more effectively than your competition. These individual capabilities are only powerful if they align and integrate to form a reinforcing capabilities system.
Keep in mind that capabilities systems cannot change overnight. They are intricate, interdependent, complex, and cross-functional, and, as such, very hard to replicate. A winning capabilities system enables a company to endure and prosper, but a company that does not continually evaluate its capabilities system can find that their core capabilities no longer enable them to succeed. This is where asking the correct questions comes into play:
For mature businesses:
- Does this business leverage management’s collective experience and expertise?
- Does this business enhance our reputation and brand?
- Are cash flow and profit maximization sustainable?
- Do our employees and shareholders value the stability and continuity of this business?
For innovative and high growth businesses:
- Does management have the experience to grow this business and anticipate competitive disruptors?
- Does our company have the brand to attract appropriate talent and be credible with our core customers in the market place?
- Do we have the sufficient capital and capabilities relative to our competition to succeed?
For declining businesses:
- Can the business be renewed or repositioned within our portfolio?
- Can the business be renewed by combining with a strategic buyer or in the hands of a focused financial buyer?
- What are the exit and separation costs?
- How much time do we have to get to market?
Third step: Decide it’s time to trim down and define your fitness plan
At the end of your portfolio assessment, you might find that you have one or more businesses that no longer fit. Very similar to individuals that are evaluating their own fitness, a business will have different timelines, unique challenges, and various options for how to trim down. Rate of decline, time-to-market, capital requirements, and degree of entanglement are analogous to an individual’s weight, proximity to a workout facility, workout budget, and competing personal priorities.
Defining the fitness plan requires that you take a hard look in the mirror, with respect to the business you are considering selling and evaluating the strategic and operational impacts of each exit option. Focusing on strategic and operational impacts will inform value trade-offs associated with different exit options, and the associated target operating models for the divestiture company and parent. The only way to fully understand these impacts is to define who and what drive the value of the businesses and consider the consequence of the separation. Examples include:
- Commercial relationships and intellectual property
- Business line leadership and key talent
- Enabling functions and infrastructure
- Market leadership positions, barriers to entry and other competitive differentiators
Fourth step: Look at the data in a synthesized way
Performing a deep dive on capabilities and defining a fitness plan for your portfolio of businesses requires that you look at enterprise data in a synthesized, consistent manner. Getting a 360-degree view of your portfolio of businesses and thinking about separation from strategy through execution requires stakeholder alignment from the C-suite to the employees in the field. Achieving this alignment increases deal value, speeds time to market, and enables more options.
A deals data hub is a good way to get the information you need. It is a combination of infrastructure, technology, and deals focused data to maximize your company’s deal insights. It provides a single source of truth for strategic, financial and operational data and increases transparency to provide deeper on demand insights to accelerate the transaction. My Deals partners at PwC, Nitin Lalwani and Mike Niland, describe the benefits of active portfolio analysis in their blog post, With the power of data and advanced analytics, divestitures can increase returns, transform a company.
Having a formal process and deals data hub enables you to identify divestiture options early and drive rapid, fact-based decisions and execution that maximize divestiture value. And the good news is that the information from the portfolio analysis feeds directly into the first steps of a successful divestiture process. Alignment of key decision makers speeds time to market and keeps the most options open to sellers whether you are contemplating a wind-down, spin-off, trade sale, or concurrent combination of options.
A regular fitness routine
Active portfolio management is vital to keeping your company fit. It allows you to anticipate at a very early stage where your current business lines may no longer be aligned with your core strategy and gives you time to consider your options. With decades of experience, we can prepare you for each step of the way – from creating a data hub to deciding which divestiture is best for your business. Together, we can help your company develop a regular fitness routine that keeps your strategy smoothly on course – and aimed at creating value.