Effective Portfolio Management
The responsibility for innovating to solve our business issues is shared by executives, business leaders, project managers and team members. Effective portfolio management is critical for sustaining the flow of innovation required to address business issues.
Effective portfolio management is how the innovation strategy is executed and is akin to driving a six-horse stagecoach. Each horse has a role: some lead, some pull close to the coach, some are wedged in between. In moving the stagecoach to the next station, the driver, like the business leader, keeps the horses aligned, balanced and in sync. The competitive advantage growth portfolio (i.e., the innovation portfolio) contains an array of projects including cost savings, market expansions, new business opportunities, new products, product line extensions and so forth. These are housed across the company in IT, R&D, business development, HR, mergers and acquisitions, etcetera.
To understand whether we are innovating to solve our business issues, we need to assess how well the innovations flowing through the company are enhancing the desired business outcomes. Project selection, resource allocation and outcomes control the what, and consequently, how a company innovates. The dynamic tension between choosing projects that have a high probability of creating an appropriate Return on Investment (ROI) and choosing projects that can create competitive advantage and growth is the ongoing challenge for portfolio management. Let us examine four different portfolio management scenarios, as outlined below.
Missing the Mark
When the flow of innovation has negligible effect on business outcome and the projects themselves have limited payback, many within the company may wonder “why bother” with portfolio management. It consistently misses the mark leading to frustration, complaints and criticism.
It is relatively easy to identify seriously flawed portfolio management. However, a systematic analysis is required to understand where the bottleneck constriction in innovation is occurring. There may be some fundamental misunderstanding or ignorance of competitive forces that hampers the execution of strategy. The analysis could show something as profound as a global move to digital, but we are analogue. It could uncover competency defects in marketing, IT, or manufacturing as well as the need for more oversight and accountability of portfolio management itself.
Many companies experience relative success in developing innovations that have strong average ROIs. This portfolio management is characterized by selection criteria emphasizing a robust pipeline with high probability of successful projects. The bottleneck that may arise from this approach constricts the flow of resources to projects whose uncertainty is lower regardless of the growth impact. One consequence of this approach can be a myopic view of the future. Equally problematic, a bottleneck may arise because the flow of resources to innovation components such as testing, marketing, legal, etcetera may constrict the overall innovation pipeline. Avery Dennison Corporation reviewed their new product pipeline and discovered they were attempting too many rollouts. Consequently, they have modified their portfolio management decision making to be attentive to what they call the “total effort to benefit tradeoff” (Wall Street Journal, June 11, 2007).
Delivering on Target
Balance, or the right mix, of average project payback and innovation generated growth is the ever-elusive challenge for effective portfolio management. Bottlenecks created by sacred cows from the past, entrenched assumptions about risk, or dynasties monopolizing resources can constrict the flow of innovation. Examples of bottlenecks created by past success abound in the popular press:
• Motorola’s allegiance to analogue in the face of the growing adoption of digital;
• Bank of America’s commitment to the consumer in light of the consumer credit pressures of 2008;
• Target’s successful positioning based on consumer preference for style and low prices as the economy flirts with recession.
Effective innovation portfolio management is challenged on all fronts by changes in technology, unforeseen global events, customer and consumer preferences and even a company’s own past successes.
What if a company’s good fortune and growth come from something besides the innovation portfolio? In other words portfolio management doesn’t really matter. In many ways, this is a dangerous situation for a company. It is indicative of a serious misconception about the innovation portfolio itself. This misconception, namely whether portfolio management is indeed how the innovation strategy is executed, calls into question the relevancy of the innovation effort. Clearly, the source for a business’s competitive advantage and growth resides outside of the portfolio under a different name. It is imperative to understand the growth source to be able to manage it.