Portfolio management tools
Portfolio Management (PM) techniques are systematic ways of looking at a set of
projects or activities or even business units, in order to reach an optimum balance
between risks and returns, stability and growth, attractions and drawbacks in general,
by making the best use of usually limited resources.
Why and when are they used?
The motivation for a company to have several projects at a time can be of very
different nature. In many organizations, the uncertainty surrounding individual
projects leads them to place considerable emphasis on the development of a portfolio
of activities which is aimed to balancing risk and reward in such a way as to reduce
the overall uncertainty. One useful approach to this task is to consider the innovation
process from idea to implementation alongside certain variables, such as future cash
flow projections and resource requirements.
The starting point for this analysis is the recognition that the innovative process
within most organisations is likely to be a multi stage one which can be slowed down,
accelerated or discontinued as circumstances dictate. Some organisations consider
their portfolio as being similar to a funnel which they need to keep topping up in
order to ensure the flow through is strong enough and the outputs are sufficient to
meet their needs. Diagrammatically it might be portrayed as in figure 1.
Figure 1
Flow of ideas/projects in comparison with resource requirements
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In general, separate analysis of projects is unlikely to ensure the most productive use
of limited resources at any time, something which PM provides. Of particular
importance is also the need to ensure that RTD plans are consistent with business
strategy. Comparable problems of fit with strategy and selection of appropriate
investments within constraints are to be found in most aspects of business
management, and are commonly dealt with using PM techniques.
Several techniques dealing with PM can be mentioned. In general, all of them have
certain common aspects:
• A
portfolio
involves
balancing
the
results
of
assessing
the
individual
projects
which
comprise
it.
In
this
way
PM
could
be
combined
with
appropriate
single
project
evaluation
techniques.
In
fact,
when
used
to
assess
and
select
projects,
PM
partially
or
totally
uses
the
outcomes
of
the
analysis
undertaken
for
the
evaluation
of
individual
projects.
One
issue
to
be
dealt
with
when
applying
PM
is
that
projects
do
not
normally
occur
over
the
same
period
of
time,
which
imply
some
discontinuities.
In
fact,
having
the
timely
balance
of
projects
in
terms
of
costs
and
returns
over
time
is
one
of
the
typical
uses
of
PM.
• Every
project
should
be
examined
in
the
same
way,
in
order
so
ensure
the
consistency
and
validity
of
the
input
data.
Otherwise,
comparison,
hence
balancing,
between
projects
is
not
sufficiently
reliable.
A
common
vocabulary
has
to
be
established.
The level of analysis might differ to suit how the company organizes the RTD
activities. In that sense, although in the explanation of this tool it is often referred to a
portfolio of projects, in the same way, depending on specific techniques, the tool can
be applied to look at a set of programmes (which in themselves are made up of a set
of projects), or technologies, or even at different business units. In any case, one
important issue is that PM is in itself a strategic exercise used to look at the whole set
of RTD activities.
Specific techniques
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Many project evaluation techniques can in fact be used as portfolio evaluation
techniques, just by directly comparing the results of the assessment of individual
projects. On the other hand, there are other types of techniques specially suited for
PM, at the strategic and operational level. A classification of distinct types of PM
techniques is shown in table 1.
Table 1
Types of Portfolio Management techniques
Techniques
Short
description
2D
and
3D
matrices
• Based
on
a
graphical
representation
of
several
variables
in
2
or
3
dimensional
matrices
• Preference
is
given
to
those
variables
most
important
to
the
decision
maker
• Foster
discussion
in
order
to
arrive
at
the
decision
Mathematical
• Based
on
complex
mathematical
algorithms
programming
aimed
at
optimising
the
portfolio
• Need
computer
support
• Mostly
company
specific,
difficult
to
adapt
to
different
companies
and
situations
• They
usually
choose
the
solution
(eg
which
are
the
projects
to
invest
in)
Others
(typical
of
• Methods
like
decision
trees
and
others
project
evaluation)
The techniques based on 2D and 3D matrices are considered the most interesting ones
for they are suitable for any company and context, as well as being quite easily
implementable and usable compared with other techniques. They are described in
more detail below.
These matrices provide a framework for examination of several parameters, and some
experimentation is needed by the company who wants to apply them in order to find
the appropriate combinations. These matrices, in any case, do not avoid the need for
judgement although these judgements will be well supported through the use of these
techniques.
2D and 3D matrices
These are matrices used to analyze and represent the situation of RTD projects or
activities, or even business units, according to 2 or 3 meaningful variables. All those
matrices are grouped together in this section because they can be regarded as mostly
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complementary and require a similar process for analysing the data and for taking
decisions.
To analyze the portfolio, business and RTD managers first examine each individual
project, then place each project within portfolio structures (matrices) that
accommodate the strategic elements most critical to the specific company and its
industry.
In most cases, the qualitative nature of many of the human judgments necessary to
assess all variables implies that the projects can only be assessed on a relative rather
than an absolute basis (i.e. better or worse rather than correct or incorrect). In general,
preference is given to those variables easily understandable and of critical meaning to
the decision maker.
One common characteristic of the 3D matrices is that one of the variables usually
represent the size of the project measured in financial terms (eg the amount of funding
invested in a specific project or technology, or the revenues being generated by a
business unit). This factor stresses the importance given to the resource issue.
In what follows, several matrices are explained in terms of its specific objectives,
what they represent and the discussion they should imply. In general terms these
matrices are useful for projects, businesses, technologies and other kinds of
applications. The matrices shown are identified by the variables which are being
assessed and discussed
Matrix:
expected value x probability of success
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Variables
Expected
value
The
expected
return
that
the
projects
can
provide
over
a
period
of
time,
usually
in
financial
terms.
Probability
of
The
probability
of
achieving
the
objectives.
It
is
a
combination
success
of
both
the
probability
of
technical
and
commercial
success.
Resources
The
amount
of
resources
allocated
for
a
specific
project/product.
It
is
represented
by
the
area
of
the
circle.
Use of the matrix
The matrix shows that efforts should better concentrate on those activities with high
probability of success and high expected value, although this is not always possible.
For those activities with low probability of success, an analysis should be made on
whether the expected return is worth the risk involved. In the example, project 1
should be better terminated and project 2 should be carefully analyzed. At the same
time, it is always interesting to have a pool of projects like project 4, which in total
ensure a steady stream of returns.
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Matrix:impact of R&D on competitive position x
familiarity of market
Variables
Impact
of
R&D
on
How
the
specific
projects
could
impact
on
the
company's
competitive
competitive
position.
High
means
that
in
case
the
project
position
succeeds
the
company's
competitiveness
will
dramatically
increase
Markets
The
company's
knowledge
on
both
the
market
and
the
(familiarity)
factors
affecting
the
market
Resources
The
amount
of
resources
allocated
to
a
specific
business/project.
It
is
represented
by
the
area
of
the
circle
Use of the matrix
This matrix gives a clear understanding of risk by examining the portfolio with
respect to market familiarity and impact on competitive position. The example shows
the portfolio of a company chiefly concerned to protect its position in existing
markets but, at the same time having two R&D projects (1 and 2) intended to gain
advantage, for instance through exploiting new technologies, one of which
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compounds the risk by aiming at a new market. By drawing attention to this, the
evaluation will prompt discussion of the risks involved.
In summary, the company, while securing the position on current markets with
several projects, it is also aiming at new growth opportunities, either coming from
new markets or from strengthening the current position in new markets.
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Matrix:
market (knowledge) x technology (knowledge)
Variables
Market
The
company's
knowledge
of
both
the
market
and
the
factors
knowledge
affecting
it.
It
also
involves
assessing
whether
the
market
is
known
by
the
competitors
Technology
The
company's
knowledge
of
both
the
technology
and
the
knowledge
factors
affecting
it.
It
also
involves
assessing
whether
the
technology
is
known
by
the
competitors
Resources
The
amount
of
resources
allocated
to
a
specific
business/project.
It
is
represented
by
the
area
of
the
circle
Use of the matrix
This matrix gives an understanding of the situation of a company's portfolio with
respect to technology and market. It is remarkable that both technology and market
are divided according to company's knowledge in three groups, and uncertainty
increases on those technologies and markets that are new. This matrix also gives
information about the risks involved (higher uncertainty, higher risks). Experience
says that those projects using unknown technologies and directed towards unknown
markets (projects 11 and 12) are likely to run into problems. On the other hand, if
successful, rewards might be huge.
Matrix: technological competitive position x industry
maturity
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Variables
Technological
The
technological
position
of
a
company's
products
competitive
regarding
its
market
competitors.
A
dominant
position
position
would
mean
the
company
is
the
technological
leader.
Industry
maturity
The
situation
of
the
company's
products
according
to
the
life
cycle:
• Embryonic:
is
not
clear
the
direction
of
technological
advance.
Regular
efforts
would
produce
some
advances
but
these
might
still
be
useless
• Growth:
major
technological
advance
can
be
expected
with
regular
efforts
• Mature:
minor
technological
advance
would
require
very
high
efforts
• Ageing:
no
technological
advance
can
be
expected
Resources
The
amount
of
resources
allocated
for
a
specific
business/project.
It
is
represented
by
the
area
of
the
circle
Use of the matrix
The matrix describes the context for innovation activities. The circles might well
represent the size of business divisions and show that, while most divisions have
favourable strong technical positions, the new venture (project 1) is poorly placed in a
rapidly developing industry. It becomes clear that the position of this division will be
soon untenable, hence the strategy should be either to find an exit or to move it
upwards by receiving much stronger support. Projects 2 and 3 are reasonably well
placed while project 4 is close to an untenable low-profit situation and should
probably be terminated.
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If the company only bets on projects aiming at mature technologies, the growth
opportunities could be low.
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Matrix: annual budget x competitive impact of
technologies
Variables
Competitive
impact
of
The
technological
position
of
the
company's
technologies
technologies
regarding
its
market
competitors
• Embryonic:
very
new
technology,
on
its
infancy
• Pacing:
potential
to
change
the
basis
of
technological
competition
• Key:
embodied
in
products
and
processes,
differentiated
in
leading
companies
• Base:
essential,
buy
known
to
and
practiced
by
all
competitors
Budget
The
amount
of
resources
allocated
for
each
type
of
technology,
normally
on
an
annual
basis
Use of the matrix
The matrix gives a view of the situation of a company's portfolio (products 1 to 14)
according to its annual budget. It is remarkable that as the technologies are more
unknown the budget involved for a product or project increases in a great amount.
With the current portfolio the company is not probably securing its current position as
the budget devoted to key technologies is very distributed among a set of small
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projects, while betting too much on new technologies. A redistribution of resources
among technologies is probably the most logical approach.
References for further information
Roussel, Philip A, Saad, Kamal N and Erikson, Tamara J (1991): Third Generation
R&D: Managing the Link to Corporate Strategy. Harvard Business School Press.
This book describes in detail several portfolio management approaches and how they
are integrated in the overall R&D management of a company. The book can be used
to learn how to apply some specific techniques in a certain context.
Websites:
http://www.npd-‐solutions.com/portfolio.html
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