Portfolio Management in New Product Development: Lessons from the Leaders-I

Article excerpt

Effective portfolio management, project selection and resource allocation were deemed critical to new product success at 35 companies. However, virtually every company admitted having problems and considered the techniques it was using to be experimental.

OVERVIEW: A study of portfolio management practices in industry reveals three goals: maximizing the value of the portfolio, achieving the right balance and mix of projects, and linking the portfolio to the business s strategy. This first of two articles provides examples of portfolio methods used to achieve the first two goals. Maximizing the portfolio s value is achieved by means of various financial models, including the Expected Commercial Value method and the Productivity Index, which are outlined and critiqued. Scoring models are also used to maximize the value of the portfolio. Achieving a balanced portfolio is quite a different issue, involving the use of bubble diagrams and other visual models.

Managers were generally displeased with, or at best doubtful about, their firm's current portfolio of projects.

One or more of three high-level goals dominated the thinking of each firm we studied, either implicitly or explicitly.

Hoechst-US. had constructed one of the best scoring models we have seen.

One attraction of this bubble diagram model is that it forces management to deal with the resource issue.

There is more to life than simply achieving a high-value portfolio-balance is also an issue.

Avoid the temptation to portray too many maps and charts, and be sure to test their use in portfolio reviews or gate meetings before adopting them.

How can a company most effectively invest its R&D and new product resources? Answering this question is what portfolio management is all about: resource allocation to achieve corporate new product objectives. Much like stock portfolio managers, those senior managers who succeed at optimizing their R&D investments-who define the right new-product strategy for their firm, select the winning new-product projects, and achieve the ideal balance of projects-will win in the long run.

This article reports the results of an exploratory investigation into portfolio management practices (see "How the Study Was Done," next page). It tells how leading firms manage their R&D portfolios, and offers insights and recommendations to help your company achieve a greater return from its R&D investment (1).

Understanding Portfolio Management

Portfolio management and the prioritization of new product projects is a critical management task. Roussel, Saad and Erikson in their widely-read book claim that ". . . new product portfolio analysis and planning will grow in the 1990s to become the powerful tool that business portfolio planning became in the 1970s and 1980s" (2).

Portfolio management and project prioritization is about resource allocation in the firm; that is, which new-product projects shall the corporation fund from the many opportunities it faces? And, which ones shall receive top priority and be accelerated to market? It is also about corporate strategy, because today's new-product projects decide tomorrow's product/market profile of the firm. An estimated 50 percent of firms' sales today come from new products introduced within the last five years (3,4). Finally, it is about balance; namely, the optimal investment mix between risk versus return, maintenance versus growth, and short-term versus long-term new product projects.

We define portfolio management as a dynamic decision process, whereby a business's list of active new product (and R&D) projects is constantly updated 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. …