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What is Portfolio Management?

A vital question in the product innovation battleground is, "How should corporations most effectively invest their R&D and new product resources?" That is what portfolio management is all about: resource allocation to achieve corporate new product objectives. Today's new product projects decide tomorrow's product/market profile of the firm. An estimated 50% of a firm's sales today come from new products introduced in the market within the previous five years. Much like stock market portfolio managers, senior executives who optimize their R&D investments have a much better chance of winning in the long run. But how do winning companies manage their R&D and product innovation portfolios to achieve higher returns from their investments? There are many different approaches with no easy answers. However, it is a problem that every company is addressing to produce and maintain leading edge products. Portfolio management for new products is a dynamic decision process wherein the list of active new products and R&D projects is constantly revised. In this process, new projects are evaluated, selected, and prioritized. Existing projects may be accelerated, killed, or de-prioritized and resources are allocated (or reallocated) to the active projects.

Portfolio Management A Problem Area!

Recent years have witnessed a heightened interest in portfolio management, not only in the technical community, but in the CEO's office as well. Despite its growing popularity, recent benchmarking studies have identified portfolio management as the weakest area in product innovation management. Management teams confess that there are rarely serious Go/Kill decision points and more specifically, no criteria for making the Go/Kill decision. As a result, companies are facing too many projects for the limited resources available.

How it Works
While the portfolio methods vary greatly from company to company, the common denominator across firms are the goals management is trying to achieve. According to 'best-practice' research by Dr. Cooper and Dr. Edgett, three main goals dominate the thinking of successful firms: Value Maximization Allocate resources to maximize the value of the portfolio via a number of key objectives (such as profitability, ROI, acceptable risk). A variety of methods are used to achieve this maximization goal, ranging from financial methods to scoring models. Balance Achieve a desired balance of projects via a number of specific parameters (i.e. risk versus return; short-term versus long-term; across various markets, business arenas and technologies). Typical methods used to reveal balance include bubble diagrams, histograms and pie charts. Align with Business Strategy Ensure that the portfolio of projects reflects the business strategy and that the breakdown of spending aligns with the companys strategic priorities. The three main approaches are: topdown (strategic buckets); bottom-up (effective gating and criteria) and top-down and bottom-up (strategic check).

What are the benefits of Portfolio Management?

When implemented properly and conducted on a regular basis, Portfolio Management is a high impact, high value activity. 1. 2. 3. 4. 5. 6. 7. 8. Maximizes the return on your product innovation investments Maintains your competitive position Achieves efficient and effective allocation of scarce resources Forges a link between project selection and business strategy Achieves focus Communicates priorities Achieves balance Enables objective project selection

Top performers emphasize the link between project selection and business strategy.