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1、,New Problems,New Solutions:Making Portfolio Management More EffectiveWORKING PAPER No:9Authors:Dr.Robert G.CooperDr.Scott J.EdgettDr.Elko J.KleinschmidtThis article was published in Research Technology Management(Industrial Research Institute,Inc.)Volume 43,Number 2,2000.34 Stone Church Road Suite
2、111Ancaster,Ontario L9K 1P4 Canada(905)304-8797 Fax:(905)304-8799,A member company of the Product Development Institute,2000 Product Development Institute,1,New Problems,New Solutions:Making Portfolio Management More Effective,There are two ways for a business to succeed at new products:doing projec
3、ts right,and doing the,right projects.Most new product prescriptions focus on the first route for example on effective,project management,using cross-functional teams,and building in the voice of the customer.,Portfolio management,the topic of this article,focuses on the second route,namely on doing
4、 the,right projects.,In spite of all the hype around the topic of portfolio management,and the myriad portfolio methods,proposed,managers have identified major problems and have raised serious concerns about the,effectiveness of portfolio techniques.This article reports the results of continuing res
5、earch into,portfolio management practices and results:it highlights some of the problems,and offers some,tentative solutions solutions that have been witnessed in typical firms as they try to address the,issue of picking the right projects(see box insert).,Portfolio Management is Vital,But Flawed,Re
6、search into Portfolio Management,Portfolio management is fundamental to successful,This article reports the findings of a continuing,new product development.Portfolio management isabout resource allocation-how your business spendsits capital and people resources,and which,research investigation into
7、 portfolio managementpractices and performances,done in part with IRI-member companies.Part I of the study looked at 35leading firms portfolio management approaches,development projects it invests in.Portfolio,and was reported in this journal 1.Part II,management is also about project selection-ensu
8、ring,considered a much larger sample of companies(205,that you have a steady stream of big new productwinners!And portfolio management is about strategy:it is one method by which you operationalize your,businesses),and was able to correlate performanceresults versus methods used 2.Part III of theres
9、earch,reported here,probes some of thedifficulties uncovered in portfolio management,and,businesss strategy.,what some companies are doing to address these,difficulties.The 30 companies in Part III were,Recent years have witnessed a heightened interest inportfolio management,not only in the technica
10、lcommunity,but in the CEOs office as well.According,deliberately chosen,based on prior knowledge oftheir approaches and the fact that they were activelyaddressing portfolio management issues.Furtherthey are more representative of industry at large,to our recent survey of IRI members,portfolio,(typic
11、al companies,as opposed to Part I,which,management has gained prominence for a number of,focused on leading firms only).The research is case,reasons 3:Financial to maximize return on R&D and,study in nature(i.e.,interviews with management inthe firms).,technology spending,To maintain the businesss c
12、ompetitive position,To properly allocate scarce resources,To forge the link between project selection and business strategy,To achieve a stronger focus,To yield the right balance of projects and investments,To communicate project priorities both vertically and horizontally within the organization,To
13、 provide greater objectivity in project selection.,New Problems,New Solutions Making Portfolio Management More Effective Copyright 2000 Product Development Institute,2,The problem is that effective portfolio management has proven to be an elusive goal for many,businesses.Management rated the effecti
14、veness of their project selection and portfolio management,methods,and the results are provocative 4(Figure 1):,Portfolio methods in use were given high marks for ensuring strategic alignment that R&D,spending and projects undertaken are consistent with the businesss strategy,Portfolio methods also
15、fared well in terms of selecting high value projects But portfolio methods were rated much weaker in terms of:,Having the right number of projects(there are far too many projects in most businesss,portfolios),Promoting timely completion of projects(there is gridlock in the pipeline),Having the right
16、 balance of projects(too many minor,incremental projects).,Figure 1:Businesses portfolio performance results are on average fairly good across six key metrics.,But there exist weaknesses in terms of too many projects,pipeline gridlock,and the right balance of,projects.Also there are major difference
17、 between the Best versus the Worst performers.,The Best(top 20%),Projects are aligned,All Businesses,with businesss objectives,The Worst(bottom 20%),Portfolio contains,very high value projects,Spending reflects,the businesss strategy,Projects are doneon time(no gridlock)Portfolio has goodbalance of
18、projectsPortfolio has rightnumber of projects,1,2,3,4,5,Poor,Excellent,Businesses were categorized into 3 groups:Best,Worst and All.Best and Worst are top and bottom20%in terms of their portfolio performance.Source 4.All differences between Best and Worst are significant at the 0.001 level.Performan
19、ce metrics are rank-ordered according to mean scores(highest mean scores at top offigure.,Note the major significant differences in Figure 1 between the Best and Worst performers:clearly a,number of companies are struggling with their portfolios,while a minority seem to have it right!,New Problems,N
20、ew Solutions Making Portfolio Management More Effective Copyright 2000 Product Development Institute,3,Some Difficulties,Why is management so disappointed with their first attempts at portfolio management?More in-,depth research has probed these issues,and has identified four main challenges or prob
21、lem areas in,portfolio management:,1.Resource balancing:Resource demands usually exceed supply,as management has difficulty,balancing the resource needs of projects with resource availability.,2.Prioritizing projects against each other:Many projects look good,especially in their early days;,and thus
22、 too many projects“pass the hurdles”and are added to the active list.Management,seems to have difficulty discriminating between the Go,Kill and Hold projects.,3.Making Go/Kill decisions in the absence of solid information:The up-front homework is often,substandard in projects,the result being that m
23、anagement is required to make significant,investment decisions,often using very unreliable data.No wonder so many of their decisions are,questionable!,4.Too many minor projects in the portfolio:There is an absence of major revenue generators and,the kinds of projects that will yield significant tech
24、nical,market and financial breakthroughs.,A lack of,Low,Resourcesfor New,Impact,Products,on Sales,Profits,Too Manysmall,lowvalueprojects,Too manyprojects forthe limitedresourcesavailable,No Portfolio,Poor,Management,Cycle,Process,Poor project,Times,prioritization;failure to killprojectsPoor job,No N
25、ewProductProcess,Poor dataon projects,done onprojects weak marketstudies,poorlaunch,HighFailureRates,inadequatetesting,Figure 2 A lack of resources,no portfolio management,and no new product process(left)are,the root cause of many problems,which feed on one another,resulting in a downward spiral of,
26、negative effects and results.,These four problems are clearly interlinked.For example,the inability to discriminate between,projects invariably leads to a resource balancing problem.Insufficient resources on key projects in,turn results in project teams short-cutting key activities.Cutting corners o
27、n projects results in poor,information and difficulty in making sound Go/Kill decisions.Inadequate resources and poor,New Problems,New Solutions Making Portfolio Management More Effective Copyright 2000 Product Development Institute,4,information invariably leads to a tendency to do short-term,quick
28、 and simple projects.And so the,portfolio problems continue,feeding one another in an endless downward spiral(Figure 2).,Consider each of these four challenges in more detail:,Problem#1:Too many projects,not enough resources.,Pipeline gridlock plagues many businesss portfolios:There are simply too m
29、any projects and not,enough resources to do them well.This is a universal complaint within product development groups,everywhere.The demand for more new products than ever coupled with corporate restructuring has,helped to create this resource crunch:,One frustrated new product project leader at her
30、 companys technology conference exclaimed:“I,dont deliberately set out to do a bad job.Yet,when you look at the job that the project leaders,around here do,its almost as though our goal is mediocrity.But thats not true.were good,project leaders,but were being set up for failure.There simply isnt eno
31、ugh time and not enough,people or the right people to do the job wed like to do!”She went on to explain to senior,management how insufficient resources and budget cuts coupled with too many projects were,seriously compromising the way key projects were being executed.She was right!The point is:,the
32、resource commitment must be aligned with the businesss new product objectives,strategy,and processes for positive results 5.,The lack of resources is part of the problem.The other side is the failure to allocate resources,effectively.Here portfolio tools and methods are partly at fault,along with a
33、lack of will on the part,of senior management to cut back the number of active projects to say“no”to some worthwhile,initiatives.,The fact is that most project selection and portfolio management methods do a poor job of resource,balancing.Projects are evaluated,Go decisions are made,but resource imp
34、lications are often not,factored in.,Example:One of the most popular methods for evaluating projects and making Go/Kill,decisions is the use of financial models,such as NPV 2,7.More advanced versions introduce,probabilities and uncertainties into the financial calculation.Management is presented wit
35、h the,NPV of the projects,along with probability distribution curves.These same models,while so,elegant in their handling of financial estimates(revenues,costs,profits)are notably lacking in,their handling of the resource constraint problem:resource availability is rarely part of the,financial calcu
36、lation.,The majority of project selection techniques are quite weak when it comes to making Go/Kill,decisions or choosing the portfolio in the light of constrained resources.There is really no way to,check that the required resources are available when using most of these selection tools.Indeed thes
37、e,selection tools consider individual projects one-at-at-time and on their own merits,with little regard,for the impact that one project has on the next.Worse yet,people resources are assigned to projects,but only later is it discovered that the same resources are committed to multiple projects,and
38、that,some people are committed 150%of their time.,New Problems,New Solutions Making Portfolio Management More Effective Copyright 2000 Product Development Institute,5,In one major beverage company,there were constant complaints that major bottlenecks were,encountered in new product projects in the p
39、ackage development department.A demand,analysis was undertaken on a project-by-project basis;only then was it discovered how heavily,committed certain players were.Each project team member was assigned to projects(number,of person-days each month).When the packaging departments time commitments were
40、,totaled up across all active projects,it turned out that this three-person group had been,committed about 100 person-days each month.Figure it out:thats a 160%commitment.No,wonder there were logjams in the process!,The results of too many projects in the pipeline are serious.Here are some of the ne
41、gative effects,weve observed:,1.Time to market starts to suffer,as projects end up in a queue waiting for people and resources to,become available.,A senior technology manager in one Xerox division,concerned about project timelines,undertook a quick survey.He picked a day at random,and sent an e-mai
42、l to every project,leader in his division:“How much work got done on your project today?”.The shocking news:,more than three-quarters of the projects had no work done on them at all!Subsequent follow-up,revealed that a minority had legitimate reasons for inaction waiting for equipment to be,delivere
43、d,or waiting for tests to be completed.But the great majority were simply in a queue,waiting for people to get around to doing something on them.His best guess was that he could,have halved time-to-market for most projects simply by having fewer active projects underway,and thereby avoiding queues,2
44、.People are spread very thinly across projects.With so many“balls in the air”,people start to cut,corners and execute in haste.Key activities may be left out in the interest of being expedient and,saving time.And quality of execution starts to suffer.The end result is higher failure rates and an,ina
45、bility to achieve the full potential of would-be winners.,One major chemical company undertook an audit of its new product practices and performance,across its many businesses.One common conclusion,regardless of business unit,revealed a,lack of good market knowledge and customer input in the typical
46、 new product project.A task,force was set up to study why.Their conclusions:marketing people were so thinly spread,across so many new product projects that they barely had time to oversee the launch of new,products,let alone even think about doing market studies and solid market research.,3.Quality
47、of information on projects is also deficient.When the project team lacks the time to do a,decent market study or a solid technical assessment,often management is forced to make continued,investment decisions in the absence of solid information.And so projects are approved that should be,killed.The p
48、ortfolio suffers.,4.Finally,with people spread so thinly across projects,and in addition,trying to cope with their“real,jobs”too,stress levels go up and morale suffers.And the team concept starts to break down 6.,New Problems,New Solutions Making Portfolio Management More Effective Copyright 2000 Pr
49、oduct Development Institute,Problem#2:Project selection methods fail to discriminate between projects,Most project selection tools-for example scoring models and financial tools-consider the,project against some hurdle or“minimum acceptable value”.In the case of NPV,for example,the,NPV is calculated
50、 using a risk adjusted cost-of-capital.If the NPV is positive,the acceptable hurdle,rate is achieved,and the project is deemed a Pass.,The trouble is,lots of projects pass the hurdles.What these methods really fail to do is provide for a,forced ranking of projects against each other.Projects are rat
