The project is profitable. The portfolio is not.

Good projects can result in a poor portfolio.

BOARDROOM QUESTIONS
The questions your portfolio should be able to answer.

Project A is profitable.

Project B is too.

Project C has a compelling business case.

Project D achieves the required rate of return.

Project E is strategically relevant.

Every single project has passed the review.

The Executive Board approves them.

A logical decision?

Not necessarily.

Because five good investment decisions do not automatically result in good capital allocation.

And 100 profitable projects do not automatically result in a profitable portfolio.

Good projects can create a bad portfolio.

The business case does not answer the wrong question – but only part of the right

one

A traditional business case considers a project largely in isolation.

How much is the investment?

What cash flows are expected?

What are the NPV or ROI figures?

When will the investment pay for itself?

What risks are involved?

These questions are necessary.

But answering them is not enough for capital allocation.

This

is

because the board of directors does not merely decide whether a project makes economic sense.

It decides which projects are actually to be financed with limited capital.

That is a different decision.

Project decisions and portfolio decisions are not the same thing

Let’s imagine five projects.

Project A: €20 million investment, attractive expected ROI.

Project B: €30 million investment, positive NPV.

Project C: €15 million investment, high strategic relevance.

Project D: €40 million investment, significant impact on productivity.

Project E: €25 million investment, interesting growth potential.

All five projects may make sense individually.

Together, however, they require €130 million.

The available CAPEX budget is:

€100 million.

Now the question changes.

No longer:

“Is Project A profitable?”

But

rather:

“Which combination of A, B, C, D and E generates the highest defined portfolio value within a budget of 100 million euros?”

A good project can tie up capital in the wrong place

A project can have a positive NPV and still not be part of the optimal portfolio.

At first glance, this sounds contradictory.

But it isn’t.

Because the relevant alternative to a profitable project is not necessarily:

carrying out

the project or not investing the money.

The alternative could be:

carrying out

Project A or using the same capital to enable a combination of Projects B and C.

This gives rise to opportunity cost.

The project can create value.

And yet, using the same capital elsewhere could create more value.

Profitable is not the same as optimal.

The highest ROI does not necessarily win

Even simply sorting by ROI does not automatically solve the problem.

Suppose Project A has the highest expected ROI in the entire portfolio.

However

,

it also requires substantial financial resources and a scarce technical resource.

As a result, several other projects cannot be implemented.

Individually, these projects may have a lower ROI.

Together, however, they can generate a higher absolute value contribution or better meet strategic requirements.

In such cases, it may make mathematical sense not to select the project with the highest individual ROI.

The best project does not necessarily have to be part of the best portfolio.

Ranking is not the same as optimisation

Many investment processes use priority lists.

Projects are evaluated.

This results in a ranking:

. Project A

. Project B

. Project C

. Project D

. Project E

The list is then funded from top to bottom until the budget is exhausted.

That makes sense.

But a ranking primarily treats projects as a sequence.

A portfolio

,

on the other hand, consists of combinations.

And it is precisely these combinations that can make all the difference.

100 projects are not a list. They constitute a combinatorial decision space.

With 100 projects, there are theoretically:

^2,100

possible subsets.

This corresponds to approximately:

1.27 × 10³⁰ possible project combinations.

Not every one of these combinations is practically feasible or relevant.

Budget constraints, resources, dependencies and other conditions reduce the actual scope for decision-making.

But this is precisely what highlights the fundamental problem:

Capital allocation is not a sorting problem.

It is a combinatorial optimisation problem.

And then there are the dependencies

The reality is even more complex.

Project B will only work if Project A is implemented.

Project C and Project D require the same engineering resources.

Project E is a regulatory requirement.

Project F cannot begin until year two.

Project G requires a specific production capacity.

Project H and Project I are mutually exclusive.

Project J only makes sense if Project K is implemented at the same time.

It is now definitely no longer enough simply to lay individual business cases side by side.

The portfolio has its own logic.

A portfolio can deteriorate even though another good project is added

This is one of the most interesting consequences.

A business unit presents an additional project.

Positive business case.

Attractive ROI.

Strategically sound.

The intuitive reaction is:

‘Why shouldn’t we do it?’

The portfolio question, however

is:

‘What will we have to give up to do it?’

Because if capital, resources or capacity are limited, taking on a project may crowd out other investments.

The new project must therefore not only be good in its own right.

It must hold its own against the best alternative use of the required resources.

This changes the discussion in the boardroom

The head of a business unit presents a project with an expected ROI of 18 per cent.

The classic question is:

“Is 18 per cent sufficient?”

The portfolio question is:

“What combination of projects are we preventing by funding this one?”

The CFO might ask:

“What happens to the overall portfolio without this project?”

The CEO:

“Which alternative generates more value with the same 40 million euros?”

The COO:

“Which projects are competing for the same resources?”

Strategy:

“Which combination best supports our strategic objectives?”

This shifts the perspective.

From project to portfolio.

The relevant key performance indicator lies one level higher

ROI, NPV, payback and other project metrics remain important.

But at board level

,

a further perspective is added:

Portfolio performance.

How much expected value does the totality of the selected projects generate?

How efficiently is the available capital utilised?

Which strategic objectives are being achieved?

Which resources are tied up?

Which dependencies are taken into account?

Which projects are deliberately not funded?

And what opportunity costs does this entail?

A company does not invest in business cases.

It invests in a portfolio of decisions.

What happens if the budget is changed?

This is where the portfolio perspective becomes particularly relevant.

Suppose the CAPEX budget is initially 500 million euros.

A specific combination of projects is selected.

Then the board reduces the budget to 425 million euros.

A simple list of priorities might remove the projects at the bottom of the list.

Portfolio optimisation, on the other hand, reframes the entire question:

Which combination is now optimal within the 425 million euro budget?

In this process, it is not only projects that may be dropped.

Other projects may be added to the portfolio at the same time.

The optimal combination may undergo structural changes.

New conditions may require a new portfolio.

What happens if the CEO changes a strategic priority?

The same applies to strategy.

The CEO places greater emphasis on growth.

Or the CFO tightens a liquidity limit.

Or the COO identifies an operational resource as a bottleneck.

Or a project becomes a regulatory requirement.

The projects themselves have not changed.

But the scope for decision-making has changed.

Consequently, even the best combination of projects may change.

The portfolio should be able to respond to new conditions.

From ‘Is this project good?’ to ‘Is this the best use of our capital?’

This is perhaps the most important shift in mindset.

The first question remains essential:

“Does this project make economic and strategic sense?”

But this must be followed by a second question:

“Is this project part of the best available portfolio alternative?”

Only then does project evaluation become genuine capital allocation.

CAPEX Live Boardroom Simulation

Let’s imagine the portfolio is presented during the board meeting.

The CEO asks:

“What happens if we remove Project A?”

The portfolio is recalculated.

The CFO asks:

“Which projects would replace the 40 million euros that would become available?”

New calculation.

The COO says:

“Projects C and D cannot be implemented at the same time

New restriction.

New calculation.

Strategy changes a priority.

New calculation.

Question. Calculate. Compare. Decide.

The difference is crucial:

The algorithm does not decide which project a company should implement.

Management defines objectives, assumptions and constraints.

The maths calculates the consequences within this decision-making space.

The Executive Board makes the decision.

StratePlan: Don’t look for the best project. Calculate the best portfolio.

StratePlan does not consider projects in isolation, but as part of a shared decision-making space.

Investments compete for limited capital and – provided they are modelled accordingly – for resources, capacities and other constraints.

Dependencies and defined strategic or economic criteria can form part of the model.

This shifts the central question.

Not:

‘Which of our projects are good?’

But rather:

‘Which combination of our projects produces the best result under the defined conditions?’

The Project Is Profitable. The Portfolio Is Not.

Good projects can create a bad portfolio.

A positive business case is important.

A high ROI is attractive.

A positive NPV is relevant.

But capital is limited.

Resources are limited.

Time is limited.

And every investment competes with alternatives.

That is why the crucial question in the boardroom should not simply be:

“Is this project profitable?”

But rather:

“Is this project part of the best portfolio we can achieve with our capital?”

Management defines the decision space.

Mathematics calculates the combinations.

The board decides.

DON’T TRUST US. CALCULATE IT.