In this instance the portfolio management causality means the relationship between two events which affect the portfolio. This is a situation where one event causes another. Typically, from portfolio management perspective, this could mean a significant change in the customer demand or in the interest level. A well-defined portfolio can find an effect for this during portfolio analysis.
External indicators for the portfolio are a challenge
A company’s external factors and their indicators are often left on a lighter level, which can be a challenge for portfolio management. We often expect criteria to emerge from strategy or from its emphasis. However, there is often a need to use the portfolio in order to see how effective the changes in business environment are, and thus receive impulses to support strategy work.
Chief Financial Officer (CFO) needs information about future
This is especially important when predicting the cash flow. Financial administration and chief financial officers (CFO) are expected to provide insight into predicting future trends and signals. However, often the internal accounting information used by the financial administration focuses on the past and on the knowledge of something which has already happened. It is very challenging to identify causal factors only from the basis of this information.
The danger is that we keep on analysing information with the aim to find the correlation, and use it to explain the dependency between two separate components. This could perhaps be compared with predicting the economical situation and evaluating the business environment. Predicting needs a different perspective.
Correlations alone are not enough
We now expect CFO to provide us with insight and scenario work in relation to business environment. It may be possible to predict the economical situation from the correlation of different quantities (interest level, Baltic Dry, CRB etc.), but now we live in times when decisions cannot be based on these.
We must be able to predict the chain of events if the basic demands decrease by -20%: the market share stays the same but the company’s basic products or the market price for its services decreases by -20%.
How should we intervene with the contents of the portfolio in the scenario described above?
Strategic portfolio management means an active portfolio for the organisation’s projects, risks, services and applications, amongst others. These causal (so-called cause and effect) relationships for the portfolio perspective are likely to be found somewhere. Could this be a good place to start?
Causality ( causalitas < causa, ’cause’) is a cause and effect relationship, i.e. a relationship between two events where one causes the other. One event is thus the cause and the other the effect. Cause is shown before the effect.
Correlation is a concept used in probability calculus and in statistics, and it describes the dependency between two variables.