Portfolio Management: Setting Priorities

Jan. 11, 2008
Successful product development efforts require companies to wisely select which projects to pursue.

Not all product development ideas are created equal. Some require little financial investment; others require a lot. Some have a short-term payback horizon; the horizon for others is many years away. Some are equivalent to walking on the safe side of the street; others require a leap of faith.

Choosing which projects to invest in and which to discard matters. It can be the difference between gaining a competitive advantage or abandoning the playing field. A strong portfolio management program provides companies with a structure for making these important decisions.

The Product Development and Management Association (PDMA) defines portfolio management as "a business process by which a business unit decides on the mix of active projects, staffing and dollar budget allocated to each project currently being undertaken." Eugene Kania, principal of mc2solutions, a Chicago-based consulting and training firm, describes managing a product development portfolio as analogous to managing a financial portfolio. He outlines the goals of portfolio management this way:

  1. Maximize portfolio value.
  2. Maintain balance between risk and reward. Ask the questions, "For each project how much risk are we taking with respect to the expected reward? For the portfolio, is it balanced? Do we have to too many risky projects or too many safe projects with low returns?" Kania explains.
  3. Link to firm's strategy. For instance, "If your strategy is to grow your market share in Asia, then does your portfolio contain the right products to sell into Asia?" he says.

Of course, improving the effectiveness of your firm's product portfolio -- or instituting a portfolio management program where none existed before -- is easier said than done. Kania offers the following steps to better portfolio management:

  • Make a list of the projects in your product development portfolio.
  • For each project, use a scoring model to take a first cut at separating the promising projects from the less-than-promising. For example, Kania says, rank each potential project in terms of how well it advances the firm's strategy. Do this scoring for all the criteria that are meaningful to a particular company.
  • For each project, use a scale of one to 10 to evaluate risk and reward. Plot this data to assess the balance of the portfolio.
  • For each project, determine the resources required to do each project. Roll that up to determine if your portfolio is even achievable. If it's not, start pruning away the least-promising projects, he says.

In the end, portfolio management is a communications tool. Done right, "it should facilitate meaningful conversation among management," Kania says.

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About the Author

Jill Jusko

Bio: Jill Jusko is executive editor for IndustryWeek. She has been writing about manufacturing operations leadership for more than 20 years. Her coverage spotlights companies that are in pursuit of world-class results in quality, productivity, cost and other benchmarks by implementing the latest continuous improvement and lean/Six-Sigma strategies. Jill also coordinates IndustryWeek’s Best Plants Awards Program, which annually salutes the leading manufacturing facilities in North America.

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