Critical Aspects of Project Portfolio Management in NPD Success

Fuzzy Front End 2For those managing new product development, the “fuzzy front end” including project portfolio management remains a key challenge. A recent survey provides compelling evidence of just how difficult it is. In the 2012 Third Product Portfolio Management Benchmark Study, almost 70% of the respondents listed “too many projects for our resources” as their primary problem in managing project portfolios. In these difficult economic times, every organization has to become more effective at determining which projects to resource. The decisions made at the front end of the process drive success at the back end. Multiple surveys (1) find that best-performing firms derive about half of their sales and profits from new products.

This article first proposes a basic framework for project portfolio management that incorporates many ideas that exist in the literature combined with the author’s experience managing new product development in a mid-sized company manufacturing a highly-engineered, low-volume, high-margin product. It is important to point out that processes appropriate for large companies do not work for small to mid-sized companies. In my experience, simple tools such as Microsoft Excel© are perfectly acceptable, especially if there is currently no process in place. Starting with simple tools can also  help when it does make sense to move to more sophisticated software products as you will have gained experience with the actual process.  That leads to the second part of the article. Whether you use simple tools to manage the portfolio or more expensive specialized software products, a key factor is senior management leadership of the process itself. I will have some thoughts on that as well.

A basic framework for managing a project portfolio is illustrated in the figure below.  Before talking specifics, let me make a couple initial observations. The left portion of this diagram illustrates the typical phase-gate development process. Once projects are defined and resources assigned, this is a typical framework for managing active projects, culminating with completed projects (2). The right side of the diagram is the iterative portfolio management process that is meant to evaluate existing ideas for new products, and help the organization decide which ones to work on.  That will be our focus.

Portfolio Process Rev2

A second comment concerns who drives this process. In small companies, this may in fact be the responsibility of the owner, president, or other senior manager. In mid-sized companies the process is likely driven by a product or marketing manager but is ultimately still the responsibility of the senior manager. At the end of the day, new product development is a key business function and the senior manager is  responsible.

New IdeasTo begin, ideas for new products is the input and is the reason to have a process in the first place. Ideas should come from many different sources including both internal and external stakeholders. Again, simple tools such as a Microsoft Access© database or even Excel will suffice. The most important thing is that all ideas are captured and considered. The product manager and senior management should be actively engaged in soliciting ideas and scanning the competitive landscape.

The portfolio management process as shown consists of three primary activities including 1) the portfolio process, 2) a resource allocation process, and 3) generation of a consolidated project plan. The process is iterative and will be repeated formally maybe 2-4 times per year, but product and senior management should be spending a considerable amount of time outside the formal process to engage key personnel in all business functions.

The portfolio process is how the business prioritizes existing and potential new projects and culminates in a portfolio document that can be in the form of an Excel spreadsheet. The rows list all active and potential projects in order of business priority. The columns would typically include the current priority, a “scorecard” ranking number, the project status and phase, and the project type. The “scorecard” ranking is a qualitative tool (3) that can be used to help judge the relative “quality” of a list of current and potential projects. It uses criteria such as strategic fit, product and competitive advantage, market attractiveness, core competencies leverage, technical feasibility, and financial rewards vs. risk to determine a relative ranking score. It is a simple tool, but I believe effective if used with multiple stakeholders. Project status includes “active” for those projects that are currently underway, “active hold” for those projects where the decision has been made to work on them as soon as resources are available, and “hold” for those projects where no decision has been made. Project phase refers to where you are relative to the phase-gate stages. Finally, each project would include a project type descriptor such as “extension” for an incremental enhancement to an existing product, “new” for a product that might be new-to-the-company but not to the market, and “radical” for a new-to-the-market product. From a practical standpoint, the product manager might start with a proposed ranking, then over the course of several weeks engage with the appropriate stakeholders in a series of formal and informal meetings to gain consensus.

The next step is to take this list of projects and align them with resources. Again, in my experience this can be done with simple tools such as Excel or Project and is typically the responsibility of R&D management. Of course for existing projects, it is much easier to determine resource requirements compared to future projects where there may not even be a clear definition, but you have to start somewhere and consider resources in making decisions on the portfolio. The important thing to remember for all involved is that the further out you go, and the less defined the future projects are, the higher the uncertainty in the projections. The second comment is that because of resource constraints, some projects that are ranked lower than others may be worked on sooner just because of resource availability. Again, from a practical standpoint, R&D will work with the product manager over the course of several weeks, going back and forth, to come up with the final component, the consolidated project plan.

The consolidated project plan, or roadmap if you will, attempts to communicate to the organization when specific new products will come to market. Depending on the type of industry and cycle time, it might provide a current snapshot of what the organization believes is possible over the next several years.  It will list projects that are active where the new product will be introduced in the short to medium term, and other projects where either minimal or no resources have been committed, may have very limited definition, and are projected to come to market in the medium to long term.

As mentioned previously, the 3-step process is never-ending and will repeat multiple times each year, as consensus emerges, projects are defined, existing projects are completed, etc. If done properly, it will help insure that the business is working on the right projects and drive the organization to contemplate in a purposeful way where to go from a development standpoint and where more work needs to be done, for instance in defining new products, conducting some basic technology research, performing market research, etc.

Now that we have defined a basic framework, let’s discuss the key areas where senior management can support the process.

First, the senior manager must make the process a priority and be engaged and supportive. In my experience, it is a messy process, but necessary. As mentioned previously, new product development is a key business process and is the responsibility of the senior manager, and portfolio management is an important part of overall NPD success. The problem in many small to mid-sized firms is that senior management will likely be very focused on short-term financial performance. Of course that is important, but without a clear commitment from senior management to portfolio management, the organization will make decisions but they will not be done in a purposeful, thoughtful way. Some additional food-for-thought: senior managers in high-performing firms believe that portfolio management is more important than senior managers from low-performing firms (4).

BalanceAnother key role of senior management is maintaining a balanced portfolio. Just as with any investment portfolio, you need a good mix of projects from incremental, new-to-the-firm, and radical. No firm can survive in the long run by focusing on only one type. A recent article in the Journal of Product Innovation Management (5) suggests that a balanced portfolio is one of the most important factors that leads to improved firm performance. It is up to the senior management to guard against the tendencies of successful companies to “fall in love” with their products and forget the fact that customers do not buy products for sake of technology but to satisfy a utilitarian or emotional need (6). They also need to guard against listening exclusively to current customers and pushing the boundaries of  existing technology past the point where customers value the next generation product. Roger Martin’s concept of the “knowledge funnel” which encourages firms to investigate new “mysteries” parallel to continuing to advance existing knowledge is a good way to think about this (7). It speaks to the need to have a balanced project portfolio.

Finally, despite the fact that many companies have implemented portfolio management processes, idea selection is still political and champion-based (5). It is important that the senior manager hear and listen to all the voices and not let decisions be driven to a particular outcome. It is important that the culture support an open and honest discussion about project risk. At the end of the day, the senior manager can hinder or support a culture of innovation by how he manages the process and supports dissenting views. As mentioned previously, project portfolio management can be a “messy” process. Gaining consensus can take time, but you also have to drive to get decisions made in a timely fashion. In the same survey cited at the beginning of this article, the third most common complaint in project portfolio management is an ineffective decision making process that leads to decisions not being made in a timely fashion. The senior manager, therefore, has to walk a fine line to make sure all the voices and opinions are heard, but not let the process bog down to the point where no decisions are made or are made late.

How does your organization address portfolio management? Do you use simple tools, or more sophisticated software products to assist in the process? What factors do you believe are most important for an effective process? How does senior management support the process?

Notes:

(1) Barczak, G., A. Griffin, and K.B. Kahn. 2009. Perspective: Trends and drivers of success in NPD Practices: Results of the 2003 PDMA best practices study. Journal of Product Innovation Management 26 (1):3-23

(2) Refer to this article on phase gate processes. A common mistake is to confuse phase gate processes with project management tools. This article addresses that misconception.

(3) See Chapter 3 and in particular pages 54-56: Robert G. Cooper, Scott J. Edgett, and Elko J. Kleinschmidt, Portfolio Management for New Products Second Edition. (New York: Basic Books, 2001)

(4) See Chapter 1 and page 7 in particular in Cooper, et.al.

(5) McNally, Regina C., Durmusoglu, Serdar S., and Calantone, Roger J. 2013. New Product Portfolio Management Decisions: Antecedents and Consequences. Journal of Product Innovation Management 30 (2):245-261.

(6) See this article entitled “What’s the Right Definition of Marketing?” for additional thoughts on this subject.

(7) See this article entitled “What Does Having a Design View Mean to You?” for more information on the concept of the knowledge funnel.

New Product Visions is a consulting company that helps organizations improve the effectiveness of their new product development processes. We specialize in small to mid-sized companies that manufacture highly engineered products. Contact us today about how we might help you!

Specialties: NPD consultants, new product development consulting, developing new products, new product development seminars, small business consulting, new product development expert, product development process, new product development strategies, integrating NPD for mergers & acquisitions, organizing for innovation, management role in NPD, project risk analysis

6 thoughts on “Critical Aspects of Project Portfolio Management in NPD Success

  1. This is very interesting article. I believe if an engineer is working on one product, then it is helpful for him/her to use gained experience on other product variant. However, I am just curious to know how such product portfolio concept can help in new knowledge creation.

    • Satish, thanks for the comments and I have a couple thoughts. I think a well functioning project portfolio management system supports new knowledge creation. Without some way of prioritizing all the opportunities, every project becomes important which leads to an NPD system that is overloaded. That is one of the most common problems and means that no one really has the time to work on creating new knowledge. Second, new knowledge in an of itself may not have value. The key is linking new knowledge with a market need. That leads to innovation and turns new knowledge into revenue and earnings. That is the goal for for-profit companies, not the creation of new knowledge in and of itself. Finally, I think the creation of new knowledge vs. reliance on existing knowledge is a critical aspect of senior leadership, apart from the project portfolio management process. There are powerful forces that lead companies to become more risk averse, which means they focus on incremental projects related to existing knowledge. Truly dynamic companies always spend some of their resources exploring new knowledge that can lead to new sources of revenue. Again, the portfolio management system can help manage that. If all the projects in the portfolio are incremental projects year after year, there will eventually be a problem.

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