Innovation Portfolio Management
Mathews, Scott H., Research-Technology Management
It is difficult to understand why doing portfolio management well is so challenging. Shouldn't it be as simple as deciding on a few attributes, like net present value and time to market, lining up all the opportunities and ranking them on those attributes, then funding the best of the bunch until you run out of money? If life were so simple, we would all have 2.5 children and live happily ever after. Clearly, it's not. Year after year, IRI members rank portfolio management as a compelling topic and ask that IRI offer more resources on it. I am sure many of us aspire to accomplish great things with a portfolio of projects while being tantalized by the complexities of the process.
Innovation portfolio management, the subject of this special issue of RTM, adds another layer of complexity. Here, the challenge is not only to create and manage an effective portfolio, but to do so in new spaces with new activities where the right attributes and metrics are still emergent and the odds of success are slim at best but the payoffs are substantial. Portfolio management is not project management. The defined valuation methods and staged, gated processes of project management can't always accommodate the chaos of early-stage innovation. Instead, portfolio management relies on its own set of metrics, relying on a layered analytical technique that reveals unique insights, giving meaning and value to the management process itself.
In our lead article, "Where are all the Breakthrough New Products?," Robert Cooper points out the differences between project management and portfolio management, challenging the notion that all projects require a heavy dose of financial analysis. Rather, he argues that portfolios of early-stage projects should emphasize other approaches, including qualitative scoring criteria for such factors as project alignment, competitive advantage, and the like. His reasoning is that financial analysis favors "renovations"--incremental improvements--over breakthrough projects because the financial metrics on more mature activities are relatively well established. These tend to dominate the more risky game changers that result in true innovation. As a result, today's innovation portfolios have far too few breakthrough initiatives like those that have led corporations to greatness in the past.
In "From Budget-Based to Strategy-Based Portfolio Management," two highly experienced portfolio management consultants, Richard Sonnenblick and Dan Smith, offer a fascinating case study of a six-year transformation of the R&D portfolio management practices of a major pharmaceutical company. The story Smith and Sonnenblick tell portrays how one company realized the strategic benefits of selecting the best set of projects rather than ranking and choosing the best projects. The company had fallen into exactly the trap Cooper describes, allowing the dominance of low-risk projects to boost short-term sales, with the result that only 5 percent of the portfolio budget was allocated to innovative projects. Applying additional metrics to assess the entire portfolio, rather than relying on metrics that ranked individual projects, gave the company a new perspective on its portfolio.
John D. Evans and Ray O. Johnson, in "Tools for Managing Early-Stage Business Model Innovation," provide another interesting approach to creating a balanced portfolio that includes early-stage opportunities. …