Companies need innovation to increase their market share and profit margin. Innovation helps companies deliver higher value to customers. The process of converting an idea into a product or service allows companies to remain relevant and competitive in their fields.
Innovation through projects
Companies can decide to innovate by relying on incremental technology improvements which require different behaviors and processes. In this case, a company will launch a series of incremental projects which will be managed by using a process with gated decision points (Cooper 2001). This approach is particularly effective in projects where the market and technology are known.
Otherwise, companies could decide to innovate by implementing architectural or extreme technology. In this case, a company will launch a series of projects which will require a more complex learning strategy to manage the challenges associated with this approach.
A learning strategy is characterized by an iterative process in which suppositions and doubts are tested and resolved through tests and iterations (O’Connor et al. 2008). It is important to underline that the project direction and strategy often shifts as uncertainties decrease.
Portfolio management and innovation
Portfolio management is a primary innovation capability used to plan, align, and optimize innovation investments. It is particularly useful as a primary link between innovation strategy and project execution. In fact, it provides executives with the knowledge and visibility to improve decision making in order to be able to fund the right mix of projects.
Companies need to identify the services and products to achieve the innovation vision. Basically, the strategy is translated into a product portfolio that senior management takes on by determining project selection and resource allocation.
Portfolio management is a critical senior management challenge. Additionally, higher performing businesses also tend to evaluate the portfolio management as a critical factor for their success.
The four portfolio management goals
When it comes to portfolio management, there are four goals across businesses set out by Cooper. These four macro goals are:
- Value Maximization: This goal is about allocating resources in order to maximize the value of the portfolio. Companies select projects so as to maximize the sum of the values or commercial worths of all active projects in the pipeline in terms of some business objective.
- Balance: This goal is a critical one. To be successful it is crucial to develop a balanced portfolio. A portfolio that contains the right balance of projects in terms of long term projects versus short ones; or high risk versus lower risk projects; and across various markets, technologies, product categories, and project types.
- Strategic Direction: This goal is about ensuring that the final portfolio of projects truly reflects the business’s strategy. Basically, it is important that the breakdown of spending across projects, areas, markets, etc., is directly tied to the business strategy.
- Right Number of Projects: It is common to find companies which have too many projects underway for the limited resources available. The downsides are that projects end up in a queue and they take longer and longer to get to market. In addition key activities within projects are neglected because of a lack of people and time. So, it is key to ensure a balance between resources required for the approved projects and resources effectively available.
Sometimes there can be conflicts between these four high level goals. For example, the portfolio that yields the greatest NPV or IRR may not be a very balanced one; it may contain the most short-term, low risk projects; or is highly focused on one market. For this reason, it is important that executives choose the appropriate portfolio approach according to the goal they have set.
Keep in mind
All companies need to innovate if they want to remain relevant and competitive in their fields. So, in order to be successful companies need to identify the right mix of projects. Project Portfolio management helps companies manage all services and products to achieve the innovation vision.
