Portfolio Management for

New Products

Portfolio Management

• Portfolio Management for product innovation has surfaced as one of the most important management function.

The reasons being• Shorter PLC• Heightened Global CompetitionPortfolio Management is the manifestation of

the business strategy---- it dictates where and how you will invest for the future

Pitfalls of Poor Portfolio management• Strategic-

1. Projects not strategically alligned with the business strategy

2. Many strategically unimportant products in the portfolio

3. R&D spending that does not reflect strategic priorities of the business

• Low Value Projects- Deficient Go/kill and project selection decisions

• No Focus— Strong reluctance to kill project

• The wrong projects

Importance of Portfolio Management• Financial-to maximise returns, to maximise R&D

productivity, to achieve financial goals• To maintain the competitive position of the

business• To properly and efficiently allocate scarce

resources• To forge a link between project selection and

business strategy• To achieve focus• To achieve balance• Better communicate priorities within the

organization• To provide better objectivity to project selection

A typical Scoring Model For Project Prioritization

Strategic Alignment:• Degree to which project aligns with our strategy• Strategic importanceProduct/Competitive Advantage:• Offers customers/users unique benefits• Meets customer needs better• Provides value for money for the customer/userMarket Attractiveness:• Market size• Market growth rate• Competitive intensity in the market (high=low

score)

Synergies (Leverages Our Core Competencies):

• Marketing synergies• Technological synergies• Operations/manufacturing synergies

Technical Feasibility:• Size of technical gap (large=low score)• Technical complexity (barriers to overcome)(many/high = low score)• Degree of technical uncertainty (high=low

score)

Risk Vs. Return:• Expected profitability (magnitude:

NPV)• Return on investment (IRR)• Payback period (years; many=low

score)• Certainty of return/profit estimates• Low cost & fast to do

Portfolio Methods

• Financial Methods• BCG Matrix• GE Matrix

Portfolio Analysis

• Strategic Business Unit (SBU) Definition– Single independent operation of a company– Has its own competitors– One manager responsible for performance

• Allocation of resources over all SBUs• Goals

– Set benchmarks– Create generalized descriptions of strategic

situations

Basis of the BCG Portfolio Matrix

Time

Introductory Phase “?”

Growth Phase “Star”

Sales V

olume

Mature Phase “Cash Cow”

Decline Phase “Dog”

Source: Das Boston-Consulting-Group-Portfolio Dipl.-Ing. Holger Blumhof

BCG Matrix Construction

• Internal measure: Relative market share– Firm’s sales of the SBU .

Total market’s average sales– Firm’s Sales of the SBU .

Strongest Competitor’s Sales

• External measure: Market growth– Match strategy with market stage

The BCG Matrix

High Low

High

Low

Product Sales Growth Rate

Relative Market Share

Strategy Recommendations

• Investment– Further Growth– Maintain Market Position

• Cash flow– Self-sustaining: Fund their own

growth– Require funds from other SBUs (Cash

Cows)• Assure the future of the company• Grow into Cash Cows

Strategy Recommendations

• Investment– Increase market share– Selectively develop into Stars

• Cash Flow– Require funds from other SBUs (Cash

Cows)

• Unrealized future opportunities

Strategy Recommendations

• Investment– Maintain market share– Maintain capacity

• Cash Flow– Positive cash flow– Provides funding to support Stars and

“?”

• No potential for profit growth

Strategy Recommendations

• Investment– Divestiture strategy– Reduce capacity to free up resources

• Cash Flow– Goal of Positive Cash Flow– Negative Cash Flow = Divestment

• No real growth opportunities

Evaluation of BCG Matrix: Cons

• Oversimplifies complex decisions• Only 2 factors considered = creates

risk• Uncertainty in market and SBU

definition• Only considers current businesses no

dynamics• Does not recognize possible synergies

between SBUs

Evaluation of BCG Matrix: Pros

• Simple and rapid• Solid basis for decision-making• Good measurability of market

share and growth• Provides information about

efficient resource allocation within the organization

• Generator for strategic options

Conclusion

• As long as management understands that the BCG Growth/Share Matrix generates options which require further analysis and validation, this tool can greatly enhance strategic decision making