What is Portfolio Management?

“Portfolio management”:http://en.wikipedia.org/wiki/Portfolio_management has traditionally referred to management of a portfolio of investments where the portfolio manager allocates resources between competing securities/investments so as to maximise returns from investing in a number of securities/investments – a portfolio – having different rates of expected returns and risks. It is a way to hedge risks and maximise returns. While fund managers of asset management firms such as mutual funds resort to portfolio management routinely, the term portfolio management has assumed new significance in recent times with regard to project management and new product development. This article takes a look at portfolio management in its latest avatar – how it helps to efficiently allocate resources in “new product development (NPD).”:http://en.wikipedia.org/wiki/New_product_development
A vital question in the product innovation battleground is, “How should corporations most effectively invest their R&D and new product resources?” That is what portfolio management is all about: resource allocation to achieve corporate new product objectives.

Today’s new product projects decide tomorrow’s product/market profile of the firm. An estimated 50% of a firm’s sales today 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 chance 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 is addressing 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.

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. Management teams confess that there are rarely serious Go/Kill decision points and, more specifically, no criteria for making the Go/Kill decision. As a result, companies are facing too many projects for the limited resources available!

While the portfolio methods vary greatly from company to company, the common denominator across firms are the goals management is trying to achieve. According to ‘best-practice’ research by “Dr. Robert G. Cooper and Dr. Scott J. Edgett of the Product Development Institute Inc,”:http://www.prod-dev.com/about.shtml who are also famous for developing the “Stage-Gate process,”:http://www.prod-dev.com/stage-gate.shtml three 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 business 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 gating and criteria) and top-down and bottom-up (strategic check).

Companies without effective new product portfolio management and project selection face a slippery road downhill. Many of the problems that plague 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:

*1. A Strong Reluctance to Kill Projects*
* no consistent criteria for Go/Kill decisions
* the result, projects are simply added to the ‘active list’ of projects with no clear directional focus; resources are thinly spread; long times to market; poor quality of execution; and higher-than-acceptable failure rates.

*2. Poor Go/Kill and Project Selection Decisions*
* many mediocre projects in the pipeline (i.e. extensions, enhancements) and a lack of high reward projects
* few good projects that do exist are starved of resources, take too long to get to market and fail to achieve full potential.

*3. The Wrong Projects are Selected*
* decisions are not based on facts and objective criteria, but on politics, opinion and emotions
* many of these ‘ill-selected’ projects fail to bring reward to the company

*4. Strategic Criteria are Missing*
* no strategic direction for project selection and, therefore, projects are not aligned with the business’s strategy
* projects are typically a poor fit with strategy and overall spending does not reflect the strategic priorities of the business.

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

* 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

For all these reasons, top corporate performers emphasize the link between project selection and business strategy.
(Source: Product Development Institute Inc.)