Strategic Portfolio Management and causality of the business environment

Portfolio management causality in this context refers to the interrelation between two events impacting the portfolio. This is a situation, where an event results in another event. From a portfolio management perspective such a situation would typically arise from a significant change in demand or interest rates. A well-defined portfolio contains an outcome for such events as determined by the portfolio analysis.

Challenge of indicators outside the portfolio

One of the most significant challenges in portfolio management is posed by external factors which have insufficient indicators. Usually criteria arise from strategy or its areas of emphasis. However, the prudent approach would be to utilise the portfolio in order to see what types of impact changes in the business environment have, and to use the data to support strategizing.

Information on future is vital to financial management

This is vital for forecasting cash flow. Financial management and the CFO are expected to have sufficient insight in forecasting future trends and signals. More often than not, however, financial management is operating on internal calculations based on past events. It is quite a challenge to identify causal factors based on such data. The danger here is to analyse the information in order to find a correlation and to use that to explain the interdependence of two factors. This is comparable to forecasting business conditions and evaluating a changing business environment. Forecasting requires a different perspective.

Correlations do not provide the entire picture

Today’s financial management is expected to possess insight and skill to create scenarios related to the business environment. While it may be possible to forecast business conditions based on the correlation between different variables (interest levels, Baltic Dry, CRB, etc.), in the current business climate, this is not an adequate basis for decision-making. It is necessary to be able to foresee the chain of events in case basic demand decreases by 20%, the market share remains the same, but the company’s basic product or the market price for the service decreases by 20%.

How should the content of a strategic portfolio be handled in said situation?

Strategic portfolio management refers to the process of actively preparing a portfolio containing an organisation’s projects, risks, services and applications, among other items. Causal relationships between these portfolio items should not be difficult to find. Perhaps this would be a good starting point?

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