Action-Oriented Portfolio Management

By Spradlin, C. Thomas; Kutoloski, David M. | Research-Technology Management, March/April 1999 | Go to article overview

Action-Oriented Portfolio Management


Spradlin, C. Thomas, Kutoloski, David M., Research-Technology Management


Strategy tables permit decision makers to build and evaluate R&D portfolios that focus on value-enhancing actions.

OVERVIEW: Efficient portfolio management is paramount to adding shareholder value in any organization. However, the art of portfolio management stretches beyond evaluation techniques. More significantly, it is the ability to promote actionable steps utilizing all company assets that allows managers to create shareholder wealth. The strategy table approach to R&D portfolio management helps focus efforts into this realm of action for the following reasons: 1) It generates alternatives where choices will actually be entertained (the equivocal projects); 2) It eliminates unnecessary analysis where no alternatives are under consideration (doomed favorite projects); 3) It focuses decision makers on portfolio issues rather than project issues; 4) It provides the materials necessary to communicate a recommendation for action. Although significant challenges remain to make this approach commonplace, it appears to be an attractive methodology that should be considered for effective R&D portfolio management.

There are a number of industries in which R&D places great sums of money at risk in facing an uncertain future; examples include pharmaceuticals, oil and gas exploration, and motion picture production. In pharmaceuticals, significant scientific complexity, regulatory risks and market uncertainties magnify the need for insightful decision making. Among approaches to the management of an R&D portfolio, decision analysis (DA) continues to prove its applicability and effectiveness as a methodology equipped to tackle such underlying issues and to increase shareholder value. In this article, we present a method for structuring the conversations around portfolio decision making and for reaching a conclusion in a timely manner deserving of consensus.

Evaluation vs. Management

Matheson has written that the two primary constituents of the effective management of R&D activity are ". . . the economic evaluation of potential R&D results and the development of alternative R&D programs" (1). In our experience, pharmaceutical portfolio managers work tirelessly and incessantly on the former while devoting little attention to the latter. The word "manage" means to handle or direct with a degree of skill, or to alter by manipulation; it implies action. By this definition, the management of a portfolio involves the act of changing it, or of intentionally leaving it alone rather than changing it. Much of what is written and spoken about portfolio management actually has to do with portfolio evaluation, which involves no explicit notion of action. We take the position that the act of evaluating the portfolio has minimal value. Portfolio management is valuable because of the value-enhancing actions that are taken as a consequence of the analysis. As this article is concerned more with the decision process than with the pharmaceutical industry, we assume the reader's familiarity with both basic DA and the industry's drug development process. Additional discussion of DA can be found in (2) and (3). The drug development process is discussed in (4) and (5).

Drawbacks to Prioritization

Business units need to allocate resources to a collection of opportunities, but they do not have sufficient resources to fund all of them at the currently required level. Alternately, they wish to reconsider their portfolio of investments to find a more attractive allocation of resources. In the past, they have used various methods to evaluate each of the opportunities and then to prioritize them. The prioritization provides a rank-ordered list of the projects, ordered generally by importance to the company, but this is not always clearly the case.

We feel that this approach suffers from several drawbacks. It offers only a little guidance to those who must make resource allocation decisions. …

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