Step 1: Develop Your Long-Term Strategy—The Future State Portfolio

A future state portfolio is a visual representation of your enterprise at its target end state. Here, you’ve made high-level assertions about the business—covering core, adjacent, and new growth efforts—and translated them into projected revenues or profits. Since long-term value is driven by top-line growth, we generally encourage clients to think in terms of revenues rather than profits; however, there are exceptions. For institutions in the nonprofit or government sectors, we recommend that you substitute projections of relative importance or magnitude. For example, a research institution could delineate the number of major programs it would run per research area. The impact of a public health initiative can be measured by the number of lives it touches. Regardless of whether you benchmark revenues, profits, or impact, the act of projecting out each effort and weighing its status as part of a portfolio makes your vision more tangible.

Like picking the right time horizon, setting a topline growth aspiration merits considerable debate and discussion. Sometimes companies already have a clear goal they can simply extend into the future, such as wanting to exceed GDP year over year (as the defense contractor did) or sustaining a commitment to shareholders of delivering 5 percent annual revenue growth. Other times they rally around a simple and memorable aim, like doubling the business in a decade. Spend the time you need to develop a target that is both aspirational and realistic and that the full team can get behind. Then debate and develop explicit assumptions about how much growth each of your core and adjacent businesses can deliver. Put simply, the larger the difference between your aspiration and what your core and adjacencies can deliver (your growth gap), the more you’ll have to stretch beyond them.

Knowing when your growth gap will develop helps you determine the pace and scale of the new business activities you’ll need to fill it. For example, if you have a moderately sized gap (say, 10 to 20 percent of revenues seven years out) but expect it to grow gradually, you likely have time to develop new businesses organically. If, however, you anticipate your gap emerging sooner, you’ll need to be more aggressive and consider buying your way into new businesses. Most companies we work with land on a hybrid approach, with mergers and acquisitions in some lines of business and organic development in others.

Once you’ve quantified your growth gap, we generally recommend that you divide it by three or four and then create three or four major areas of beyond-the-core growth, or what we call strategic opportunity areas (SOAs), that can fill it. That makes sense as a starting point, because it’s too risky to place bets on just one or two SOAs, given the likelihood that they won’t all pan out. On the other hand, most organizations have trouble funding and managing five or more at the same time.

When you’ve determined how big each line of business must be to fill your gap by your target date, use abductive reasoning (as discussed in chapter 2) to pressure test how well your future state portfolio hangs together. Ask questions like: What would we have to believe for a business in market x to attain $y million of net new growth by year z? Can we assume the overall market will grow fast enough to make that a realistic proposition? Analyses like these can give you more reason to believe your strategic picture is in the right ballpark, or it can warn you that it’s not—in which case you’ll need to revise your vision. The defense contractor’s future state portfolio is shown above.

An industrials company we worked with had originally thought they fit into implication archetype 3 (Major Opportunities), so they focused most of their thinking on profitability while placing a few bets on early-stage but high-potential areas beyond their core (plastics and climate solutions). But as they began to develop their future state portfolio, they realized that one of their higher-risk business divisions no longer fit their strategy. If they divested it, they could not achieve the net growth they needed. This meant that, like the defense contractor, they actually fit into implication archetype 2 (Moderate Threats). Commoditization was more imminent than they’d previously understood; the beyond-the-core growth they thought they might pursue as an option was in fact quite necessary. So they decided to accelerate those early bets while undertaking a high-potential M&A opportunity as well. As shown in the chart above, they pegged the potential of those three initiatives in profits due to their need to lock down their near-term profitability forecasts.

Step 2: Walk the Future Back—Milestones Development

Once you have defined your future state portfolio, the next step is to walk it back to the present. To do this, you work backwards from your future state, setting milestones at roughly two- to three-year intervals. Now you are moving from SOAs to the actual business initiatives you can develop to exploit them. If you’ve set your future state portfolio at a distance of ten years, first you’ll define what has to be true in eight years to take the next step to year ten. Ask yourself: What will your portfolio mix across core and new businesses be? What new capabilities and business structures will need to be in place? How mature will each of your new initiatives be? Next, you’ll move to year six and so on, moving back two to three years at a time and setting explicit benchmarks for each stage until you land in the present.

It can be overwhelming to contemplate the implications of visionary strategies. Setting achievable near-term goals for your efforts (for example, key talent hired, programs launched, proof of concept achieved, partnerships developed, M&A deals executed) instills confidence, creates momentum, and ensures accountability.

Transformational strategies can take a long time to show significant results; the curve often looks more like a hockey stick than a diagonal line. The walk back should account for this, allowing sufficient time for initiatives to incubate or explicitly defining the parameters for M&A to more quickly plug gaps. The importance of setting these milestones from the future back—starting with the end state and working backwards to the present—cannot be overstated. If a strategy is simply extrapolated from the present forward, your existing processes, rules, norms, and metrics will get in your way. Developing it from the future back reduces the likelihood that you will perpetuate your existing realities.

Step 3: Develop the Innovation and Investment Portfolios

The walk back lands in the innovation portfolio, which includes all of the core, adjacent, and new growth initiatives intended to deliver the growth defined in the future state portfolio, as well as any capability-building initiatives required. Striking the right balance between core and new growth efforts is extraordinarily challenging, as there are deep management challenges associated with allocating for the future while also managing for today. This was the subject of the recent book Dual Transformation: How to Reposition Today’s Business While Creating the Future that Mark cowrote with our Innosight colleagues Scott Anthony and Clark Gilbert, which is in many ways a companion to this one.¹ We will return to the principles it laid out in chapter 5, which covers programming and implementation.

We set the horizon for the innovation portfolio at one to three years, so that it covers both ongoing initiatives and placeholders for new ones, as well as any M&A efforts that will have to be chartered. To do this on your own, simply sort your programs into buckets covering core, adjacent, and new. Each should have distinct expectations for growth, risk, and return. Core projects are your bread and butter; they come with limited upsides but high degrees of certainty. You know how to execute tweaks and more significant changes to them as needed. New growth projects, on the other hand, are options for the future—they come with significant uncertainty but lots of potential.

At the same time, you need to develop an investment portfolio, in which you formalize your decisions about where to invest and where your resources will come from. In building it, you should measure dollars but also people and leadership mindshare, as talent and leadership energy are often more scarce in big companies than seed funding. Set ideal targets for proportional spending across core, adjacent, and new initiatives, and measure how far off you are. This frames your most difficult choices, as you’ll likely need to cut funding or slow down or stop initiatives in some places to pay for increases in others. This is where you make further calls on which programs won’t fit into your overall future state. Given that all of your programs have vested interests and influential sponsors, it is likely to be extremely difficult to slow down or stop any of them. Looking into the future, defining a future state portfolio, and then walking it back to the present via the innovation and investment portfolio provides perspective that makes the need for those kinds of decisions much clearer.

Future-back strategy is always about the allocation (and reallocation) of scarce resources. Any new strategy will cost money and require the dedication of top talent. Having a clearly articulated vision is highly clarifying as there will always be programs that can be deprioritized, reshaped, or divested.

One of the most critical aspects of the three portfolios work is deciding what to slow down or shut down.

A. G. Lafley told us that when he began his second stint as Procter & Gamble’s CEO, he made a strategic decision to weed the garden, selling off businesses in at least half a dozen of P&G’s industry categories, including fragrances, hair coloring, food and beverage, and cooking oil. All of the brands in those categories were profitable, he said, but they were prone to commoditization. As he put it, “Our strategy, in Peter Drucker’s terms, was one of systematic abandonment. We wanted to free up the scarce resources, people, and cash to fund the innovations that were necessary to enter new businesses and transform important existing businesses.”²