Portfolio Management in New-Product Development

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© Jens Arleth, Stage-Gate.EU ®, 2010

How should we most effectively invest our product development resources? How many and which projects should we work on? How should we prioritise the projects and allocate the resources? These are the crucial issues of Portfolio Management. The executives who win the competition in the long run are the ones who define the right development strategy, choose the best projects and optimise and balance the development programme.

My colleague R. G. Cooper and his Canadian colleagues at McMaster University have conducted many studies of portfolio management methods at several leading companies. The most recent results are published in the book “Portfolio Management for New Products” (www.stage-gate.eu/books), a groundbreaking work full of examples of companies’ portfolio management strategies, combined with the authors’ analyses of the methods. In Europe, we have carried out a number of analyses in individual companies as part of designing and implementing portfolio management systems.

Four serious problems when good portfolio management is lacking

In several of our studies, groups of managers from each company were interviewed. All said that portfolio management was important for their product development process. Selecting projects and correctly allocating resources are major obstacles and increasingly scarce resources make it more crucial than ever to overcome them. Therefore, companies target many resources on finding the best methods.

Disconnect between strategy and new-product investments. 
Many companies have formulated their strategy in writing. Some also have a product-development strategy with development goals. For example: “Five years from now, 32% of our sales should be generated by products we don’t have at present,” and “60% of our growth should come from new products”. Some also defined the areas of focus – i.e. product types, markets and technologies – on which the companies will target their efforts to reach the goals. But few converted their strategies into a development programme. If the projects were grouped by main types, they often demonstrated low consistency between strategy and actual project allocation.

Weak GO/KILL decisions: a tunnel instead of a funnel.

• The GO/KILL decisions during the development processes are often ineffectual. Once a project has started, it is almost impossible to stop it again. 49 out of 56 projects at a large consumer-goods company were like an express train which merely slowed down at the stations (project assessments at gates or milestones).
• Stopping a project was rarely discussed. Only 7 projects were thoroughly discussed at demanding GO/KILL decision meetings. And projects that were stopped, often reappeared under new names.
• The criteria for GO/KILL decisions were often in-sufficient or not even used.
• There were no mechanisms for ranking and priori-tising projects. Even mechanisms for stopping projects were often lacking. As a frustrated man-ager commented: “We claim to have a filter or a funnel which rapidly weeds out weak projects. But we don’t have a funnel, we have a tunnel: We start with ten ideas and we develop ten products. We market ten products and only one product succeeds.”

Far too many projects in the pipeline
Resources are too scarce to waste on the wrong projects. All development managers complained of insufficient resources, especially from marketing and production. Most companies had far too many projects compared to resources. As a result, all projects lacked resources. Even the best projects were inadequately staffed with too little time and money. Therefore they took too long and important tasks were hastily executed. As a result, some of these projects were poorly prepared and defined from the outset, causing additional delays.

Only the easy projects are implemented
Everyone must reduce time spent on development, despite scarce resources and inadequate focus. As a result, many companies often implement projects that are convenient and fast, but also the least innovative. “We pick the low hanging apples.” Routine projects like modifications, updates and additions to product lines are common. This makes the project portfolio short-sighted. The programme lacks trailblazing projects with new future opportunities and new competitive advantages.

The four goals and success drivers in portfolio management
To tackle the above problems, four goals for portfolio management have been formulated. These goals have later been scientifically validated as important best practices and strong drivers of high profitability of a company’s new-product development programme.

• Seek a portfolio with high-value NPD projects – profitable, high-return projects with solid business prospects. This is a weak area for most businesses, and most have not discovered how to achieve this.
• Establish a portfolio with excellent balance in terms of long term versus short term, high versus low risk, across markets and technologies, etc.
• Strike a good balance between the number of projects and the resources available. This is an-other weak area. Nine out of ten companies have far too many projects underway.
• Link the portfolio to business strategy: ensuring that the spending breakdown across project types, markets and business areas in the portfolio truly reflects the company’s strategic priorities.

Portfolio management involves three decision-making processes (see figure)

To achieve the four goals, we need a portfolio management model or process. Our model integrates three decisionmaking processes, so they are in harmony with each other.

1. Strategy development is where you specify new product goals (e.g., sales from new products), arenas of focus (e.g., markets and product areas for which new products will be developed) and relative priorities (e.g., R&D spending breakdown across markets, product areas and project types). Strategy is depicted as a sun-like circle in the upper left-hand corner of the model. The arrows are sunbeams illustrating how the strategy influences all other decisions in the model.

2. The new-product process (Stage-Gate® process) has gates where go/kill decisions are made on individual projects and hence resources are allocated. The gates have strategic decision criteria to en-sure that all projects approved are within the company’s newproduct strategy. The gates also have a number of profitability criteria to ensure that we meet the goal of high value NPD projects. Important deliverables from the gates are project plans for each project in the portfolio. All project plans are compiled in the “Overall R&D and Launch Plan” that gives the “big” overview of when new products are developed and introduced on the market. Other deliverables from the gates are estimates of each project’s financial impact illustrated with an investment calculation and an estimate of the project’s probability of commercial success. Again, these elements are compiled in an over-view, i.e. the “Overall Longterm New Product Budget”.

3. Portfolio Review is where senior management periodically reviews all projects and compares them to one another. Here, our vital question is: Do we have the right set of projects? Is this really how we want to spend our money?

Senior management looks for three things at portfolio reviews

• Maximum portfolio value: here, we use data about each project generated from the Stage-Gate process (see point 2 above).
• The right balance of projects: balance is depicted using various graphics, such as bubble diagrams and pie charts. Again, the data for these charts will come from the product development process.
• Alignment of portfolio with our strategy: here, we use the Strategic Buckets approach to allocate funds so they reflect our strategic priorities. Again we use various charts that show spending splits across strategic focus areas (project types, markets, etc.).

Many companies have a portfolio manager or project administrator who prepares and facilitates the portfolio review. Details of the above mentioned charts and tools and the agenda for the portfolio review meeting are shown in the “Presentation on Portfolio Management” at www.stage-gate.eu/portfolio, as well as in our portfolio management book (see above). These sources also include information on to go about implementing Portfolio Management in your company.

Conclusion
Portfolio Management helps you to force an analysis of the “big picture” and questions whether your company is making the right new-product investments and meeting your new-product goals. Portfolio management of product development is a relatively new management discipline. This article gives you a brief overview of the principles and methods we have derived from scientific research, practical implementation and testing.

Text: Jens Arleth, Stage-Gate.EU

About the author

Jens Arleth is the founder of Stage-Gate.EU, a consulting firm which assists companies in achieving their goals for growth and profit from new products. Our methods are based on internationally recognised research which we have transformed into practical solutions.

Jens is the leading European expert in implementing Stage-Gate® new-product development processes, Portfolio Management and benchmarking of new product development.

Over the past thirty years, Jens has advised many leading European organisations including Akzo Nobel, Alfa Laval, Carlsberg, Chiquita International, Confederation of Danish Industries, Confederation of Norwegian Industries, Danfoss, European Investment Bank, Hempel's Marine Paints, LEGO, Maersk Medical, Danish Telecom, Telenor and Uddeholm Tooling AB.

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