principles of strategic portfolio management

Principles of Strategic Portfolio Management

David MathesonPresident and CEO

www.smartorg.com

http://www.smartorg.com/

© 2000-2012 SmartOrg. | Confidential and Proprietary.2

David Matheson—Session Chairman

Dr. David Matheson has helped senior management of firms in the United States and Europe improve their results from portfolio management, product development, innovation, R&D, capital investment and strategy, and is an expert on measuring value and managing uncertainty. His practical experience covers a wide variety of industries,

including printing, software development, biotechnology, telecommunications, chemicals, pharmaceuticals, medical devices, manufacturing, electric power and entertainment. He is co-author of the best selling book, The Smart Organization:

Creating Value through Strategic R&D (Harvard Business School Press) and has authored numerous articles on innovation, portfolio management and decision making. In addition to SmartOrg, his executive roles include: currently

member of the board at Photozini, Inc. and prior to founding SmartOrg in 2000, a principal at Strategic Decisions Group.His Ph.D. is from Stanford University, where he currently teaches

on Strategic Portfolio Management and other topics at the Stanford Center for Professional Development

Improving capability to discover value.

3

Life science Aerospace Technology Other

© 2000-2012 SmartOrg. | Confidential and Proprietary.

http://www.bayer.com/

http://www.lilly.com/index.html

http://www.ineco.es/ApliServlet?accion=verPagina&idNavegacion=100

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Software and services to help you build your capability.

Portfolio Navigator Software Services


Evaluate and track sources of value, risk and upside.

Focus stakeholders on critical issues.

Aggregate and compare projects and portfolios.

Jim Matheson, Ph.D. Chairman

Nadine Oeser,European Consultant

Greg Lorch,Consultant

Somik Raha, Ph.D.Consultant

Grant Steinfeld,Software

Peter McNamee, Ph.D. Solutions & Software

• Training & Coaching• Management Consulting• Pilots & Implementation

Projects• Customization

SPD-Framework v15—5 © 2009 by Stanford Strategic Decision and Risk Management. All rights reserved.

Strategic Decision and Risk ManagementA Professional Certificate Program

Principles of good strategic portfolio management.


Aligned Decision Forum

Value Creation Focus

Credible, Comparable Evaluations

Embraces Uncertainty

and Dynamics

Clear Communication

& Learning

Inclusive, Collaborative

Process

Principlesof SPM

The three basic dimensions of great portfolio results.


What

How

Process:MilestonesGatesTimelineReviews

Resources:AssignmentBudgetingConflict

Economic:PrioritizationEvaluationStrategy

Great portfolio results

Who

De

cis

ion

s

Tracking Execution

Delivering A Billion Dollars – Lessons In

Portfolio Evaluation

Ken Edwardsson – Global Leader

Dow AgroSciences

September 15, 2008

Dow AgroSciences is a good example of a company – Achieving more with less.

© 2000-2012 SmartOrg. | Confidential and Proprietary. 10


Decision Focused

— Choosing the Right Path by

Deciding Where To Spend

Long Learning Loop

Results Focused

— Running Well on the Chosen Path

By Managing How You Spend It

Short Learning Loop

Portfolio Management Best Practice

Strategy Execution

Resource Management

Charter Projects

Development Stages

ReviewIdeas

Value Capture

Project Review

DecisionValue

Promise

Create Projects

Portfolio Management Project ManagementGating Process:• Singular projects• In depth reviews• Go/Kill decisions• Standards based

Portfolio View:• All Projects• Investment Types• Strategic Alignment

Requires – Both A Strategic View And A Tactical Focus

11


Identifying key projectUncertainties and their Impact (Value Drivers)

Valuing Projects and Characterizing alternatives

SensitivityAnalysis

Project Risk Assessment

Technical

Market

ExpectedFuture Value

H

Likely

L

Issues &Assumptions

••••••••

ProbabilityDistribution

DecisionAnalysis

InvestmentIntensity

Risk RewardBal. Portfolio

Less Emphasized

Decision and Risk Assessment Tools

Portfolio Management Best Practice

12

13

DAS Portfolio Management Results

EBIT* CAGR

SALES CAGR

16%5%

2001-2010

CAGR Goal

6%23%

2001-07

Actual CAGR

Growth + Return

*Non-GAAP financial measure, excludes certain items


The core of portfolio management: making decisions.






and Dynamics

Clear Communication

& Learning


Process

Principlesof SPM

Portfolio Management = The discussion of what to do about the gap between top-down aspiration and bottom-up reality


Top-Down• Where do we want to go?• What do we need to get

there?

Bottom-Up• What do we have in our

portfolio?• What should we keep,

modify, shut down?

Portfolio Manager Role

• Set funding priorities

• Allocate resources among segments

• Balance innovation and incremental projects

• Meet corporate financial goals

• Assure a steady stream of successful new products

$-

$50.0

$100.0

$150.0

$200.0

$250.0

$300.0

2004 2005 2006 2007 2008 2009 2010

Example top-down meets bottom-up: a growth gap.


Growth Goal

GAP

Contribution from NPD Portfolio

Existing business, growth markets

Existing business, declining markets

Line 1Line 2Line 3Line 4


Aligned Decision Forum. The process drives real decision-making at all levels.


People

Structure

Information

Players compete to make decisions or advance their own agendas without an effective forum for joint portfolio decisions.

Players deliberate, resolve conflict, and take actions

based on cooperative discussion.

The process is unclear or most projects are exceptions to the process.


Decisions are made using “gut feel” based on anecdotal information.

Meaningful and relevant information is summarized at appropriate level of detail for

decision at hand.

The process brings the right people together, clarifies top-

down aspirations and bottom-up reality, and frames decisions

about prioritization and strategy

About 40% of companies have difficulty with the Aligned Decision Forum.


Take the survey at: http://spreadsheets.google.com/viewform?hl=en&formkey=dGk2TWdQUjJwT3J6YmIyUWU0VVYtU2c6MA#gid=0

Here’s a case where the key to success was shifting the focus to value creation.






and Dynamics

Clear Communication

& Learning


Process

Principlesof SPM

Too many projects, not enough resources – what would you do in this situation?

• A high-tech packaging company built on tremendous innovation over decades in materials and design.

• Increasing global competition and erosion of its advantage.— Its products were increasingly undifferentiated.— Margins eroding dramatically.— R&D and NPD had in recent years failed to produce.

• The portfolio was choked with R&D and NPD proposals.— CEO has asked for more innovation— Largely cost reductions and incremental projects.— New innovation was crowded out.— Lots of churn and debate as projects struggled to get

resources.— They had 70+ projects and could only support about 15.


Which approach produces the best result?

• Business cases – CFO created a business case process that gathered relevant data and put it in financial terms. Modeled after successful capital investment process.

• Project management – Assign clear project leadership responsibility, form teams, create plans with clear milestones and deliverables. Pursue the best plans, hold people accountable.

• Resource allocation – Core issue is that certain resources are oversubscribed. Create resource managers to assign key resources based on guidelines and situation specifics.

• Scoring rules – Define essential criteria, such as strategic fit, size of opportunity, technical difficulty and investment. Assess score for each project on scale of 1-5 on each dimension. Take weighted average to get figure of merit.


Typical approaches often fail to resolve the real portfolio issues

“Business cases strongly favored incremental projects.” “Project management methods created more work on projects we would cancel.” “Resource allocation efforts abdicated the companies most important investment decisions to relatively low-level managers.” “Weighted scoring rules simply elevated politics to a new level of sophistication.”

“When we got clear about value, many project leaders voluntarily cancelled their own projects; they realized they could better direct their efforts to higher-value projects.”

“We reduced our portfolio from 70 to 20 projects, improving the return by more than 100%.”


A High-Tech Packaging Company

APPROACHES THAT DID NOT WORK

GOOD EVALUATION WORKED

Too many projects — how to sort them out?

Reinventing the Product Portfolio: Session III – May 2010



Value Creation Focus. The goal is to find the strategy that maximize value creation.


People

Structure

Information

Objectives are driven by personal agendas, functional perspectives, and individual biases.

Individuals and groups think clearly about economic and

strategic issues and creatively about how to improve value.

Metrics and analysis are not clearly connected to value creation, or they are manipulated to advance personal agendas.


Information selected to support personal agendas or positions. Irrelevant information brought to bear on decisions.

All the information needed to inform value creation, both positive and negative, are incorporated into a neutral

evaluations

Metrics and analysis inform understanding of economic outcomes

and drive choices.

About 55% of companies have challenges with Value Creation Focus.


Next we see an organization lacking comparable evaluations and full collaboration in decision making.






and Dynamics

Clear Communication

& Learning


Process

Principlesof SPM

Accelerating the Deployment of Technology to Business Opportunities

Kevin Kimber – ChevronTexaco

Role of Portfolio Optimization Process & Toolsfor Heavy Oil Technology

Like many organizations, we faced significant challenges…

• Business needs for technology were not being met in a timely fashion

• Corporate growth objectives demanding more for less

• Technologists keeping projects alive too long

• Inconsistent project evaluations

• Not enough project failures

• Difficulty comparing projects of different types

• Limitations of thumbs up / down approach to project prioritization

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The existing portfolio process was primarily a “roll-up” of business cases to justify projects.

ProjectJustifications

• Business Cases

PortfolioDecisions

• Subjective Factors

This was a competitive, adversarial process, with very little quality in the data, which severely hampered decision-making.

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CT Heavy Oil met the challenges by implementing a value-based, portfolio management process.

Value-based, Portfolio Management Process

Project Evaluations

• Specify & quantify uncertainty

• Clear standards• Give teams real

direction

Peer & Expert Review

• Transparency• Credibility &

comparability

Portfolio Decisions

• Value-based• Solid information• Strategic

alignment

Uncertainty Tracking

• Baseline assessments

• Updates based on evidence

32

A transparent process helped address the “garbage-in, garbage-out” problem.

Commercial Value Given Technical Success Range of Uncertainty ($million)

Improving Computational Capability

Shearing

LSTS

Performance Prediction

Dow nhole Steam Prof ile Control

2D NMR

Thin Sand Thermal

Dow nhole Steam Prof ile - New Wells

Catalyst

Remote Sensing

Steam Inj Well BP

Steam Distribution

Bio-Upgrading

Heat Management

Improve Hydrocoking Process

Well Gauging

High Mobility Ratio Waterf lood

HOSGD

Reservoir Opportunity Identif ication

VAPEX

Cold Flow

Heavy Oil Chemistry

Sulfur & Metals Removal

CASH

-100 0 100 200 300 400 500 600

Project 1

Project 2

Project 3

Project 4

Project 5

Project 6

Project 7

Project 8

Project 9

Project 10

Project 11

Project 12

Project 13

Project 14

Project 15

Project 16

Project 17

Project 18

Project 19

Project 20

Project 21

Project 22

Project 23

Probability of Technical Success

Shearing

Heavy Oil Chemistry

Improving Computational Capability

Bio-Upgrading

Thin Sand Thermal

Sulfur & Metals Removal

VAPEX

Catalyst

High Mobility Ratio Waterf lood

LSTS

Improve Hydrocoking Process

Performance Prediction

HOSGD

Steam Inj Well BP

Reservoir Opportunity Identif ication

Cold Flow

CASH

2D NMR

Dow nhole Steam Prof ile - New Wells

Heat Management

Remote Sensing

Steam Distribution

Well Gauging

Dow nhole Steam Prof ile Control

0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80

Project 1

Project 2

Project 3

Project 4

Project 5

Project 6

Project 7

Project 8

Project 9

Project 10

Project 11

Project 12

Project 13

Project 14

Project 15

Project 16

Project 17

Project 18

Project 19

Project 20

Project 21

Project 22

Project 23

Project 24

• Historically this was one of the most challenging issues

• Process and tools key to overcoming

Project Evaluations

• Specify & quantify uncertainty

• Clear standards• Give teams real

direction

Peer & Expert Review

• Transparency• Credibility and

Comparability

Portfolio Decisions

• Value-based• Solid information• Strategic

Alignment

Uncertainty Tracking

• Baseline assessments• Updates based on evidence

After: a value-based management process

Project Comparison Tools33

The result: acceleration of technology to business opportunity.

2003 2004 Improvement

New ideas screened

22 35 60%

Projects initiated

6 9 50%

Projects Deployed

1 2 100%

Projects Terminated

3 6 100%

34

A major challenge in portfolio management:


Saying “no” to a good idea…

In order to fund a better one…

How do you make a “no” stick? • Power• Persuasion

http://images.google.com/imgres?imgurl=http://www.pachd.com/free-images/household-images/pennies-01.jpg&imgrefurl=http://www.pachd.com/free-images/household-images.html&usg=__q0kR7vIljAG-dPl8o0JAXuXW-GE=&h=768&w=1024&sz=169&hl=en&start=1&sig2=G7aziAsK0vJfMh_UT-_MjQ&um=1&tbnid=ChIzlKS0aEz0fM:&tbnh=113&tbnw=150&prev=/images?q=pennies&hl=en&rls=com.microsoft:en-us&sa=N&um=1&ei=_epYS_CDGpTEM_CEgN0E

http://www.homeenergyaffordabilitygap.com/Images/HowToUse_Images/dollars%20pic2.jpg

The gold standard of persuasion:


The political loser comes to the same conclusion himself.

This sucks for me but I have to

agree it is the right priority.

http://mindmillion.com/MONEY/gold-treasure-wealth.htm

The silver standard of pursuasion:


The political loser accepts that the process was fair and accurate.

This sucks for me and I think it’s the wrong choice, but at least they heard the full story and

made a tough call.

Credible, Comparable Evaluations. The process allows participants to make and accept decisions.


People

Structure

Information


Project evaluations are internally inconsistent without underlying mental models or logic.

Information is selected to support individual projects without regard for consistency across projects.

Information comes from knowledgeable sources,

and is shared, vetted, and understood across the

projects.

Common evaluation framework follows clear

and comprehensible logic; common issues

are treated in common ways.

Significant advocacy: the objective is to “win” by having requests granted and gaming the system is tolerated.

Those whose preferred alternatives are rejected

find the basis for the decision convincing.

Explicitly evaluating uncertainty was key to unlocking value in the next company’s portfolio.






and Dynamics

Clear Communication

& Learning


Process

Principlesof SPM

Reinventing the Product Portfolio: Session III – May 2010


Go/No Go: Knowing What to Bank On Version 10.0, 6/07© 2006 Sprint Nextel. All Rights Reserved.

41

Before: The valuation guessing game…

2007 2008 2009

Revenue 3M 6M 9MCosts 6M 7M 8M Margin (3M) (1M) 1M

PRO FORMA

Effects of this approach

Does not allow you to innovate around the business model, here the business model is constant – subscription model

Hides high areas of certainty Not the correct tool for highly uncertain businesses opportunities. Gives impression of precision based on difficult to support

assumptions.

Assumptions: Take Rate Market Size Market Share Ramp Up …

http://images.google.com/imgres?imgurl=http://fischeaa.tripod.com/web_kit/icons/light.gif&imgrefurl=http://fischeaa.tripod.com/craftideas.html&h=229&w=198&sz=4&hl=en&start=679&tbnid=AiQ0td-nGDnyDM:&tbnh=108&tbnw=93&prev=/images?q=idea+light+bulb&start=660&ndsp=20&svnum=10&hl=en&sa=N

Go/No Go: Knowing What to Bank On Version 10.0, 6/07© 2006 Sprint Nextel. All Rights Reserved.

42

After: Focusing on driving value up

Effects of this approach

Each variable accounts for the range of variability

Top three variables are clearly illustrated Helps to filter non-essential data and stay

focused!

1: What is known / unknown about key economic factors?

e.g. Channel deal High: we use own channel,

we go direct, we do deal with X or Y

Low: we stay in traditional channel, we do deal with P or Q, we need lots of floorspace

2: What is the possible range of the factor given our uncertainty?

e.g. Channel deal High: 25% Base: 10% Low: 5%

NPV

“GRAND SLAM” VALUATION

$100M $450M$0M

Channel Deal

Margin

Monthly Fee

5% 25%

10%5%

$5 $15

3: What is economic impact of that uncertainty?

http://images.google.com/imgres?imgurl=http://fischeaa.tripod.com/web_kit/icons/light.gif&imgrefurl=http://fischeaa.tripod.com/craftideas.html&h=229&w=198&sz=4&hl=en&start=679&tbnid=AiQ0td-nGDnyDM:&tbnh=108&tbnw=93&prev=/images?q=idea+light+bulb&start=660&ndsp=20&svnum=10&hl=en&sa=N

A company set up a new lab, with high expectations. Later they asked, “Is the new lab on track?”


• A Fortune 100 company acquired several smaller companies with good products in the market, but not much of an R&D pipeline.

• A new R&D laboratory was established with the goal of “researching their way” to becoming a world-class firm.

• Since the lab was new, and the technical areas were leading edge, they picked easy targets to get them onto the map soon.

Is the lab on track? Will their lab generate the hits required?

A 1-month quantitative evaluation revealed a lack of the “oysters” needed to create block-buster products.


Probability of Development

Success

.1

.2

.3

.4

.5

.6

.7

.8

.9

1.0

0

Expected Commercial Value Given Development Success($ millions)

0 100 200 300 400 500 600 700 800 900 1,000

PearlsBread & Butter

OystersWhite Elephants

Innovation Screen

After a quarter spent identifying more valuable commercial targets, their portfolio had better odds of winning.


Probability of Development

Success

.1

.2

.3

.4

.5

.6

.7

.8

.9

1.0

0

Expected Commercial Value Given Development Success($ millions)

0 100 200 300 400 500 600 700 800 900 1,000

PearlsBread & Butter

OystersWhite Elephants

Innovation Screen

Uncertainty ranges tend to be base case + 10%.

Embraces Uncertainty and Dynamics. All uncertainties are treated explicitly over time.


People

Structure

Information

Deterministic thinking and risk aversion drive a quest for certainty.

Robust thinking about upside, downside, and

options. Willingness to take prudent calculated risks.


Assumptions co-mingle discussions about knowledge, commitments and aspirations into point estimates.

Assumptions are made to defend a position. Disconfirming information is suppressed.

Information is robustly represented in terms of

ranges and probabilities with supporting rationales

for the assessments.

Discussion of uncertain knowledge are separated

from discussions about commitments and

aspirations.

About 60% of companies have challenges with Embracing Uncertainty.


Unless carefully managed, the portfolio process can create unintended burdens.






and Dynamics

Clear Communication

& Learning

Inclusive Collaborative

Process

Principlesof SPM

Have you ever encountered a spreadsheet with hundreds of inputs?


Simplified logical map of a spreadsheet once in common use at Boeing (the actual spreadsheet is too large to show).

Spreadsheet models can spin out of control creating drudgery and overhead.


Spreadsheet model lacks a

feature needed in a case, feature is

added

Data requirements increase for everyone to

support more complex model

Broader Analysis

Expansion in scope of portfolio

More projects of different types

added

New portfolio insight

Benefits increase for every project added

Overhead increases as the square of the number of

projects

“Death by a thousand cuts”

Adversarial processes – a spiral of increasing overhead and distrust.


Pressure to create a winning pitch creates a search for an advantage and tendency to

exaggerate

Concern of being misled creates need for extra

scrutiny

Staff and process created to oversee and

make sure pitches are good

ones

“You are asking for the rope you are going to use to hang me.”

Information available but biased and not vetted.

Documented for large Units only.

Inclusive, Collaborative Process. All stake-holders participate and derive value from the process.


People

Structure

Information

Portfolio process serves some people (e.g. executives) and is not in the interest of others (e.g. project leaders).

All participants find the portfolio process useful

in accomplishing their work.


Participants experience large scale drudgery in support of portfolio process

Basis of decisions lost or information is privileged.

Basis of decision is stored and becomes a common repository

of knowledge.

Tools, methods,

practices, etc. are efficient.

Finally, it is all about clear commination and learning.






and Dynamics

Clear Communication

& Learning


Process

Principlesof SPM

Reinventing the Product Portfolio: Session III – May 2010Reinventing the Product Portfolio: Session III – May 2010


BIG MISTAKES IN EVALUATIONPEOPLE Treating a project evaluation as an analysis rather than as a

conversation. Not having the right people in the room for the conversation. Not having a process for making the decision.

TOOLS Use of scoring grids, strategic buckets or other tools that lack the power to provide real insight and drive a lasting business decision.

VALUE Failing to bring an evaluation to the bottom line prevents real discussion of business issues and tradeoffs. Narrow view of value as NPV. Undocumented assumptions lead people to believe that a particular value metric is more comprehensive than warranted.

UNCERTAINTY Critical issues are covered up using assumptions rather than explicitly quantified as uncertainty. Failure to evaluate, vet, and learn about uncertainties. No understanding of the businesses ability to manage risk and uncertainty.

Source: Robin Karol, CEO of PDMAStrategic and Operational Portfolio Management Conference, 2006

© 2000-2012 SmartOrg. | Confidential and Proprietary. 56

© Inspire Pharmaceuticals Inc., all rights reserved. Used with permission. 57

New Corporate Strategy

PatentGranted

CompetitiveProduct Approved

Technical Setback

NPV Given Technical Success

Pro

bab

ilit

y o

f Te

ch

nic

al S

uccess

What can we do with this asset?What can we do with this asset?

Bread & Butter Bread & Butter PearlsPearls

White ElephantsWhite Elephants OystersOysters

Innovation screen

PositivePhase 1

PositivePhase 2

RegulatorySet-back

Initial Perception

IP uncertainty addressed

ImprovedStrategy


Clear Communication and Learning. Information is freely shared and updated.


People

Structure

Information

Results are used to blame, punish, reward, etc.

Results are used to improve

project and portfolio value.

Results are used to measure progress and hold people

accountable.

No mechanisms for tracking, feedback, and learning.

Variance and cost / schedule

tracking only

The focus is on the most available information

Information is gathered based on the quantified

benefits of filling information gaps.

Uncertainties are tracked and updated based on

new evidence, and decisions are updated

appropriately

The design challenge is applying these principles in a way that best fits the situation.



The process drives real decision-making at all levels.


The goal is to find the portfolio strategy that maximizes value created for the organization.


The information and evaluations in the process allow participants to make and accept decisions.

Embraces Uncertainty and Dynamics

All uncertainties are treated explicitly and updated over time.

Clear Communication and Learning

Information is share freely, performance is tracked, and assessments are routinely updated.

Inclusive, Collaborative Process

All stakeholders participate openly and derive value from the process.

Principles of Strategic Portfolio Management

Try assessing your own organization:www.smartorg.com/PrinciplesSurvey






and Dynamics

Clear Communication

& Learning


Process

Principlesof SPM

SmartOrg® provides software and services to help companies evaluate their opportunities and make the best decisions about where to invest, especially when the future is clouded with uncertainty. Customers use SmartOrg® to build their capability in driving innovation from idea to commercial results and in selecting projects, improving returns in their portfolio.

SmartOrg® helps companies to attain the highest value from projects and portfolios.

855 Oak Grove, Suite 202Menlo Park, CA 94025 USAT: [email protected]

www.linkedin.com/company/smartorg

@smartorginc


mailto:[email protected]

principles of strategic portfolio management

Business

embraces uncertaintyand

aligned decision

hold people

clear communication

strategic

great portfolio

portfolio

clear communication