Portfolio Management for New Product Development
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The article presents findings from a study on portfolio management practices in new product development, emphasizing its critical role amidst global competition and changing technologies. It highlights that while portfolio management is recognized as important, many companies struggle with its implementation, often limiting their focus to short-term projects at the expense of long-term innovation. Key insights include the need for effective senior management buy-in and a structured, clearly defined portfolio management process to achieve better alignment with business strategy and resource allocation.
Portfolio Management for New Product Development
- 1. Portfolio Management for New Product Development: Results of an Industry Practices Study By Dr. Robert G. Cooper, Dr. Scott J. Edgett and Dr. Elko J. Kleinschmidt
- 2. Review of a research article Introduction: This article reports the results of a large sample best practices study into portfolio management. The study’s overall goals are to study industry current and best practices in portfolio management, and to gain insights to guide all of us in designing and implementing superior portfolio management methods. Literature review: heightened global competition, rapidly changing technologies and shorter product life cycles making companies more responsible towards their resource management and one of the most important senior management functions is Portfolio management. Portfolio management dictates where and how you’ll invest for the future. It decides How do companies choose where and how to spend their R&D funds? And how are senior managements dealing with the issue of portfolio management? Portfolio management is a dynamic decision process, whereby a business’s list of active new product (and R&D) projects is constantly up-dated and revised. In this process, new projects are evaluated, selected and prioritized; existing projects may be accelerated, killed or de-prioritized; and resources are allocated and reallocated to the active projects. The portfolio decision process is characterized by uncertain and changing information, dynamic opportunities, multiple goals and strategic considerations, interdependence among projects, and multiple decision makers and locations. The portfolio decision process encompasses or overlaps a number of decision-making processes within the business, including periodic reviews of the total portfolio of all projects (looking at the entire set of projects, and comparing all projects against each other), making Go/Kill decisions on individual projects on an ongoing basis (using gates or a Stage-Gate TM process, and developing a new product strategy for the business, complete with strategic resource allocation decisions. Note that many businesses use multiple methods for portfolio management and project selection approaches, however Bubble diagrams or portfolio maps have received much hype and exposure in recent books, articles and software. Here, projects are plotted on an X-Y plot or map, much like bubbles or balloons. Projects are categorized according to the zone or quadrant they are in (e.g., pearls, oysters, white elephants, and bread-and butter projects). These bubble diagrams resemble the original portfolio models – Stars, Cash Cows, Dogs, etc. – except that the axes are quite different, and projects rather than business units are plotted. A total of 40.6 percent of businesses use portfolio maps; only 5.3 percent of businesses use this as their dominant method Method: Quantitative method: Next, a detailed survey questionnaire was developed in concert with the IRI’s Research on Research Committee The questionnaire dealt with a number of topics including: • importance of portfolio management and reasons why • general nature of the portfolio management method used by the business • details of the portfolio methods used • dominant method used • criteria used for selecting and ranking projects • performance of the
- 3. business’s portfolio management method • general demographics (industry, business size, etc.). Data collection method: Data was collected via a mail survey of businesses known to be active in product development in North America. The population list included the IRI membership list (largely CTOs of larger firms in the US) as well as other private lists compiled by the authors. Although not the total population of all firms undertaking R&D and product development in the U.S., the list is a fairly representative one. Data analysis: Heads Description 1. Exploratory study 30 leading firms was first undertaken – in-depth personal interviews. This study helped to identify the issues, goals, concerns, metrics, types of methods used, etc. 2. Quantitative method Questions required the respondent to check a box or circle a number, although some open-ended questions were included to solicit verbal comment. The questionnaire itself was carefully structured, exhaustively reviewed by a committee of industry experts from the IRI, pre-tested on eight businesses via personal interviews, and finalized. 3. Data collection method survey questionnaire, mail survey 4. response rate The eventual combined useable response rate was a respectable 205 completed questionnaires (a response rate of 25.8%). Discussion/conclusion: Portfolio management is typically very poorly handled, however. It was rated as the weakest area in new product management in a recent benchmarking study. Portfolio management is viewed as a very important task in the business however, Marketing/Sales managements are perceived as thinking that portfolio management is less important. Senior managements in the Best companies consistently and significantly view portfolio management as much more important as do managements in the Worst. This is true regardless of functional area. Thus, there appears to be a direct link between whether senior management in a business recognizes portfolio management to be important, and the portfolio results it achieves. Once again, however, technology managers score by far the highest here, with senior technology management in the Best businesses rating portfolio management a very high 4.6 out of 5 in importance. Marketing/Sales and Operations/Production managements continue to be perceived as seeing portfolio management as less vital, even among the Best businesses. Eight key reasons that has been identified in this study why Portfolio management is so important, cited by senior management who took part in the study: 1. Financial – to maximize return; to maximize R&D productivity; to achieve financial goals. 2. To maintain the competitive position of the business – to increase sales and market share.
- 4. 3. To properly and efficiently allocate scarce resources. 4. To forge the link between project selection and business strategy: the portfolio is the expression of strategy; it must support the strategy. 5. To achieve focus – not doing too many projects for the limited resources available; and to resource the “great” projects. 6. To achieve balance – the right balance between long and short term projects, and high risk and low risk ones, consistent with the business’s goals. 7. To better communicate priorities within the organization, both vertically and horizontally. 8. To provide better objectivity in project selection – to weed out bad projects The clear message is this: Businesses that achieve positive portfolio results – a balanced, strategically aligned, high value portfolio, with the right numbers of projects and good times-to- market (no gridlock) – boast a clearly defined, explicit, all-project, consistently applied portfolio management process which management endorses. Poor performers lack this. Challenges: Although most businesses in the study recognize the need for and importance of portfolio management, there are still many issues that need to be addressed. Thus, we asked managers to identify what are the most significant challenges ahead. The most common challenge identified is the need to create a positive climate, culture and buy-in for their portfolio method. As might be expected, a key issue in any new process is the need to obtain organizational buy-in. Without total senior executive support, the portfolio management process becomes a difficult sell. Other challenges and issues pertain to achieving the primary goals of portfolio management – achieving business objectives, obtaining linkages to strategy and achieving balance – and to the tools needed to obtain the needed information to be able to make disciplined decisions. The most common complaint cited by managers is the abundance of short term, low risk projects in the pipeline. People are too busy working on these types of projects to be able to devote the time and energy needed to develop the next generation of “big winners” for the company. Executives are concerned that the need for quick hits in the market is placing longer term projects at risk. Limitations: Heads Description 1. Limited firms sample. 30 leading firms were under taken. 2. Limited geographical boundary Conducted in the vicinity of U.S.A Future research direction:
- 5. Heads Description Positive climate, culture and buy-in for effective portfolio management. Need to create a positive climate, culture and buy-in for their portfolio method. As might be expected, a key issue in any new process is the need to obtain organizational buy-in. Without total senior executive support, the portfolio management process becomes a difficult sell.