Now that a seemingly interesting and viable concept has been developed, it is time to check where that new concept is positioned among the other offerings of the company (even though this subtheme can also influence the initial choice of ideas – this does not have to be a linear process as discussed before). This process is called Project (or Product or Service) Portfolio Management (PPM). More formally, portfolio management can be defined as:
Portfolio management is a dynamic decision process, whereby a business’s list of active new product (and R&D) projects is constantly up-dated and revised. In this process, new projects are evaluated, selected and prioritized; existing projects may be accelerated, killed or de-prioritized; and resources are allocated and reallocated to the active projects. The portfolio decision process is characterized by uncertain and changing information, dynamic opportunities, multiple goals and strategic considerations, interdependence among projects, and multiple decision makers and locations. (Robert G. Cooper, Portfolio Management for New Product Development: Results of an Industry Practices Study, 2001)
Another definition is provided in (Project Management Institute, 2004):
A group of projects or programs and other work that are grouped together to facilitate effective management of that work to meet strategic business objectives.
It is widely acknowledged within the discipline of innovation studies that there is a high percentage of failure of innovation projects (Matta & Ashkenas, 2003) in addition to exceeding budget and overrunning timescales (Anbari & Kwak, 2004). Mindful of this, portfolio management methods aim to improve innovation success rates by ensuring that a strategically aligned portfolio of innovation projects exists in terms of risks, project types, etc. and ensuring efficient use of resources is maintained (Matheson & Matheson, 2005).
The importance of portfolio management is underscored from best practice studies and includes the following objectives: financial maximisation, resource allocation, focus and balance and strategy alignment (Cooper, Edgett, & Kleinschmidt, R&D Portfolio Management Best Practices Study, 1997). At a basic level, Turner (Turner, 2009) suggests a five phase process for portfolio management: (1) Maintain a list of all current projects in a project database; (2) Report the status of all projects through a central project-reporting system; (3) Prioritise and select projects through a transparent system maintained centrally; (4) Plan and assign resources on all projects centrally and (5) Evaluate the business benefits of all projects post-completion.
As described in (Robert G. Cooper, Benchmarking Firms' new product performance and practices, 1995), even though the importance is widely understood, portfolio management is often one of the weakest areas in the new product development process.
There are many different ways to take on Portfolio Management. Broadly, the approaches can be categorised across the following dimensions as per (Cooper, et al., 2001) industry practice study of portfolio management – financial methods, business strategy, bubble diagrams, scoring models and checklists, which are illustrated in Figure 1.
- Financial methods: in their study, the authors found that a total of 77.3 percent of businesses use a financial method for PPM. 40.4 percent of business used a financial method as the dominant PPM method. Here we find methods like Net Present Value, ROI calculations or Payback Period versions.
- Business strategy methods: in this type of method, the organization defines several strategic domains (or ‘buckets’) that are relevant to the company, and divide the projects among these buckets. These domains can be defined based e.g. on “type of market”, “type of development”, “product line”, “project magnitude”, “technology area”, “platform type”, “strategic thrust” and “competitive needs”. Next, the projects are graded among each other within one bucket (using strategic fit or a different, e.g. financial, technique). Using this approach, there is a higher probability that the selected projects actually contribute to the strategy of the company. 64.8 percent of businesses used a strategic approach to PPM. 26.6 percent of businesses used a strategic approach as the dominant method for PPM.
- Bubble diagrams or portfolio maps: In this approach, projects are placed on an X-Y map, denoting specific properties. There are many properties used, e.g. “risk” on one axis and “reward” on the other. Projects are then categorized according to their quadrant (e.g. pearls, oysters, white elephants and bread-and-butter projects). 40 percent of businesses use this method for PPM. 5.3 percent of businesses used this method as the dominant method. The low score for the dominant method means that the bubble diagram is most often used as a supporting approach. Important to note is that in order to place the project somewhere on a map, a score for the axis dimensions has to be calculated, e.g. with financial methods.
- Scoring models: In this approach, projects receive a score for each question in a list of questions. The scores are then added (simply added, or on a weighted basis) to determine the total score. 37.9 percent of businesses were found to use this approach. For 13.3 percent of businesses, this was found to be the dominant approach.
- Check lists: In this approach, portfolio managers have to answer a check list with yes or no answers. The number of yes answers determines whether there will be a “Go” or “Kill” decision.
- Others: In this category we find methods such as “gut feeling” and “intuition”, or some variation on the methods mentioned above. For instance, some organizations use “probability of commercial success” as a determinant, sometimes multiplied with financial estimates.
Figure 1 Portfolio Management Methods
|Financial ECV Method||
Popularity of Portfolio Methods Employed
Source: (Cooper, et al., 2001)
In addition to these models, one can also design complete business cases for the concepts. Many authors even advise to draft these business models earlier on in the innovation cycle. The ‘Business case’ of an innovation prospect and/or project reflects the materials and evidence prepared to demonstrate that the idea under consideration is commercially viable and therefore serves as a rational means for assessing the business value of potential investment (Digrius & Keen, 2002). Reflective of this, Cooper (Cooper R. , Winning at New Products: Accelerating the Process from Idea to Launch, 2001) incorporates business case analysis in the stage gate model to assess and screen the potential of a given innovation prior to incurring development costs. For Kinnunen et al. (2011) business case development involves four components: market-related, technical and financial information and the embedding of strategic issues in the decision making process (as presented in the Concept Development module).
Figure 2: Business Case Procedure (Kinnunen, Pekuri, Haapsalo, & Kuvaja, 2011)
As can be seen from the Kinnuen et al. (Kinnunen, Pekuri, Haapsalo, & Kuvaja, 2011) model for business case procedure, the relevance of the aforementioned topics of innovation management and macro analysis are integral to shaping the innovation decision making process. In this context, business modelling which implies a conceptualization, framework or blueprint for distinguishing a strategy to undertake, and the underlying organizational structures, processes and systems involved offers relevance. According to Osterwalder and Pigneur (Osterwalder, Pigneur, & Smith, 2010) a business model describes the rationale of how an organization creates, delivers, and captures value. They elaborate on this model through mapping out nine basic building blocks that show the logic of how a particular organization intends to succeed (see Concept Development Module for an overview of the Business Model Canvass approach.
In a nutshell, business model mapping makes the implicit thinking behind the venture explicit; and allows the identification of economic value creation opportunities (existing and future), thereby allowing the business to take full advantage of the strategic partners, resources, channels and activities at its disposal to align customer’s needs with company offerings (Mitchell and Cole, 2003). As business model innovation looks beyond product or process innovation, it builds in strategies designed to enhance the flexibility of the business, create barriers to imitation and reduce costs. Osterwalder and Pigneur’s (2010) business model concept has been applied and is in use in organizations such as IBM, Ericsson, Deloitte and Government Services of Canada, but it has relevance for every organization as it covers the four main areas of a business: customers, offer, infrastructure and financial viability. Some organizations may have multiple business models in operation, with some aimed at satisfying a market, others focused on improving or disrupting a market or bringing a new product/technology/service to the market, with other models creating a market for an entirely new type of business.
The business model mapping process involves systematically questioning the assumptions on which the business operates, and considering alternative means of creating value – these may be quantitative targets/performance indicators/ action points (e.g. price, speed of service) or qualitative (e.g. design, customer experience). The process of examining assumptions regarding market forces, industry forces, key trends and macroeconomic forces, will by its nature, allow users of the framework to get a grip on the complexities which need to be considered in developing/innovating a business model suitable for the specific environment/context. By employing the questioning techniques to the business model mapping or development process, management teams are able to tame the information over-load common today and grasp the concept of where and how their business/products/services (can) deliver value, and focus on practical solutions that will deliver value to their customers. Visualization tools and/ or idea generation using a trigger question methodology to question each building block as a starting point for this discussion, is recommended. A key result of the business model mapping process is that management teams will have a compass to enable them to identify and develop viable ideas and opportunities. According to Osterwalder and Pigneur (Osterwalder, Pigneur, & Smith, 2010) the business model design process involves a series of iterative phases, which facilitate the business model’s exploration and description through the nine building blocks encompassing:
- Blueprinting existing/ projected business model and its internal building blocks.
- Generating and strategically challenging the external environmental factors most influential to your business model.
- Evaluating the strengths and weaknesses of your business performance.
- Innovating and designing new/revised strategic business models
Complementing the business model process, Mullins (Mullins, 2003) New Business Road Test model offers an additional means for new start-ups to assess and develop their business case. The model (as presented in the Concept Development subtheme) incorporates seven key components, four of which are industry and market focused and the remaining three are focused on the entrepreneurial and business development capacity of the innovator/entrepreneur.
Similarly, Blank’s Four Steps to the Epiphany (Blank, 2005) framework offers innovators a toolkit for navigating the complexities of determining the business value of their concepts and offers specific resources for customer engagement, insights into finding markets for products as specified, strategies and tactics for market navigation (entering existing or new markets) and strategies for managing and responding to product and company growth. The relevance of Blanks contributions are most noted in the area of value propositioning and hypothesis gathering/iteration to address the needs/demands of a customer base. ,
- Financial methods (ECV) -
- Business strategy method -
- Scoring models -
- Business model -
- Bubble diagram -
Business strategy method :
- Business case :
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