Is your portfolio fit for the future or fashioned only on the past?

Organizations need to think hard about how they are going to free up capital to invest in digital and innovation. Leading companies strategically divest non-core or underperforming businesses to fund digital innovation and refocus their core businesses.

This is why divestments are increasingly a fundamental component of successful portfolio transformation. According to EY’s 2018 Global Corporate Divestment Study, 87% of companies plan to divest within the next two years, double the number reported in the 2017 study.

With the global economy improving, credit still freely available and corporate earnings at record levels, current dealmaking conditions make this an opportune moment to divest. Indeed, companies are already in the regular rhythm of selling assets in order to raise capital to invest.

The challenge is deciding what, where and when to divest. The balance between speed of decision and execution needs to be judged finely in order to extract the most value and lay the foundation for future success.

• Companies who decide to divest in order to focus on top-performing assets, particularly where new technology can provide a competitive edge, are 21% more likely to achieve an above expectation sale price than opportunistic divestments.
• Furthermore, companies that divest to fund new technology investments are 48% likelier to achieve a higher valuation multiple on the remaining business post-divestment than those that divest without planning on how to reinvest the proceeds up-front.

As businesses pursue new technology-driven opportunities, they must weigh up the pros and cons of buy vs. build. This decision-making process has led to some companies considering alternative strategies to accelerate innovation and react to rapid sector convergence.

Partnerships, alliances and joint ventures are one way for businesses to access new technology, skill sets and markets more rapidly than through organic growth or M&A, with 22% taking this approach as their primary driver of digital strategy over the next year (vs. 74% picking M&A), according to our Digital Deal Economy survey. This tactic also enables companies to access innovation in a more flexible framework without stretching their available capital.

However, these arrangements come with their own risks and require careful management, equitable risk- and reward-sharing and constant oversight to become a success. Here again, understanding the evolving external environment and aligning strategic digital goals — aided by a robust, regular portfolio review process — are the primary drivers of success.

Many companies are also investing in building digital ecosystems through separate investment vehicles. Creating corporate venture capital arms or incubators have become an increasingly popular way for executives to future-proof their business.

But even here, the challenge is when — and when not — to integrate these innovation offshoots with the main business. It’s all part of the innovator’s duality — and the right answer will vary case by case, depending on conditions, the limitations of the current business and where the strength of the asset lies. Once again, taking a holistic view of business risks and opportunities and conducting regular portfolio reviews are all vital in making the right call.

Staying ahead of the pack in a period of rapid transformation is about making the right choices at the right time for the right reasons. How do you know which part of your business you should focus on and which part you should offload?

Those companies that better understand how evolving technology and sector convergence affect their core business are more likely to beat expectations. Equally, those that take an “‘always-on approach to strategic reviews, using data and analytics capabilities to constantly reassess their current portfolio, can make more informed decisions about their strategy and make their portfolio fit for the future.

Three key takeaways that help drive portfolio transformation in this Transformative Age:

1. Are you utilizing tomorrow’s technologies today? Technology is a transformer. The increasing use of AI, RPA and big data is revolutionizing the way boards assess and optimize their operations — and encouraging them to make bold decisions on what to buy and sell to gain prime market position. Companies need to be certain their strategic decision-making processes enable them to take advantage of emerging technologies.
2. Can you strategically manage your own ecosystem or will the external environment manage you? The pace of convergence and disruption is compelling companies to look across a broader landscape to understand their relative competitive position. Companies should recognize the new realities of today’s markets and develop new ecosystems to spot future growth opportunities — and identify emerging threats.
3. Is your portfolio fit for purpose? Buying and selling can be the fastest way to transform your portfolio and reshape the future direction of your business. Being able to proactively respond quickly to emerging opportunities — and threats — is a must in the warp-speed world of business today.