JEREMY CHEN

Accounting for Market Dynamics by Extending the

McKinsey Portfolio of Initiatives

Note: I do not work for McKinsey, and this presents an extension of a management framework. There is no claim to authorship of the original framework. This set of slides, originally uploaded May 2010 with the title “Accounting for Market Dynamics Using the McKinsey Portfolio of Initiatives”, was deleted erroneously for Terms of Service violation. Contact with SlideShare indicated that the individual/entity reporting the violation did not respond to requests for clarification. To the best of my knowledge this has not been presented before. (Furthermore, it may be argued that the ideas presented herein may be arrived at through plain old “good managerial sense”.) This note serves to clarify that there is no copyright infringement.

The Portfolio of Initiatives

Published by McKinsey in about 2002.Provides a strategic picture of investments in

the short, middle and long term.

See “Enduring Ideas: Portfolio of Initiatives” at https://www.mckinseyquarterly.com/Enduring_Ideas_Portfolio_of_initiatives_2446

Some Comments on the Framework

“a very flexible and evolutionary approach, that fits very well to industries where people are familiar with programme and project management, like high tech”

“The portfolio of initiatives approach sounds like a standard for strategic management. The assumption that a company does not need a portfolio of strategies with risk managed in the areas of time, return and investment is what leads to trouble in the long-term.”

“a hopelessly static tool for what may be a fast-moving, dynamic challenge”

Incorporating Dynamics

The plain Portfolio of Initiatives presents a “static” picture of the outlook given current investments Unable to present the effects of uncertainty being realized Unable to present the effects of decisions

The comments on “the lack of dynamics” are slightly unfair since the real estate on a given Portfolio of Initiatives is already reasonably packed

Idea: Describe market dynamics through a decision tree-like structure Each terminal node presents Portfolio of Initiatives optimized to

that scenario “Work backwards” to decide on sensible allocations for parent

nodes

A Small Example

Prob(Scenario 2) ~ 0.7

Prob(Scenario 1) ~ 0.3

Present Day

Assign subjective probabilities.

Work backwards and decide on capital investments in parent nodes.

Closing Remarks

This approach provides a sensible approach to arriving at today’s investments given tomorrow’s possibilities (similar to option pricing methods)

Such a structure also describes a response policy to (presently) uncertain events

Decisions that may influence the market may be incorporated using decision nodes (difficulty in “valuing” decisions) or presented on separate “trees” (the simpler option and more

sensible given few market making decisions)This is not a quantitative tool, but rather a

facilitator for discussion

Closing Remarks

As uncertainty unfolds over time, one may choose to shift investments along the risk and time axes … or take a “now and into the future” perspective and not

make any shiftsWatching many shifting and pulsating dots may be

too much information Insights may also be gleaned by using this to study capital

investments in a single initiative Initiatives often influence each other and cannot be

analyzed singly, however analysis and then synthesis still aid in building clarity

It goes without saying that the “tree” should be updated regularly