Portfolio Management in uncertain times

PwC Corporate Portfolio Management Study 2023

Our expert for questions

Erik Hummitzsch
Member of the Management Board, Head of Deal Advisory and Co-Leader Advisory at PwC Germany

Searching for balance between resilience and transformation

Climate change, Ukraine war, high inflation, rising interest rates – the list of current events that impact portfolio management is long. However, companies are also getting better at adapting to volatility, uncertainty, complexity and ambiguity – VUCA for sort – and revising their strategic portfolio management approaches accordingly. For example 55 percent of companies say they are  likely to make adjustments to their portfolio of business units over the next twelve months. 

These are the findings of the Corporate Portfolio Management Study 2023, which PwC Germany has conducted for the third time in cooperation with the Technical University of Darmstadt. 

“At a time of frequent and overlapping crises, companies have learned to deal with them better and to continuously make their corporate portfolio more resilient. At the same time, there is a growing realisation that volatility is a double-edged sword: on one hand, it brings risk and threatens corporate survival, but it also opens up new opportunities and is a catalyst for transformative change.”

Erik Hummitzsch,Member of the Management Board, Head of Deal Advisory and Co-Leader Advisory at PwC Germany

The study at a glance

Moderately optimistic view of the future despite growing uncertainty

The current market environment is characterised by a high degree of uncertainty – and according to the respondents, this will not change for the time being. Instead: 55 percent assume that uncertainties will continue to increase over the next 5 years. In particular, price risks (80 percent), supply chain risks (77 percent), and the risk of economic uncertainties and crises (70 percent) are of concern to decision-makers. Nevertheless, despite all these risks and uncertainties, almost one in two (46 percent) executives remain  optimistic about the market attractiveness and growth opportunities of their own business segment in the next five years.

Strategic approach: Adapting  instead of preserving

In order to find out whether companies tend to focus on preserving or adapting their corporate portfolio in such market environments, the PwC experts asked about the most important criteria for the strategy development process. Criteria such as flexibility, speed and risk optimisation, which are aimed more at adaptation and transformation (“adapter” approach), were named more frequently than characteristics such as stability, detail orientation and profit optimisation, which are aimed at protecting and preserving  the core business (“preserver” approach). The strategic approach of the “adapter”, which flexibly adapts  to changing market conditions, prevails with 58 percent over the “preserver” approach, which is pursued by 42 percent of respondents and focuses on optimising existing structures and exploiting efficiency optimisation potentials.

Too little focus on inorganic measures

To achieve their strategic goals, the respondents rely primarily on organic measures. They name programmes for sustainability (72 percent) and growth (71 percent) as well as restructuring and cost reduction (66 percent) as the most important measures for the next five years. On the other hand, inorganic measures that offer advantages in terms of speed and impact in dynamic markets are not focused on sufficiently. For example only 44 percent of the decision-makers consider acquisitions, carve-outs are even considered by 11 percent only. 

In any case, the pace of change remains high, as respondents continue to expect major changes in the sources of revenue in their core business. 44 percent expect the revenue sources in the core business to change by at least 20 percent in the next five years.

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Corporate Portfolio Management Study 2023

Major weakness in implementation

The more complex the market environment, the more important it is to have  a strong strategic backbone and advanced decision-making structures in place to enable deliberate portfolio decisions in uncertain times. However, only 29 percent of respondents have fully implemented a strategic portfolio management approach. This is significantly less than in previous editions of this study (2020: 47 percent, 2022: 38 percent). 35 percent have at least partially implemented such an approach, but 33 percent have not implemented one at all. 

Ultimately, however, any portfolio management approach is only as effective as the defined measures and their implementation. When it comes to the consistent and timely execution of defined portfolio adaptation measures,  there is a large gap: Only seven percent of respondents say they would sell business units consistently and in a timely manner if an analysis showed that they were no longer part of the core business. 34 percent would only sell if market conditions were favourable. 

Companies should implement the defined measures consistently and in a timely and consequent manner, as they otherwise run the risk of lagging behind the pace of market dynamics and risk the strategic measures losing their impact once eventually implemented. 

PwC's Corporate Portfolio Adaptation Index

To provide market participants with better transparency on the extent of planned portfolio adaptation measures in the next 12 months, PwC introduces PwC's Corporate Portfolio Adaptation Index. 

PwC's Corporate Portfolio Adaptation Index – which combines both  likelihood and scale of portfolio adaptation measures – yields a value of 0.56/1.00 and indicates expected significant portfolio adaptation activity in the coming 12 months. 

Corporate governance in uncertain times: Six key practitioner recommendations

1 Learning to live with the uncertainties

We live in uncertain, fast-moving times, and this will remain so for the time being. Crises will continue to come up at unforeseen times and in unpredicted forms and even intensify in combination. So far, many companies have largely seen this volatility and uncertainty as a threat. However, it also offers opportunities and can serve as a catalyst for transformative change. These opportunities must be identified and seized.

2 Adapt instead of preserve

In modern markets, where planning parameters change frequently, it is difficult to make reliable forecasts. To survive in such turbulent times and lay the foundation for long-term success, executives should shift their strategic approach towards more adaptive skills and focus towards attributes such as flexibility, speed of adaptation as well as risk optimization.

3 A healthy core business is the basis for every transformation

Maintaining the core business is always of great importance, as a healthy core business forms the basis for any transformation. Especially in times of crisis, a certain flexibility in strategic orientation therefore pays off. In the long term, the focus on transformation and flexibility is crucial, but in the short term, preserving measures are often just as important to protect and maintain the core business. The right balance at the right time and the ability to make short-term adjustments in critical situations without losing sight of long-term transformation to “adapter” capabilities is crucial. 

4 Complex markets require strategic governance structures

Executives need to invest more in structures, processes and tools in order to be able to consciously manage an often global portfolio of business units in highly complex market structures. Currently, there is still too much erratic and reactive decision making, resulting in a lot of wasted potential. Furthermore, companies make too little use of technical possibilities (e.g. AI) to make almost infinite data points usable for deliberate portfolio decisions.

5 Define and implement the right portfolio optimisation measures

Choosing the right portfolio optimisation measures is key to constantly optimising the portfolio of business areas and adapting it to changing market conditions. Decision-makers still make too little use of the advantages of inorganic measures (such as acquisitions of carve-outs), although these have clear advantages over organic measures in terms of speed and effectiveness. Also, defined portfolio optimization measures are not implemented quickly and consequently enough – weak implementation is fatal, especially in dynamic times like the present, as the pulse of the company lags behind the pulse of the markets. ­

6 Courage to act

Companies can do a lot to manage the high level of uncertainty in the markets, but they cannot overcome the phenomenon itself. Therefore, they need to accept the unavoidable residual uncertainty and develop a more contemporary risk tolerance. As there will be no conclusive certainty in VUCA markets, it rather matters to make bold and quick decisions to thwart risks and take advantage of resulting opportunities. With this attitude, companies may proactively shape markets and remain flexible enough to react courageously to short-term market changes.

“The ability to find the right balance between transformation and resilience is crucial to success in uncertain times: Companies need to protect the core business on one hand, but at the same time adapt quickly to new market conditions and take advantage of opportunities as they arise.”

Tobias Huesmann, Director at PwC Germany

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Corporate Portfolio Management Studie 2023

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The methodology

For the study, 200 managers from executive boards, strategy and M&A departments of companies in Germany, Austria and Switzerland were interviewed.

The opinion research institute Mantle Germany (formerly KANTAR) interviewed the participants over the phone. The study was designed by PwC together with the Technical University of Darmstadt. The analysis was conducted by the Department of Corporate Finance under the direction of Prof. Dr. Dirk Schiereck.

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Erik Hummitzsch

Erik Hummitzsch

Member of the Management Board, Deal Advisory Leader and Co-Leader Consulting Solutions, PwC Germany

Tobias Huesmann

Tobias Huesmann

Director, author of the study and Portfolio Management expert, PwC Germany