Portfolio Management

What is New Product Portfolio Management?

A vital question in the product innovation battleground is, "How should corporations most effectively invest their R&D and new product development resources?" That is what portfolio management is all about: resource allocation to achieve corporate product innovation objectives.

Today's new product projects decide tomorrow's product/market profile of the firm. An estimated 50% of a firm's current sales come from new products introduced in the market within the previous five years. Much like stock market portfolio managers, senior executives who optimize their R&D investments have a much better opportunity of winning in the long run. But how do winning companies manage their R&D and product innovation portfolios to achieve higher returns from their investments?

There are many different approaches with no easy answers. However, it is a problem that every company addresses to produce and maintain leading edge products. Portfolio management for new products is a dynamic decision process wherein the list of active new products and R&D projects is constantly revised. In this process, new projects are evaluated, selected, and prioritized. Existing projects may be accelerated, killed, or de-prioritized and resources are allocated (or reallocated) to the active projects.

Portfolio Management - A Problem Area!

Recent years have witnessed a heightened interest in portfolio management, not only in the technical community, but in the CEO's office as well. Despite its growing popularity, recent benchmarking studies have identified portfolio management as the weakest area in product innovation management. Executive teams confess that serious Go/Kill decision points rarely exist and, more specifically, criteria for making the Go/Kill decision are non-existent. As a result, companies are experiencing too many projects for the limited resources available!

Goals of Portfolio Management

While the portfolio methods vary greatly from company to company, the common denominator across firms are the goals executives are trying to achieve. According to 'best-practice' research by Dr. Cooper and Dr. Edgett, five main goals dominate the thinking of successful firms:

1. Value Maximization
Allocate resources to maximize the value of the portfolio via a number of key objectives such as profitability, ROI, and acceptable risk. A variety of methods are used to achieve this maximization goal, ranging from financial methods to scoring models.

2. Balance
Achieve a desired balance of projects via a number of parameters: risk versus return; short-term versus long-term; and across various markets, business arenas and technologies. Typical methods used to reveal balance include bubble diagrams, histograms and pie charts.

3. Business Strategy Alignment
Ensure that the portfolio of projects reflects the company’s product innovation strategy and that the breakdown of spending aligns with the company’s strategic priorities. The three main approaches are: top-down (strategic buckets); bottom-up (effective gatekeeping and decision criteria) and top-down and bottom-up (strategic check).

4. Pipeline Balance
Obtain the right number of projects to achieve the best balance between the pipeline resource demands and the resources available. The goal is to avoid pipeline gridlock (too many projects with too few resources) at any given time. A typical approach is to use a rank ordered priority list or a resource supply and demand assessment.

5. Sufficiency
Ensure the revenue (or profit) goals set out in the product innovation strategy are achievable given the projects currently underway. Typically this is conducted via a financial analysis of the pipeline’s potential future value.

What are the benefits of Portfolio Management?

When implemented properly and conducted on a regular basis, Portfolio Management is a high impact, high value activity:

Maximizes the return on your product innovation investments
Maintains your competitive position
Achieves efficient and effective allocation of scarce resources
Forges a link between project selection and business strategy
Achieves focus
Communicates priorities
Achieves balance
Enables objective project selection

Top performers emphasize the link between project selection and business strategy.

Why is it so important?

Companies without effective new product portfolio management and project selection face a slippery road downhill. Many of the problems that plague new product development initiatives in businesses can be directly traced to ineffective portfolio management. According to benchmarking studies conducted by Dr. Cooper and Dr. Edgett, some of the problems that arise when portfolio management is lacking are:

Projects are not high value to the business
Portfolio has a poor balance in project types
Resource breakdown does not reflect the product innovation strategy
A poor job is done in ranking and prioritizing projects
There is a poor balance between the number of projects underway and the resources available
Projects are not aligned with the business strategy

As a result too many companies have:

Too many projects underway (often the wrong ones)
Resources are spread too thin and across too many projects
Projects are taking too long to get to market, and
The pipeline has too many low value projects

Portfolio Management is about doing the right projects. If you pick the right projects, the result is an enviable portfolio of high value projects: a portfolio that is properly balanced and most importantly, supports your business strategy.

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Portfolio Management