Monday, May 21, 2007

Strategy for your Investment Portfolio

As Indian companies continue to emerge and gain prominence on the world stage, those companies who outperform will be those who make better resource allocation decisions. Companies that do this consistently over time will lead their industries. It is time for corporates to strategise their Portfolio Management for competetive advantage and outperformance.

I like the word "strategy". Sounds good, no! Whenever I'm doing nothing at office and want to feel smart, I start "strategising on my options to leverage the resources at hand". Roughly translated it means, "I'm taking a nap".

Jokes apart, this is what I read in dailies:

  • The total value of M&A involving Indian companies was about $37 billion (Rs 160000 crore) in two months of 2007 as against $20 billion (Rs 86000 crore) in the whole of 2006. Is there some grand strategy there?
  • LIC, the Insurance behemoth, is in the process of carving two separate entities for its "Credit Card venture" and "pension business". Why is LIC diversifying into credit cards?
  • Jet and Sahara have finally decided to merge after 10 month of battle. Is there value in the deal?
  • Tata outbids CSN in the Corus deal? Did they pay too much?

I often wonder at the strategy behind the decisions.

"Optimizing Corporate Portfolio Management", authored by Anand Sanwal, is a useful book whose main premise is that where an organization allocates its resources is what truly drives it strategy and financial returns. So while company leaders issue strategy in presentations or in speeches, this is really not what creates strategy - it is where money gets spent that determines this.

Anand explains, "Let's take a very simple example of a company which has $100 to invest and whose leadership says that their main strategy is to focus on customer loyalty. However, when you look at where they invest their money, you see that $75 is spent on customer acquisition and $25 is spent on initiatives focused on customer loyalty. So even though the stated strategy is customer loyalty, the true strategy is one of acquiring new customers if you look at the resource allocation."

The book offers a practical methodology to bring this powerful discipline to your organization. The book is targeted at any organization struggling to figure out how to better allocate resources - this is every company and any sub-organization within a company, e.g., Information Technology (IT), marketing, R&D, sales, operations, product groups, etc who manage discretionary resources.

The book can be used to help general managers decide which product they should invest in or which country/region deserves more investment versus another. It advocates treating all investments as part of a portfolio whose risk and reward must be balanced - similar to the way a person tries to manage their money as a portfolio of investments.

The book also features case studies of successful companies deploying this discipline including AmEx, Cisco, HP, TransUnion and the State of Oregon. The case studies demonstrate that the CPM discipline can be used across organization of all types, across industries and also across for profit and not for profit (government) organizations.

I enjoyed reading the book and learnt a lot from it despite the agonising title (for a novice like me) !

Blog on Finance & Business
Post a Comment