The Importance of a Balanced Project Portfolio

In a recent article (1), I proposed a practical project portfolio management (PPM) system appropriate for small to mid-sized firms. A PPM system is necessary in order to make sure all ideas for new products are thoroughly considered, and a process in place to decide which ones to invest in. Most companies have far too many projects for available resources, therefore, a process to choose becomes very important, especially in today’s competitive market and tough economic times. The focus of this article is to discuss why there is a need for a balanced portfolio and what needs to be in place organizationally to achieve it.

To start the discussion, let’s first discuss the range of new product choices. In every company, there are multiple options in how new products are defined, and many ways to gain competitive advantage. At a basic level, projects can be

  1. Extensions: a firm’s existing product that is being extended in some way.
  2. New: product exists outside company (e.g., competitor) but is a new product for the company.
  3. Radical: new-to-the-world product.

Within each classification, you can consider three other dimensions. First is the customer base or market itself. Is the product being sold to the same customer base, or is it a new customer base? So for instance, an extension of an existing product might only be intended for the existing customer base. On the other hand, maybe the reason for the extension is to incrementally expand sales to a new customer base. In that case, there may be the need to develop additional marketing capability as part of the project. The same factors arise for new of radical products.

Second is the technology. There are two aspects to consider: product technology and process technology. For an extension, almost by definition, the product technology is likely to be fundamentally the same as the existing product. For a new product, the technology exists somewhere but the firm may not have the knowledge. Here, the choices may be to acquire a company that has the technology and people, or hire new staff and develop the knowledge in house. For  radical, or new-to-the-world products, the technology may not exist and has to be invented. That is not to say that every new product considered a “radical” innovation has to involve all new technology. The Apple© Ipod and the business model built around purchasing and downloading music is certainly considered a “new-to-the-market” innovation, but all the technologies existed. The innovation was the business model.

The process technology is associated with manufacturing the product. For instance, in a product extension, maybe there are going to be some enhancements in performance, but the real reason for the project may be to reduce manufacturing costs by changing the manufacturing process. In a new or radical product, there also may be process technology considerations.

Finally, for each choice, a project could be considered incremental or a “mega-project”. A “mega-project” is illustrated in the figure below. Even for a product extension, you could end up with a “mega-project” even though the fundamental technology remains the same. For instance, you might be incrementally improving multiple sub-systems, updating the industrial design, re-engineering the entire architecture including electronics and embedded software, and developing a new UI. While none of the individual pieces are necessarily high-risk from a technological standpoint, project complexity and the integration risk could be very high, turning the project into a high-risk “mega-project”. One of the biggest risks for this type of project is schedule slip. On the other hand, even for a radical project, you don’t necessarily need to make it a “mega-project”. You could for instance, roll out the technology on an incremental basis, over the course of several product introductions. That might provide multiple benefits including time for the organization to iterate and learn, improve quality, and allow the core technology to come to market sooner.

Mega

Now that we have defined the basic choices, what are the benefits of a balanced portfolio? The reasons on the surface seem intuitive, but are much more difficult to put into practice. At the core of the argument is the need to balance risk. No company can prosper over the long term if the only types of projects ever done are low-risk incremental, product extensions. On the other hand, the opposite is also true. Taking on only radical, mega-projects is a high-risk strategy. Most companies will want to have a more balanced portfolio of projects in order to balance the risk. This is no different than assessing your individual tolerance for risk and designing an investment portfolio based on that risk profile.

In addition to the intuitive argument above, there are examples in the literature that make a compelling case based on business performance to maintain a balanced approach. For instance, every company today is on the band-wagon to become more “innovative”, to create the next block-buster radical new product.  Companies who can execute incremental product extensions are “so yesterday”.  A good example is Apple. You might think of Apple as the epitome of a highly innovative company. There is no doubt, but from a practical standpoint, a recent article in Fast Company (2) points out that the real driver of Apple’s success is incremental innovation. As the author states: “…the marvel of Apple has been its seemingly inexhaustible capacity to pummel consumers again and again with product refinements. Apple has earned a distinctive reputation for thriving with only a handful of products…”.

A recent article in the Journal of Product Innovation Management (3) provides empirical evidence that companies who are characterized as possessing “innovation ambidexterity” are more likely to outperform competitors in terms of revenues, profits, and productivity growth. Innovation ambidexterity is defined as the ability to engage simultaneously in both exploratory activities that lead to radical innovations as well as exploitative activities necessary for incremental innovation. The point is, balance in the portfolio is important for financial success over the long term.

If you agree  that balance is important, what organizational characteristics are important to insure that you can maintain a level of innovation ambidexterity? Drawing upon the JPIM article cited previously, Roger Martin’s concept of the “knowledge funnel” (4), and my own experience, I would propose there are three (3) key factors.

First, is to maintain what the authors in the JPIM article define as a “learning capability”. This is a combination of practices including intraorganizational learning among employees that emphasizes the acquisition, dissemination, integration, and development of knowledge over time. Also important is interorganizational collaboration in the form of partnering with other sources of knowledge outside the firm, and then disseminating that knowledge within the firm. Finally, is the importance of the organization’s culture, and specifically an open culture that emphasizes and rewards risk-taking, trust, respect for others, learning, and finding new opportunities.

A second factor is to embrace Roger Martin’s concept of the knowledge funnel shown below. I have incorporated this concept in several other articles but it applies to this discussion as well. I believe this framework emphasizes the need for innovation ambidexterity. As shown in the figure all ideas start as mysteries. This can relate to either a product or a process. At this stage, a company is inventing. They are struggling to make sense of a problem. At some point, engineers may develop a heuristic, or a Knowledge Funnelrule of thumb to narrow the field of inquiry, and focus on a certain aspect of the problem.  Ultimately, every company strives to develop an “algorithm”. This allows a task or process to be done over and over again without mistakes and with a high level of quality. Moving across the stages is considered exploration or the search for new knowledge, and working within a stage is exploitation. Martin’s book makes the case, as does the JPIM article, that companies need both to survive long term. They need to explore and they need to exploit.

The final factor is management leadership. It the senior leader responsible for the business who must make sure that the portfolio is balanced. They need to commit some resources to explore new “mysteries”, otherwise competitors may just be ready to disrupt your business. I believe that as companies become more successful, they tend to become more risk averse and begin to focus more on exploitation vs. exploration. Finally, senior management need to be engaged in the NPD process and support a culture of innovation that is so important for long-term success.

Do you agree with the project type classifications? Are there other considerations that you would suggest? Are there other aspects of a balanced project portfolio that are important and you would add? Does your company focus on exploitation or exploration, or both? What have you found important in maintaining innovation ambidexterity?

Notes:

(1) See this article entitled “Critical Aspects of Project Portfolio Management (PPM) in NPD Success”.

(2) Carr, Austin. 2013. What You Don’t Know About Apple. Fast Company April 2013: 35-38.

(3) Lin, Hsing-Er, McDonough, Edward F. III, Lin, Shu-Jou and Lin, Carol Yeh-Yun. 2013. Managing the Exploitation/Exploration Paradox: The Role of a Learning Capability and Innovation Ambidexterity. Journal of Product Innovation Management 30 (2):262-278.

(4) Roger L. Martin, The Design of Business: Why Design Thinking is the Next Competitive Advantage. (Boston: Harvard Business School Publishing, 2009)

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