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Portfolio management - There's no such thing as one size fits all

Success is not to focus all your energy on preserving the old but on building the new.

Marathon Petroleum Corporation (MPC) is a leading, integrated, downstream energy company headquartered in Findlay, Ohio. The company operates the United States' most extensive refining system. MPC's marketing system includes locations across the United States, including Marathon brand retail outlets.

In the summer of 2020, the company announced the changing of its portfolio by selling the Speedway Gas stations to 7-Eleven's parent for $21 Billion. The sale of Speedway, one of the country's largest convenience store chains with nearly 4,000 outlets, was the most significant corporate deal in the oil sector since the coronavirus slashed demand for fuel early that year. At the time, MPC had been struggling financially and had shuttered operations in two refineries. It had been seeking to spin off Speedway for months. The deal brought ~$16.5 billion in after-tax cash proceeds to pay down debts and support dividend payments. The deal also included a 15-year agreement in which Marathon would provide 7.7 billion gallons of petroleum annually to the station chain.

When you dived deeper, according to an article in the New York Times, it became apparent that Marathon agreed to spin off its Speedway chain partly under pressure from investors, including the Elliott Management Corporation hedge fund. When Elliot gets involved, they mean business.

Bloomberg describes Elliot as always on the prowl for underperforming stock. For example, they took a substantial activist stake in software giant Salesforce Inc., swooping in after layoffs and a plunging stock. San Francisco-based Salesforce currently has a market capitalization of ~$197 billion, down from a peak of more than $300 billion in 2021. The move by Paul Singer's Elliott — which often pushes for strategic portfolio changes and seeks board representation — added to activist pressure on Salesforce to boost profits and shareholder returns after a half-decade of fast hiring and significant acquisitions, including the purchase of Slack in 2021 for $27.7 billion. Following the move, Salesforce said it was reducing its real estate footprint and cutting 10% of a workforce that has almost tripled in the past four years.

The Marathon Petroleum and Salesforce examples demonstrate the importance of proactive portfolio management. If you don't do it yourself, someone else might force you. Success is not leaving it too late but proactively evaluating how your different products, business lines and services perform and maximizing your portfolio to drive shareholder return. One size certainly does not fit all.

What is portfolio analysis, and why is it so crucial to strategy?

Companies make transformational moves when they change direction with a significant commitment of resources. These maneuvers typically involve a different set of products or services, a new customer base or new ways of operating. For example, Nokia Corp.'s shift in the early 1990s from forestry, TVs and tires to mobile phones was a big move. Such strategic shifts are risky — companies that attempt them often fail to meet their stated objectives. Yet, they are essential for value creation in the long run. In a study featured in MIT Sloan Management Review, experts explain how, although organizations may have long periods of incremental growth, the constantly changing business environment periodically forces corporate leaders to reposition their business portfolios in fundamental ways.

So, what is portfolio management? It is the disciplined process of reviewing portfolio holdings for appropriateness and to reduce risks. Portfolio analysis can be used to develop and compare alternate strategies that a company might pursue. Such a review aims to determine where a company should focus its investments and business activities. Business portfolio analysis evaluates a company's products and services.

Why is portfolio management important? It's essential because it helps businesses make informed decisions about allocating their resources, such as capital, time, and personnel, among different business units, products, or markets. It involves analyzing and evaluating a company's portfolio of products, services, and business units to determine which ones are performing well and which ones are not.

Strategy execution success is driven by top-line and bottom-line growth. By optimizing the portfolio, companies can maximize their return on investment, reduce risks, and ensure that resources are used effectively and efficiently. This can increase profitability, better resource allocation, and improve competitiveness. Moreover, a well-optimized business portfolio can help a company adapt to changing market conditions, customer needs, and emerging technologies. It can also help companies identify potential gaps in their product or service offerings and provide a framework for making strategic decisions about entering new markets or developing new products.

One example of a company that has done portfolio management well by defining clear and vital decision criteria is Procter & Gamble. The organization has successfully managed their portfolio by focusing on its core brands and divesting non-core brands – an essential element of its assessment approach. This has allowed them to focus on their most profitable brands and increase profitability.

How to approach portfolio management: Strategic Review, Portfolio Review & Implementation

Done well, portfolio management should drive closer alignment between the company's strategic objectives and assets. Based on my work serving clients over a career spanning a quarter of a century, I've found the best approach to involve three vital steps. Firstly, a strategic Review (knowing your core business). Secondly, a portfolio review (helping make better-informed decisions and, finally, implementation (taking action).

Aligning the portfolio approach to the core business and strategic goals is critical. One example of a company with a well-structured business portfolio management approach is the outdoor apparel and gear company Patagonia. As an avid mountaineer myself, this case example fascinated me. Patagonia started as a small company that made high-quality climbing gear in Ventura, California. However, it has expanded into a diverse outdoor apparel and gear product portfolio over the years. Despite this expansion, Patagonia has effectively managed its business portfolio approach, doing it their way, staying true to core business goals of sustainability and environmentalism.

Patagonia's business portfolio includes various products, including outdoor apparel, bags and backpacks, camping gear, and food products. However, all of these products are designed to focus on sustainability and environmental responsibility, which is a critical element of the company's brand identity. Patagonia's portfolio management strategy also involves investing in innovation and R&D to create new products and technologies that align with its goals. For example, the company has developed new materials and technologies, such as recycled nylon and Fair-Trade Certified products, to reduce its environmental impact and promote sustainable practices throughout its supply chain.

Another aspect of Patagonia's business portfolio management strategy is its commitment to transparency and accountability. The company regularly communicates with customers and stakeholders about its sustainability initiatives, including its environmental impact and progress toward its sustainability goals.

Overall, Patagonia's success in managing its business portfolio can be attributed to its strong commitment to its core values and mission and its strategic investments in innovation and sustainability. By staying true to its brand identity and investing in products and technologies that align with its values, Patagonia has maintained its competitive edge and continued to grow its business while staying true to its mission.

Ten keys to success when performing portfolio management

Understanding your portfolio forms a critical view of the inside-out analysis and how the business performs. Companies can make informed decisions to allocate resources, maximize profitability, and drive sustainable growth through comprehensive business portfolio management. While performing the analysis, it's essential to:

  1. Align portfolio to the business strategy

  2. Assess market trends

  3. Get data gathering and analysis right

  4. Evaluate the portfolio from different perspectives

  5. Support regular portfolio reviews to make decisions

  6. Ensure speedy and flexible decision-making

  7. Be prepared to make tough decisions

  8. Be proactive in governance management

  9. Focus on management and capabilities required throughout the process

  10. Ensure risk management is integrated at every step

In summary, business portfolio management is essential because it enables companies to make data-driven decisions that lead to better resource allocation, improved profitability, and long-term competitiveness unique to each business. As Richard Koch, Venture Capital Investor and author, once said, "Business is often about killing your favourite children to allow others to succeed."

By Dr. Lance Mortlock – Senior EY Partner| Strategist | Author | Adjunct Associate Professor


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