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Portfolio Management in turbulent times
New regulation, changing consumer preferences, environmental risks, technological innovations – the triggers for the so-called VUCA factors (volatility, uncertainty, complexity and ambiguity) are manifold. Recently, the Russian attack on Ukraine came on top and challenged market conditions.
How do corporate executives deal with such uncertainty factors? What strategies do they rely on to navigate their corporate portfolios through turbulent times in the best possible way – and how successful are they in doing so?
Answers to these and other questions can be found in the PwC Portfolio Management Study 2022. The study was conducted in cooperation with the research institute Kantar and the Technical University of Darmstadt. Read the most important results now.
“We were surprised by the confidence and prevailing optimism of corporate executives. But it is very likely that government measures and support programs are blurring the reality for decision-makers. That's why it's now a matter of getting a clear picture as quickly as possible and reacting accordingly."
Your expert for questions
Dr. Marc Schmidli
Partner, Deals and Valuations Leader, PwC Switzerland
Tel.: +41 58 792 15 64
The study at a glance
Market perception and prospects
More than half of the decision-makers surveyed were moderately optimistic about their 5-year growth prospects. In their eyes, the negative effects of the coronavirus pandemic have largely been overcome. Yet that positive stimulus is being challenged by the outbreak of the war in Ukraine, although stock markets and general economic activity are relatively stable as of yet and many of the recent developments such as energy price increases, supply chain bottlenecks or interest rate increases do not come as a complete surprise and were thus already factored in.
More than 4 out of 10 decision-makers expect greater uncertainty
A total of 46 percent of respondents expect VUCA factors to intensify in the future. This appears to be moderate, given that COVID-19 and the recent political tensions put a damper on the economy, in some cases quite severely.
Asked about the extent to which they feel independent of external factors or stakeholders in managing the company, the results were in the middle range (average 3.1 out of 5 points). This is slightly lower than in the 2020 study (3.4/5). But: Respondents acknowledged a relatively low level of dependency on financial investors (3.4 out of 4 points) – this is contrary to the historically high level of financial investors’ deal activity and should therefore be treated with caution.
Strategic and operational measures – and how they are implemented
The company managers certainly perceive a paradigm shift – away from continuous growth in stable market environments to significantly more volatile markets and faster market shifts. This is reflected in the strategic approaches of the respondents: 59 % of them state that they are pursuing an “adapter” approach that reacts flexibly to market changes and minimizes risks. While 41 % of the respondents are pursuing a “preserver” approach which focuses on optimizing existing structures and leveraging efficiency potential.
Gap between strategic theory and practice
However, when asked about the most important implementation measures, the respondents named organic measures such as growth programs (73.5 %), restructuring (69.5 %), and research and development (49 %) significantly more frequently – i.e., measures that are more likely to be associated with the “preserver” approach.
Inorganic measures that tend to relate to the “adapter” approach were correspondingly less relevant for the respondents – the three most frequently mentioned were acquisitions (44 %), joint ventures (27.5 %) and carve-outs (8.5 %).
In other words: In practice, corporate executives are not yet implementing their preferred strategic portfolio management approach consistently enough.
Strategic portfolio management and management of the operational footprint
The more complex and uncertain the market environment, the more important it is to have an institutionalized and adequate portfolio management approach. Here, 69 % of respondents said they had fully or partially implemented a strategic portfolio management approach. And 77.5 % of them thought it was carried out transparently and according to measurable criteria. Implementation therefore appears to be the biggest hurdle – once a strategic portfolio management approach is in place, it is being conducted in a largely professional way.
The decisive factor, however, is whether companies also consistently implement portfolio optimization measures derived from the portfolio management approach. Only 7.2 % of respondents said they would quickly sell a business unit if it was not part of their core business according to the portfolio management approach.
Management of the operational footprint
57 % of respondents expect the complexity of operational corporate structures to increase linearly over the next five years. 21 % even expect an exponential increase in complexity. In contrast, only 21.5 % expect complexity to remain constant or decrease.
In order to identify interfaces and weak points in operational structures, company executives must first understand these structures in detail. They can then optimize them to better fit the needs of an increasingly volatile market environment. A state-of-the-art operational footprint management approach offers a standardized process for identifying, evaluating and managing operational structures.
Here, 66.5 % said that their company had at least partially implemented an operational footprint management approach (fully implemented: 20.5%, partially implemented: 46%). 80.5 % of respondents that have implemented an operational footprint management approach said that they implemented it based on transparent and measurable criteria.
Unlike the portfolio management approach, the respondents apparently implement the measures derived from the operational footprint management approach very consistently: 78.2 % said so. This discrepancy in favor of the operational footprint management approach is understandable – after all, corresponding operational measures are usually more tangible and less complex. In contrast, strategic measures have a much stronger impact on long-term positioning.
“Volatile markets require a continued focus on operational excellence to make sure corporate portfolios are well aligned and core business areas stand out against competition.”
The methodology
200 decision-makers from the executive board, strategy and M&A took part in the study. The study focuses on companies from the DACH region with more than €200 million in sales. 79.5 % of them are based in Germany, 17.5 % in Austria and 3 % in Switzerland. They are active in a wide range of industries, including energy, infrastructure, healthcare, industrial production, technology, media and telecommunications, and others.
The renowned, independent opinion research institute KANTAR interviewed the participants by telephone. The study was designed by PwC in collaboration with Darmstadt Technical University. The analysis was carried out by the Corporate Finance department headed by Prof. Dr. Dirk Schiereck.
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