For personal financial planning, the purpose of portfolio management is to increase wealth while managing risk. A “balanced” portfolio protects the investor from investment downside.
Likewise, for a business, portfolio management governs how resources are invested to increase wealth while managing risk. Though, the constraints are clearly less. The large B2B enterprise commands army of engineers along with easy access to capital.
The portfolio management process can be simple or complex, formal or informal. The more important question is “How well is it working?” If “Not well”, growth stalls. Let’s look at four symptoms of a business crippled by dysfunctional portfolio management:
In frustration, an executive told me, “All our new products are just taking a green one and making it blue. We can’t grow with only small changes.”
Good portfolio management harmonizes all investments to achieve the desired ROI. And certainly, new product refreshes and tweaks will be a healthy component of the mix. But in addition to the base hits, a portion should be dedicated to doubles, triples, as well as some “swings for the fences.” Leadership should provide this desired mix as part of the corporate strategy. Portfolio management guides the execution of this strategy by placing the bets.
“Lack of resources” usually means “lack of leadership discipline.” Let me explain: Engineers are pushed to execute NPD projects according to a given budget and schedule. So, why the constant murmur about resources?
It sounds like this, “We can’t get this product out in time without more help.” Or, “If only we could hire more people, then we could do the project.”
Resources, resources, resources. It’s as if the answer to our troubles could be solved with just a few more engineers here and there. But when we add people, our troubles still persist. Why? Are we gluttons? Are we poor project managers? Almost certainly not. The problem is not a “lack of resources” in a global sense, but rather, it’s that too many projects are assigned. As stated by Dr. Robert Cooper in his white paper The Invisible Success Factors in Product Innovation, “Management’s failure to make tough choices results in a lack of focus: far too many projects for the limited resources available. Too many active projects in turn means that resources and people are too thinly spread.”
Having good portfolio management is like having an up-to-date checkbook. You must know the balance to know what you can spend. By the way, if I was the leader of a company with poor portfolio management, the last thing I would do is provide more resources. It’s like giving money to a compulsive gambler.
Another result from too many projects. When this happens, teams take on additional risk – and unfortunately, usually market risks seem more acceptable. For example, a team is more likely to cancel a customer interview than a prototype build. As a result, the project meets the schedule but launches a product doomed to fail. A poor trade-off. I’ve often said that NOBODY REMEMBERS if your NPD project was launched on time. But EVERYONE REMEMBERS if it was a flop or success. And yet, when we sacrifice customer insight to meet a schedule, we act as if the reverse was true.
A great thing about New Product Blueprinting is that you learn your customers’ most burdensome problems. When you can address these with derivations of your current solutions, your business can move forward without controversy.
However, inevitably, you will also discover market problems that are not so aligned with your capabilities. The best solution might be a very different product – or even a new service or business model. However, without effective portfolio management, a business often remains paralyzed in indecision. Of course, eventually, a competitor will come by and solve the customer’s problem. It will be not much consolation that you discovered the market problem first but didn’t act. With effective portfolio management, you’ll allocate some investments to riskier projects that push the boundaries of your firm’s comfort. This makes it easier to respond to opportunities beyond the comfortable boundaries.
It’s common to blame business stagnation on a “non-innovative culture.” I’d like to submit that there often is a simpler and less abstract cause: poor portfolio management. With our personal finances, it’s clear that we can’t write checks beyond our account balance. But when we add projects to the NPD pipeline without knowing the available capacity, this is exactly what we’ve done. A non-innovative culture is often the scapegoat for poor processes.
For more on this topic, I recommend Portfolio Management for New Products by Cooper, Edgett and Kleinschmidt.