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
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
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
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.
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.
What are the benefits of Portfolio Management?
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.
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:
As a result too many companies have:
- 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
- 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.