Portfolio Management

By Patrick Heinemann

In today's fast-paced market environment, change is the only constant. Sustaining and creating value successfully in these volatile environments is challenging, but possible. Proactive portfolio management is the cornerstone of continuous value creation. It protects the core business, facilitates efficient capital allocation and empowers a company to capitalize on growth opportunities effectively.

The rapid pace of change characterizing today's market environment is undeniable with disruption triggers from a wide range of dimensions. Evolving regulations, industry norms and sustainability imperatives create an inherent complexity of the global business terrain. Geopolitical shifts often precipitate alterations in supply chains. Meanwhile, swiftly changing consumer behaviors can challenge carefully crafted product debuts. Additionally, the financing environment is in flux due to interest rate fluctuations and industries are undergoing transformation through AI , automation and digital platforms, among other catalysts. While disruptions appear in various forms, they all drive the necessity for ongoing transformation and underscore the significance of active portfolio management. To be well positioned for future growth and secure competitive advantages, companies need to put the value creation potential of their businesses to the core of their portfolio strategy. Allocating capital efficiently to deliver the highest possible value to all stakeholders is now more important than ever. Our experience shows that industry winners share four key characteristics. Using case studies, our advisors help clients develop these characteristics in order to maximize the value of the assets in their portfolio.

Our experience shows that industry winners share four key characteristics and facilitate these characteristics through active portfolio management. At Roland Berger we support you in developing these characteristics in order to maximize the value of your portfolio.

• Maximizing strategic coherence. Industry winners vigorously manage their portfolios based on a clear strategic rationale. Through consistent review of their portfolio strategy, these players guarantee that every business has a high strategic fit and contributes towards the overarching company goals.
• Driving for industry leadership. Setting the agenda in the respective markets of the portfolio business is on top of industry winners’ minds. These players focus on building technological and know-how leadership as the basis for competitive advantage. Portfolio management strategies such as Buy & Build, Joint Ventures or R&D investments are key vehicles to attain and retain these leading positions.
• Building size, resilience and financial position. Industry winners are trusted capital partners with convincing equity stories for public or private markets. With portfolio businesses of significant scale in promising market positions, they fortify resilience and thereby attract capital very effectively.
• Provening ability to execute. Delivering consistent positive results is a core competency of industry winners. They outperform their competition through short reaction times as well as systematic analyses of their environments and the value contributions of their portfolio businesses. Each business is required to fulfill a set of criteria aimed at generating positive shareholder returns, aligning with a distinct investment thesis for potential acquisitions or divestitures.

Our portfolio management approach

At Roland Berger, we are uniquely equipped to bring new perspectives to your portfolio. We combine a value-driven private equity mindset with our deep industry knowledge gathered from extensive project experience in your industry. We support you to successfully maximize the value creation potential of your portfolio in three steps:

1. Analyze the strategic potential of your as-is portfolio based on latest market insights

Before jumping straight into strategy formulation, it is crucial to assess the strategic potential of your portfolio in its current market environment. From our experience, the strategic potential depends on the market attractiveness, the strategic position of the business in the market as well as its value contribution to the portfolio. Starting with the market attractiveness, we evaluate the economic appeal of the addressed markets, given their size, potential for growth and profitability margins. Based on that, the robustness of the company's competitive edge and strategic position based on its USPs is evaluated. Additionally, we assess the businesses’ stand-alone value contributions considering operational profits and their cost of capital. As a result, we define the strategic potential of individual businesses and outline market opportunities of the as-is portfolio.

2. Corporate benefit and strategic fit / gap analysis

Multi-business companies create value by nurturing portfolio businesses with high strategic and economic value contribution. However, to maximize the value creation potential, they need to achieve parenting advantage. This is determined by the corporate contributions towards the portfolio businesses that put them in a better spot than on a stand-alone basis or in ownership of a different parent.

We divide corporate parenting leaders into three main categories driven by their corporate contribution patterns: The natural owner, the performance enabler and the proactive investor.

• The natural owner has distinct business or industry advantages that a portfolio business can leverage to drive its top-line growth. This can come in multiple forms, ranging from well-established route-to-markets to unique engineering capabilities or market insights.
• Performance leaders are experts in driving operational efficiency across portfolio businesses and create economics of scale. This can include superior procurement practices, logistics capabilities or processes automations in the overhead departments that can be accessed by portfolio businesses.
• Proactive investors are able to identify attractive business areas early, to internally build or acquire portfolio businesses leading to rapid growth and profitability. By tailoring their resource allocation practices with an investor mindset, they also exit less promising fields early, before destroying value while ensuring their portfolio is streamlined for growth.

Roland Berger employs a tree-based synergy approach to ensure that all potential synergies leading to parenting advantage are collectively and exhaustively investigated. We consider revenue, cost and financial synergies across portfolio businesses. In addition to the synergy assessment, we perform a strategic fit / gap analysis. It demonstrates which market segments draw on the same capabilities and where core competencies of the parent stack to generate additional value. On the other hand, it identifies gaps in the value proposition to specific target markets and ideal growth opportunities liked to the core competencies of the parent.

3. Define the portfolio strategy and target composition

Based on the defined strategic potential of portfolio businesses, market opportunities and parenting advantages, we define an actionable portfolio strategy to maximize value creation and optimize asset allocation. First, we focus on the core businesses and define actions to protect competitive advantages. Investments should be channeled to strengthen USPs of portfolio businesses, which have the highest ability to win in their respective markets. Also, distinct performance improvement programs can be setup to drive profitability and the parent’s ability to harvest consistent cashflows. Next, a plan is developed to address identified market opportunities as future business. Investments are needed to develop or acquire new capabilities. Strategic options we consider are internal developments, Buy & Build strategies, large single acquisitions, or joint ventures. To free-up capital for investments in these growth opportunities, we develop exit strategies to divest non-core businesses. This is considered when the divestment benefits outweigh relevant strategic implications. Divestments require a diligent carve-out concept as a basis for a structured sell-side M&A process and need to be planned diligently.

All defined portfolio management activities are then summarized in a strategic roadmap that leads to the Group’s target portfolio composition. Due to a dynamic market environment and shifting strategic priorities, portfolio management is a continuous process. So regular revisions of the portfolio strategy and the target composition are of essence to ensure long-term success.

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