Portfolio management aims at managing risk in R&D by selecting an appropriate mix of high- and low-risk projects, as well as long- and short-term results. However, building a balanced project portfolio, considering risk and reward issues, is a significant challenge for managers. The case study described in this paper illustrates how a portfolio management exercise was carried out at the Mexican Petroleum Institute (IMP).
The IMP is the research arm for PEMEX, the Mexican state-owned oil and gas company. It is a public research center created in 1965 to undertake R&D activities in order to provide high-value technical solutions to PEMEX. The IMP employs approximately 4,500 people and has annual sales of US $300 million. The Institute consists of five business units: Oil and Gas Exploration and Production, Process Engineering, Project Engineering, Environment and Safety, and Training.
Technology Strategy and NPD
In 1999, a significant effort was undertaken to build and consolidate sound research capabilities. However, after the first three years, the need for a stronger alignment of the R&D activities with the business needs was identified. As a result, an Innovation Group was created in 2002 and the need to revise and focus the Institute activities was addressed.
In order to focus the Institute's R&D activities, a technology strategy was developed. A technology strategy exercise, which identified and assessed 26 technology arenas and led to the selection of four core arenas, was carried out. The remaining 22 were classified as maintenance arenas. At the same time, a Stage-Gate[TM] process for new product development based on Cooper's process was developed and implemented (1). This process was helpful in organizing development activities and managing NPD risk.
The Stage-Gate process consists of three routes, as depicted in Figure 1: 1) the basic research route, which joins the applied research route after the scientific principles have been proven; 2) the applied research route; and 3) the technology acquisition route, which joins the development route at the validation stage, after the technology has been acquired and assimilated from a third party. The central process is the applied research route, where both the basic research-oriented and the technology acquisition routes converge.
[FIGURE 1 OMITTED]
Having identified four technology arenas to focus on, as well as having had the Stage-Gate process in operation for a year, the management team decided it was the right time for carrying out a portfolio review of all projects in the pipeline. Prior to the review, there were 83 on-going projects, from which 21 were on the basic research route and accounted for 40 percent of the assigned resources, while 62 were on the applied research and technology acquisition routes, representing 60 percent of the resources allocated to R&D.
Structuring the Portfolio Analysis
The portfolio analysis was divided into five project categories: 1) basic research projects, 2) applied research projects aligned to core arenas, 3) applied research projects aligned to maintenance arenas, 4) technology acquisition projects aligned to core arenas, and 5) technology acquisition projects aligned to maintenance arenas, as illustrated in Figure 2.
[FIGURE 2 OMITTED]
The basic research projects required a completely different set of assessment criteria from those used for the applied research and technology acquisition routes. Therefore, these were removed from the prioritization exercise and analyzed separately. They were restructured into platform projects and reduced from 21 to 11. This reduction accounted for saving 33 percent of the budget assigned to basic research projects.
It became evident from the case study that it is critical to carefully analyze the projects that integrate the portfolio and recognize their differences. …