Seeking the Right Balance of Projects

A major portfolio goal is a balanced portfolio: a balanced set of development projects in terms of a number of key parameters. The analogy is that of an investment fund, where the fund manager seeks balance in terms of high-risk versus blue-chip stocks and balance across industries and geographies in order to arrive at an optimum investment portfolio.

Visual charts effectively display balance in new product project portfolios. These visual representations include portfolio maps or bubble diagrams (see the example in Figure 7.2-7), an adaptation of the four-quadrant BCG (stars, cash cows, dogs, and wildcats) diagrams that have seen service since the 1970s as strategy models, as well as more traditional pie charts and histograms.

A casual review of portfolio bubble diagrams will lead some readers to observe that "these new models are nothing more than the old strategy bubble diagrams of the 1970s!" Not so. Recall that the BCG strategy model and others like it (such as the McKinsey-GE model) plot business units on a "market attractiveness" versus "business position" grid. Note that the unit of analysis is the business unit: an existing business whose performance, strengths, and weaknesses are all known. By contrast, today's new product portfolio bubble diagrams, which may appear similar, plot individual new product projects—that is, future businesses, or what might be. As for the dimensions of the grid, here too the "market attractiveness" versus "business position" dimensions used for existing business units may not be as appropriate for new product possibilities, so other dimensions or axes are extensively used.

What are some of the parameters that should be plotted on these portfolio diagrams in order to seek balance? Different pundits recommend various parameters and lists and even suggest the best plots to use.

Risk-Reward Bubble Diagrams. The most popular bubble diagram is the risk-return chart (see Figure 7.2-7). About 44 percent of businesses with a systematic portfolio management scheme in place use this bubble diagram or one like it.15 Here, one axis is some measure of the reward to the company and the other is a success probability.

One approach is to use a qualitative estimate of reward, ranging from "modest" to "excellent."16 The argument here is that too heavy an emphasis on financial analysis can do serious damage, notably in the early stages of a project. The other axis is the probability of overall success (probability of commercial success times probability of technical success).

In contrast, other firms rely on very quantitative and financial gauges of reward, namely, the probability-adjusted NPV of the project.17 Here the probability of technical success is the vertical axis, as probability of commercial success has already been built into the NPV calculation.

A sample bubble diagram is shown in Figure 7.2-7 for a business unit of a major chemical company. Here the size of each bubble shows the annual resources committed to each project (dollars per year; it could also be people or work-months allocated to the project). The four quadrants of the portfolio model are:

• Pearls (upper-left quadrant): These are the potential star products: projects with a high likelihood of success and that are also expected to yield a very high reward. Most businesses desire more of these. There are two such Pearl projects, and one of them has been allocated considerable resources (denoted by the sizes of the circles).

• Oysters (lower-left quadrant): These are the long-shot projects: those with a high expected payoff but with low likelihoods of

Figure 7.2-7 A Risk-Reward Bubble Diagram

Pearls

Deck Coat

TP-40

TP-40

Deck Coat

Solvent 800

Top Coat A

Oysters

Top Seal

High

D-50

T-400

Bread and Butter

Auto Seal

Bread and Butter

Auto Seal

Top Floor

Top Floor

Reward (NPV)

Solvent 1

First Coat

Edge Coat

Edge Coat

White Elephants

Note: Projects are plotted as bubbles, with bubble size denoting the resources committed to each project. The shading or cross-hatching shows the product line that each project is associated with.

Source: Cooper, Edgett, and Kleinschmidt, Portfolio Management for New Products.

technical success. They are the projects where technical breakthroughs will pave the way for solid payoffs. There are three of these; none is receiving many resources.

• Bread and Butter (upper-right quadrant): These are small, simple projects with a high likelihood of success but low reward. They include the many fixes, extensions, modifications, and updating projects of which most companies have too many. More than 50 percent of spending is going to these projects.

• White Elephants (lower-right quadrant): These are the low-probability and low-reward projects. Every business has a few white elephants; they inevitably are difficult to kill, but this company has far too many. One-third of the projects and about 25 percent of spending fall in this quadrant.

Given that this chemical business is in a specialty area and a star business seeking rapid growth, a quick review of the portfolio map in Figure 7.2-7 reveals many problems. There are too many White Elephant projects (it's time to do some serious project pruning), too much money spent on Bread and Butter low-value projects, not enough Pearls, and heavily underresourced Oysters.

One feature of this bubble diagram model is that it forces senior management to deal with the resource issue. Given finite resources, the sum of the areas of the circles must be a constant. That is, if one adds one project to the diagram, another must be subtracted; alternatively, one can shrink the size of several circles. The elegance here is that the model forces management to consider the resource implications of adding one more project to the list: some other projects must pay the price.

Also shown in this bubble diagram is the product line that each project is associated with (the shading or cross-hatching). A final breakdown is timing, indicated by color (not shown in the black-and-white figure). Thus, this apparently simple risk-reward diagram shows a lot more than risk and profitability data. It also conveys resource allocation, timing, and spending breakdowns across product lines.

Bubble Diagrams That Capture Newness to the Firm. Two key dimensions that senior managers should consider when mapping their development portfolio are:

• Market newness—how new or "step-out" the markets are for projects underway

• Technology newness—how new the development and manufacturing technology is to the business

Both dimensions are proxies for risk and aggressiveness.18 Here, development projects are plotted on these two axes in order to help management view the current portfolio and whether it has the right balance and mix of step-out versus close-to-home projects (similar to the newness diagram in Figure 7.2-5). Again, circle sizes denote resources allocated to each project. This is the second most popular bubble diagram used for NPD portfolio management by industry.

Traditional Charts to Display Resource Breakdowns. There are numerous other parameters, dimensions, or variables across which one might wish to seek a balance of projects. As a result, there is an endless variety of histograms and pie charts that help to portray portfolio balance—for example:

• Resource breakdown by project types is a vital concern. What is the spending on genuine new products versus product renewals (improvements and replacements), or product extensions, or product maintenance, or cost reductions and process improvements? And what should it be? Pie charts effectively capture the spending split across project types—actual versus desired splits, shown in italics in Figure 7.2-8. Pie charts that show the resource breakdown by project types are a particularly useful sanity check when the business has already established strategic buckets. Now one can compare the current resource split (the "what is") to the target split ("what should be") as defined by strategic buckets, as in Figure 7.2-8. Note in this figure that the market sector splits are almost on target, but the project types are too heavily weighted toward cost reductions and fixes.

• Markets, products, and technologies provide another set of dimensions across which managers seek balance. The question is: Does the business have the appropriate split in R&D spending across its various product lines? Or across the markets or market segments in which it operates (see Figure 7.2-8)? Or across the technologies it possesses? Pie charts are again appropriate for capturing and displaying these types of data. And once again, these pie charts

Figure 7.2-8 Pie Charts: Actual versus Targeted Resource Allocation in the Portfolio

Breakdown by Project Types

Breakdown by Market Sector

Institutional

Cost Reduction^ 27% Target = 10%

Platforms

Cost Reduction^ 27% Target = 10%

Platforms

Extensions

New Products

Extensions

Automotive 20% Target = 20%

Medic 10%

Breakdown by Market Sector

Institutional

Automotive 20% Target = 20%

Medic 10%

Residential

Residential

Note: The targets are shown in italics, and the pie chart slices show expenditure breakdowns to date.

close the loop on the strategic buckets exercise, revealing the "what is" versus the "what should be."

• Timing is a key issue in the quest for balance. One does not wish to invest strictly in short-term projects or totally in long-term ones. Another timing goal is for a steady stream of new product launches spread out over the quarters, that is, constant "new news" and no sudden logjam of product launches all in one quarter. A histogram captures the issue of timing and portrays the distribution of resources to specific projects according to quarters or years of launch.

• Another timing issue is cash flow. Here the desire is to balance projects in such a way that cash inflows are reasonably balanced with cash outflows in the business. Some companies produce a timing histogram that portrays the total cash flow per year from all projects in the portfolio over the next three to five years.

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