Pitfalls in Strategic Portfolio Management. How to Avoid Them

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Pitfalls in Strategic Portfolio Management. How to Avoid Them

🔥 Strategic Portfolio Management (SPM) has evolved into a critical component of success in large corporations. SPM is enabling such businesses to make informed decisions about capital allocation, resource prioritization, and overall strategic alignment. However, many organizations still struggle to fully grasp SPM. In particular following SPM Capability Gaps hinder their ability to achieve their strategic goals:

1. Weak Alignment of Portfolios to Enterprise Strategy and Risk Appetite
   A fundamental challenge in SPM is the often tenuous connection between portfolios and an organization's overarching strategic objectives and risk tolerance. Organizations may struggle to translate their strategic aspirations into actionable portfolio decisions, resulting in misaligned investments and missed opportunities.
   To address this gap, organizations need to establish a clear understanding of their strategic priorities and risk appetite, ensuring that portfolio decisions are consistently aligned with these guiding principles. This requires effective communication and collaboration between portfolio managers, strategists, and risk managers to ensure that investments are not only financially sound but also strategically relevant.
2. Limited Visibility into Interdependencies between Portfolio Elements
   Portfolio elements are often interconnected, with the success or failure of one element impacting the performance of others. However, organizations often lack the ability to understand and manage these interdependencies, leading to unintended risks and inefficiencies.
   To overcome this challenge, organizations need to develop comprehensive tools and techniques to map and assess interdependencies across their portfolios. This may involve using advanced analytics and visualization techniques to identify and quantify interdependencies, enabling portfolio managers to make informed decisions that consider the overall impact of their investment choices.
3. Inability to Measure Recurrent Risk-Adjusted Returns
   Accurate measurement of risk-adjusted returns is essential for evaluating portfolio performance and making informed investment decisions. However, organizations often struggle to reliably assess the risks associated with their portfolio elements and aggregate these risks into meaningful portfolio-level metrics.
   To address this gap, organizations need to develop robust risk assessment frameworks and apply appropriate risk-adjusted return metrics to evaluate portfolio performance. This may involve employing sophisticated risk models and considering a wide range of risk factors, including financial risks, operational risks, and market risks.
4. Insufficient Modelling of Prospective Scenarios and Stresses
   Effective SPM requires considering potential future economic scenarios, market stresses, and disruptive events. However, organizations often fail to adequately model these scenarios and assess their impact on their portfolios, leading to poor portfolio performance and increased exposure to risks.
   To overcome this challenge, organizations need to adopt scenario planning and stress testing methodologies. These methodologies involve developing plausible future scenarios, analysing the impact of these scenarios on the portfolio, and identifying potential risks and opportunities. By considering a range of potential outcomes, organizations can strengthen portfolio resilience and make informed investment decisions in the face of uncertainty.

Sources
"Strategic Portfolio Management: Concepts, Practices, and Insights from the United States and Europe" by Mark L. McDonald, John H. Young, and Robert L. Phillips (2019). Journal of Management Studies, 56(7), 1563-1590