new product portfolio management: practices and performance

New Product Portfolio Management: Practices and Performance

Robert G. Cooper, Scott J. Edgett, and Elko J. Kleinschmidt

Effective portfolio management is vital to successful product innovation. Portfoliomanagement is about making strategic choices—which markets, products, andtechnologies our business will invest in. It is about resource allocation—how youwill spend your scarce engineering, R&D, and marketing resources. It focuses onproject selection—on which new product or development projects you choosefrom the many opportunities you face. And it deals with balance—having the rightbalance between numbers of projects you do and the resources or capabilities youhave available.

In this article, the authors reveal the findings of their extensive study ofportfolio management in industry. This study, the first of its kind, reports theportfolio management practices and performance of 205 U.S. companies. Itsoverall objective was to gain insights into what portfolio methods companies use,whether they are satisfied with them, the performance results they achieve withthe different approaches, and suggestions for others who are considering imple-menting portfolio management.

The research first assesses management’s satisfaction with portfolio methodsthey employ and notes that some firms face major problems in portfolio manage-ment. Next, businesses are grouped or clustered into four groups according tomanagement’s view of portfolio management: Cowboys, Crossroads, Duds, andBenchmark businesses.

Various performance metrics are used to gauge the performance of the busi-ness’s portfolio. The results reveal major differences between the best and theworst. Benchmark businesses are the top performers. Their new product portfo-lios consistently score the best in terms of performance—high-value projects,aligned with the business’s strategy, the right balance of projects, and the rightnumber of projects. The authors take a closer look at these benchmark businessesto determine what distinguishes their projects from the rest. Benchmark busi-nesses employ a much more formal, explicit method to managing their portfolioof projects. They rely on clear, well-defined portfolio procedures, they consis-tently apply their portfolio method to all projects, and management buys into theapproach.

The relative popularity of various portfolio methods—from financial methodsto strategic approaches, bubble diagrams, and scoring approaches—are investi-

Address correspondence to Scott J. Edgett, Michael G. DeGrooteSchool of Business, McMaster University, 1280 Main Street West, Ham-ilton, Ontario, Canada L8S 4M4.

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J PROD INNOV MANAG 1999;16:333–351© 1999 Elsevier Science Inc. All rights reserved. 0737-6782/99/$–see front matter655 Avenue of the Americas, New York, NY 10010 PII S0737-6782(99)00005-3

gated. Not surprisingly, financial approaches are the most popular and dominatethe portfolio decision. But what is surprising is the dubious results achieved viafinancial approaches. Again, benchmark businesses stand out from the rest: theyplace less emphasis on financial approaches and more on strategic methods, andthey tend to use multiple methods more so than the rest. Strategic methods, alongwith scoring approaches, yield the best portfolios; financial methods yield poorerportfolio results.

The authors provide a number of recommendations and suggestions for anyonesetting out to implement portfolio management in their business. © 1999 ElsevierScience Inc.

Introduction

A vital question in new product management is:How should the business most effectively in-vest its research and development (R&D) and

new product resources?1 That’s whatportfolio man-agementis all about: resource allocation to achieve thebusiness’s new product and technology objectives.

Much like a stock market portfolio manager, thosesenior executives who manage to optimize their R&Dand marketing investments—to define the right newproduct strategy for the firm, select the winning newproduct projects, and achieve the ideal balance ofprojects—will win in the long run. This article pre-sents some of the findings of an extensive investiga-tion into how businesses manage their R&D and newproduct portfolios, how satisfied management is withtheir portfolio management practices, and the portfolioresults achieved in these businesses.

What Is Portfolio Management?

“Portfolio analysis and planning will grow in the1990s to become the powerful tool that business port-folio planning became in the 1970s and 1980s”, ac-cording to Roussel et al. [19] in their widely readbook, Third Generation R&D. Portfolio managementand the prioritization of new product or R&D projects[19] is vital to successful business performance formany reasons:

• First, portfolio management is about making stra-tegic choices. It is one route by which senior man-agement operationalizes their business’s strategy—the types of products, markets, and technologiesmanagement has chosen to attack, and the relativeemphasis on each.

• Second, the new product and technology choicesthat management makes today determine what thebusiness will look like 5 years out. An estimated32% of firms’ sales today come from new productsintroduced within the last 5 years [10].

• Third, portfolio management is about resource al-location—the allocation of scarce and vital R&D,engineering, marketing, and operations resources ata time when these resources are more stretched thanever.

Some firms restrict “portfolio management” to new and improvedproducts, and platform projects with new product potential [16,18]. Incontrast, other firms include virtually any Development project under thetopic “portfolio management,” such as process improvements, cost reduc-tions, minor product improvements, customer projects, and so on. Thus, wetend to use terms such as “new product portfolio” or “R&D portfolio”interchangeably in this article.

BIOGRAPHICAL SKETCHES

Robert G. Cooper is the Lawson Mardon chaired Professor ofIndustrial Marketing and Technology Management at the MichaelG. DeGroote School of Business. He is also Professor of Marketingand Director of Research of the Canadian Industrial InnovationCentre. He holds Bachelor’s and Master’s degrees in ChemicalEngineering, and an M.B.A. and Ph.D. in Business Administration.Dr. Cooper is a leading researcher in the field of new products andhas published more than 75 articles and books on the topic. Manywill be familiar with his widely acclaimed NewProd series ofresearch studies into new product practices. His latest book co-authored with Drs. Edgett and Kleinschmidt isPortfolio Manage-ment for New Products. Scott J. Edgett is an Associate Professor ofMarketing at the Michael G. DeGroote School of Business. Heholds an M.B.A. and Ph.D in Marketing. He is an active researcherand consultant in the field of new product development and port-folio management. He has published numerous articles and twobooks, including theJournal of Marketing Management, EuropeanJournal of Marketing, Services Industry Journal, Industrial Mar-keting Management,and Journal of Product Innovation Manage-ment.Elko J. Kleinschmidt is a Professor of Marketing and Inter-national Business at Michael G. DeGroote School of Business. Heholds a Bachelor’s degree in Mechanical engineering, and anM.B.A. and Ph.D in Business Administration. He is an activeresearcher and consultant with a particular emphasis on interna-tional comparative studies of new product practices. He has pub-lished extensively on these topics in theJournal of Product Inno-vation Managementand other noted journals.

334 J PROD INNOV MANAG1999;16:333–351

• Finally, portfolio management deals with the criti-cal issue of balancing resources available with thenumbers of projects. Errors here—for example, try-ing to do too many projects for the limited re-sources available—results in longer cycle times,poor quality of execution, and underperformingnew products.

Before charging into the topic of what portfoliotechniques industry relies on, let’s stand back andreflect on what portfolio management is. Wedefineportfolio managementformally as follows:

Portfolio management is a dynamic decision process,whereby a business’s list of active new product (andR&D) projects is constantly updated and revised. Inthis process, new projects are evaluated, selected, andprioritized; existing projects may be accelerated,killed, or deprioritized; and resources are allocatedand reallocated to the active projects. The portfoliodecision process is characterized by uncertain andchanging information, dynamic opportunities, multi-ple goals and strategic considerations, interdepen-dence among projects, and multiple decision-makersand locations.

The portfolio decision process encompasses oroverlaps a number of decision-making processeswithin the business, including periodic reviews of thetotal portfolio of all projects (looking at the entire setof projects, and comparing all projects against eachother), making go/kill decisions on individual projectson an on-going basis (using gates or astage-gateprocess), and developing a new product strategy forthe business, complete with strategic resource alloca-tion decisions.

R&D Portfolio Methods: A CheckeredHistory

The original portfolio selection models of the 1960sand 1970s were highly mathematical, and they em-ployed techniques such as linear, dynamic, and integerprogramming. The objective was to develop a portfo-lio of new and existing projects to maximize someobjective function (for example, the expected profits)subject to a set of resource constraints. Anyone famil-iar with these programming techniques will immedi-ately recognize the challenge that the mathematicianand management scientist would have solving thisportfolio problem. A good summary article on suchmethods is Jackson’s [12] “Decision methods for se-lecting a portfolio of R&D projects.”

Although conceptually appealing and perhaps the

most rigorous, mathematically based portfolio modelssee more visibility in text books and journal articlesthan in corporate offices. Studies done in North Amer-ica and Europe show that managers have a great aver-sion to these mathematical techniques, and for goodreason [1]. The major obstacle is the amount of datarequired: information on the financial results, resourceneeds timing, and probabilities of completion and suc-cess for all projects. Much of this information simplyis not available, and, when it is, its reliability is sus-pect. Further, these mathematical portfolio approacheshistorically have provided inadequate treatment of riskand uncertainty; they are unable to handle multiple andinterrelated criteria; and they generally fail to recog-nize interrelationships with respect to payoffs of com-bined utilization of resources. Finally, managers per-ceive such techniques to be too difficult to understandand use.

The portfolio management decision problem re-mains an important, albeit complex, one. Thus, recentyears have witnessed the introduction or use of anumber of other or new product portfolio methods.These include, for example:

• Financial models and financial indices.Theserange from ranking or selecting projects based ontraditional net present value (NPV), internal rate ofreturn (IRR), and payback methods through to var-ious financial ratios (such as SDG’s popular Pro-ductivity Index2) [2,15].

• Probabilistic financial models. These includeMonte Carlo Simulation (for example, the add-onprograms to various spreadsheets, such asAt Riskand Crystal Ball); and decision trees (such as theexpected commercial value (ECV) method) [20].

• Options pricing theory. This newer method,adopted by Kodak and others, treats each stage ofthe new product project much like purchasing anoption on a future investment [9,14].

• Strategic approaches.Here, the selection of theportfolio of projects is largely driven by the strategyof the business. The business strategy decides thesplit of resources across different categories—forexample, by types of projects, markets, or productlines—to create strategic buckets [5]. And strategicconsiderations dominate the decision to do (or notdo) certain R&D or new product projects.

Productivity Index: Probability-adjusted NPV divided by R&D costsremaining in the project (alternately, divided by the total costs remaining).Projects are rank ordered according to this index.

335PORTFOLIO MANAGEMENT FOR NEW PRODUCTS J PROD INNOV MANAG1999;16:333–351

• Scoring models and checklists. Here, projects arerated and scored on a variety of qualitative ques-tions (in some cases, the project score becomes thecriterion for project prioritization) [11,19,21]. Thequestions or items often capture proven drivers ofnew product success such as product advantage,market attractiveness, synergy with the base busi-ness (leverages core competencies), familiarity, etc.[3,17].

• Analytical hierarchy approaches.These are deci-sion tools based on paired comparisons of bothprojects and criteria. Models such asExpert Choiceenable a team of managers to arrive at the preferredset of projects in a portfolio [22]. Voting softwareand hardware (for example, hand-held wireless vot-ing machines linked to software and a video pro-jector) permit the management team to input theirchoices quickly and visually.3

• Behavioral approaches.These are tools designed tobring managers to a consensus in terms of whichprojects to undertake, and include methods such asDelphi and Q-Sort [13,20]. They are particularlyuseful for the early gates, where only qualitativeinformation is available.

• Mapping approaches or bubble diagrams.Theseare essentially extensions of the original BostonConsulting Group (BCG) portfolio models (stars,cash cows, dogs, wildcats) and the GE/McKinseymodel, which were designed to allocate resourcesacross the business units in a corporation. In newproduct mapping models, various parameters areplotted against each other in a bubble diagram for-mat—plots such as Reward versus Probability-of-Success or Ease-of-Undertaking versus Project-At-tractiveness [15,19].

Although the published literature over the past 30years outlines many approaches for portfolio manage-ment and project selection, there is very little evidenceregarding thewidespread transferof these techniquesinto management practice or whether these approacheshave had positive results. Despite all the proposedsolutions, a recent benchmarking study points toproject selectionand project prioritization as theweakest facetof all new product management activi-ties [7,8]. In this benchmarking study, managementsconfessed to a lack of project prioritization, too manyprojects for the available resources, and minimal at-

tempts at portfolio management. So there appears tobe a major gulf between theory and practice.

Further, although many prescriptions have been of-fered over the years, surprisingly littleempirical re-searchhas probed the topic of portfolio managementin industry. Numerous questions thus remain in theportfolio management area. For example, how docompanies select the appropriate portfolio of newproduct investments? Do formal and explicit methodswork better than informal, ad hoc approaches? Howsatisfied is management with the various approachesthey use? And what portfolio results are businessesrealizing?

The current research study seeks to address some ofthese questions regarding both the use and perfor-mance of portfolio management methods—questionsthat remain largely unanswered in the literature. Theunderlying goal of the investigation is to provide in-sights into how businesses manage their R&D and newproduct portfolios, and the results achieved. Specificobjectives are as follows:

• to describe and characterize portfolio managementand project prioritization methods used in industry,

• to determine the relative popularity of each method,• to assess managements’ perceptions of, and satis-

faction with, alternate portfolio management meth-ods,

• to characterize the portfolio methods used, and• to determine portfolio results achieved.

How the Research Was Undertaken

Exploratory Work

An exploratory study was undertaken first to gaininsights into industry’s use of portfolio models. Lead-ing firms were identified and in-depth interviews wereconducted with management to better define whatportfolio management is, to identify the types of port-folio management methods in use, to understand theprincipal goals that businesses are trying to achieve viaportfolio management, and to determine how manag-ers perceived these models and methods [4–6].

Conceptual Framework

Next, a conceptual framework was developed to helpguide the current large sample study (Figure 1). Theframework consists of six main sets or blocks ofvariables:

See, for example, the system offered by the Saunders ConsultingGroup, Toronto, Canada, used in a number of businesses.


1. Performance metrics.The framework postulatesthat management seeks certain ultimate perfor-mance goals from their portfolio managementmethod. These performance goals or metrics wereuncovered in the exploratory study and includeitems such as maximizing the portfolio’s economicvalue, strategic alignment, and portfolio balance(more on these later). These performance goals areat the right side of Figure 1.

2. Perception and satisfaction metrics.There is also aset of interim or intermediate metrics and charac-teristics that captures how managers perceive theirportfolio management tools (for example, decisioneffectiveness or user friendliness) and whether ornot they are satisfied with the portfolio method theyuse (for example, whether or not they would rec-ommend the method to others). Although not theultimate goals of portfolio management, nonethe-less they are highly desirable and very commonlydiscussed metrics, as uncovered in the exploratorystudy. They are shown in the middle of the con-ceptual framework of Figure 1.

3. Drivers.Finally, there are four sets of variables thatare postulated to drive both sets of metrics outlinedpreviously (again, these were tentatively identifiedin the exploratory study). These blocks of variablesinclude:

• how important portfolio management is perceivedto be in the business.

• the reasons whyportfolio management may be im-portant—why the business has adopted more for-mal approaches to portfolio management,

• the nature of the portfolio management methodsused by the business—for example, how explicitand formal the method is,

• the specific portfolio modelsor tools used by thebusiness—for example, financial methods versusmapping techniques versus scoring models or stra-tegic approaches.

These four blocks of driver (or causal) variables areshown to the left of Figure 1.

The six blocks of variables outlined in this concep-tual model in Figure 1 form the foundation for thestudy. A list of variables was constructed for eachblock, and these variables then were operationalized.

Data Collection

A detailed survey questionnaire was developed in con-cert with the IRI’s Research on Research Committee.(The IRI or Industrial Research Instituteis an associ-ation consisting largely of Chief Technology Officersof Fortune 500 companies in America.4) The question-naire measured variables within each of the six blocksoutlined in the conceptual framework, namely:

• how important portfolio management is thought tobe, and the reasons why;

• the types of portfolio methods used by the business;• management’s perceptions of, and satisfaction with,

the portfolio method(s) they use;

Representing approximately 80% of R&D spending in the U.S.

Figure 1. Portfolio conceptual framework.


• the performance of the business’s portfolio man-agement method;

• various characteristics—formality and explicit-ness—of the portfolio management approach em-ployed; and, finally,

• general demographics (industry, business size,etc.).

Most of the questions were close-ended (i.e., requirethe respondent to check a box or circle a number),although some open-ended questions were included tosolicit verbal comment. Many of the questions re-quired ratings on 1–5 Likert-type scales. The question-naire itself was carefully structured, exhaustively re-viewed by a committee of industry experts from theIRI, pre-tested on eight businesses via personal inter-views, and finalized.

A listing of businesses known to be active in prod-uct development in North America was prepared, in-cluding the IRI membership list as well as other pri-vate lists compiled by the authors. Although not thetotal population of all firms undertaking R&D andproduct development in the U.S., the list is a fairlyrepresentative one.

A respectable response rate of 25.8% was achievedfrom the mail survey, numbering 205 businesses. Thebreakdown of respondents by industry is as follows:

High technology 17.6%Processed materials 8.3%Industrial products 8.3%

Chemicals and advanced materials 28.3%Health care products 6.3%

Consumer goods 12.2%Others 19.0%

The corporations that took part in the survey arequite large, with average annual sales of $6.74 billion(U.S.). Similarly, the size of the business studiedwithin the corporation also was quite large, with av-erage annual sales of $1.89 billion. Note that the unitof analysis was a business, SBU, or division—a selfcontained business with its own R&D budget. Theaverage R&D spending across the sample of busi-nesses is 5.05% of sales, considerably higher than theU.S. national average.

There were no noticeable biases in the respondingbusinesses5 versus those in the original mailing (i.e,the responses reflect the population). Additionally,

there are no differences in the response patterns be-tween IRI and non-IRI members; thus, the two sam-ples are combined and results are presented together.Further, every effort was made to ensure that perfor-mance and satisfaction measures were objective ones:for example, multiple measures were used to heightenreliability; measures were reviewed by a panel ofexperts for their validity; and anchor phrases wereused to improve consistency across respondents.Nonetheless, there is always the possibility of haloeffects or “after-the-fact rationalization” in the case ofretrospective research studies such as this.

Results: Management Perceptions andSatisfaction Level

Management’s satisfaction with the portfolio manage-ment methods they are using was one of the primeareas of interest in the current study—for example, theperceived effectiveness, efficiency, realism, and userfriendliness of their portfolio approaches (the middlebox in Figure 1). Management perceptions and satis-faction levels were captured on nine different metrics(Figure 2).

On average, managements appears to beonly mar-ginally satisfiedwith their portfolio management ap-proaches. Note the mid-range, middle-of-the-roadscores achieved in Figure 2. The most positive facetsof the portfolio management methods include:

• the portfolio management process usedfits themanagement’s decision-making style, and

• the method is perceived as beingeffective (i.e.,makes the right decisions).

These elements are the best, but still the meanscores achieved here point to much room for improve-ment. The remainder of Figure 2 reveals much moredisturbing results. On average:

• The portfolio method used is not particularly effi-cient (somewhat laborious and wastes time);

• It is not especially realistic in capturing key facetsof the decision problem;

• The method is not particularly user friendly andeasy to use; and

• It is not well understood by senior management.

The three lowest scoring items in Figure 2 arenoteworthy. On average, businesses do not rate theirportfolio methods as excellent (rather, a mid-range,fairly mediocre rating is given); their method is notreally used to make go/kill decisions on projects; nor

Note: we use the term “business” rather than company, because thecompleted questionnaires describe only a single business or SBU within alarger corporation.


do they strongly recommend their portfolio approachto others . . . all in all, not a strong endorsement ofcurrently used portfolio approaches!

A large spread in satisfaction responses exists be-tween businesses, however (see the standard devia-tions in Figure 2). This range or spread in responsesunderscores thesubstantial differences in satisfaction:for example, about 10% or fewer businesses and theirmanagements arevery pleasedwith their portfoliomanagement approach (a score of 5 out of 5 on the sixmetrics), butthe great majority are not. For example,almost one-third of businesses surveyed rate their port-folio management approach as anything but excellent(a score or 1 or 2 on the five-point scale); and morethan one-third would clearly not recommend theirapproach to others! Major improvements to portfoliomanagement methods and their application are clearlyneeded in the case of many businesses.

Mapping the Satisfaction Scores

Not surprisingly, these nine satisfaction metrics orvariables are intercorrelated, some in a strong fashion.

Thus, factor analysis was undertaken to identify theunderlying dimensions or themes—the main dimen-sions of management satisfaction and perception oftheir portfolio management methods.6 Two main fac-tors emerged from the factor analysis: these two fac-tors capture well the original nine satisfaction metricsor variables and have face validity. Figure 3 shows thesatisfaction map, with the two factors as the X and Ydimensions, and factor loadings on these two dimen-sions or factors portrayed as vectors. Five of the ninesatisfaction metrics or variables had loadings in excessof 0.7 on at least one factor, and all had loadings ofmore than 0.5, thus permitting a straightforward inter-pretation of the two factors.

The two factors are:

Factor 1: overall quality rating, consisting of:

• The portfolio method is realistic, capturing keyfacets of the decision problem;

Principal component factor analysis; SPSSX routine; varimax rotation.The two-factor solution was chosen based on eigenvalues.1.0 and theScree test.

Figure 2. Perceptions and satisfaction with the portfolio management method.


• Management would highly recommend their port-folio method to others;

• The method is rated as excellent by management;• The portfolio method is truly used to make go/kill

decisions on projects;• The method is user friendly;• The portfolio method is understood by management

(also loads on factor 2 following); and• Management believes the method to be effec-

tive—makes the right decisions (also loads onfactor 2).

Factor 2: management fit, consisting of:

• The portfolio method fits management’s decision-making style;

• Management rates the method to be efficient—isnot laborious and does not waste time;

• They see it as effective (makes the right decisions;also loads on factor 1); and

• The method is understood by management (again,loads on factor 1).

Four Types or Clusters of Businesses

As might be expected, the 205 businesses are scatteredacross Figure 3, the X–Y map generated by the twofactors as axes. A review of the map reveals thatlogical clusters of businesses exist, however—for ex-ample, businesses with high quality and high manage-ment fit portfolio methods versus those with muchpoorer methods. Thus, it was of interest to identifythese different clusters, search for differences betweenthem, and, in so doing, gain more insights into theportfolio management methods and performance.

Cluster analysis was used to define these logicalgroupings of businesses in terms of these two dimen-sions of management perception.7 Four clusters ofbusinesses were identified (Figure 4). This clusteringsolution was validated by undertaking multiple dis-

The clustering routine used was SPSS for Windows, Release 6.0,K-Means Cluster Analysis. The four-cluster solution was elected based onboth discrimination and parsimony. This solution yielded the highestbetween-group explanation based on ANOVAs of cluster membershipversus the original two factors, and it produced a reasonable distribution ofcases across clusters.

Figure 3. Satisfaction map: loadings of factors on dimensions of satisfaction and management perception of portfolio managementmethods.


criminant analysis of cluster membership versus theoriginal nine variables used in the factor analysis. Thevalidation results were very positive, with 94.0% ofthe businesses correctly classified. Additionally, theSPSS macro routine DISCLASS was used to validatethe cluster solution (this is a jackknife-like unbiasedclassification method). Here, 93.4%% of the caseswere correctly classified, again suggesting that thefour cluster solution is quite robust.

The four clusters identified in the cluster analysiswere next characterized and labeled. Analyses of vari-ance (ANOVAs) of cluster membership versus theoriginal nine variables in the factor analysis yieldedmany strong and statistically significant differencesbetween clusters (Table 1). These ANOVAs, alongwith Duncan Multiple Range tests, led to the followingdescriptions of the four clusters (refer to Figure 4 andTable 1):

Cowboy Businesses:These businesses shoot fromthe hip when it comes to project selection andportfolio management. They are in the upper left

quadrant in Figure 4. They rely on a very poor-quality portfolio model or approach (as we shallsee later, actually not much of a model or systemat all!), but an approach that suits managementvery well. For example, as shown in Table 1,cowboy businesses indicate that their portfolioapproach is the opposite of excellent, the lowestof all businesses; nor would they recommendtheir approach to others, again the lowest of allfour business clusters. Moreover, their portfoliomodel, such as it is, is a rather simplistic one (theleast realistic of all clusters) and fails to captureimportant elements of the decision situation. Onthe positive side, management likes the approach:they view the portfolio method as efficient (thebest of the four clusters), and it certainly fitsmanagement’s decision-making style (tied forbest). Cowboys are the smallest cluster of busi-nesses on the satisfaction map, representing only12.1% of the sample. We call these businessescowboys simply because they have no real port-

Figure 4. Factor map displaying the four-cluster solution.


folio approach, they know it, and they like it thatway!

Crossroads Businesses:These businesses are theopposite of cowboy businesses and are found inthe lower right quadrant in Figure 4. They em-ploy a highly recommended, excellently rated,and very realistic portfolio method. But they areat a crossroads in the sense that management hasyet to fully embrace the method—it is perceivednot to fit management’s style (the lowest of allfour clusters); it is not perceived by managementto be particularly efficient or effective; and themethod is not well understood by management.We call these businesses crossroads, simply be-cause they face choices: they employ an appar-ently proficient approach to portfolio manage-ment, yet there is some resistance to the methodby management, a situation that must be cor-rected. Crossroads businesses account for 28.0%of the sample; hencem they are a fairly substan-tial group.

Duds: Dud businesses are what the name implies-. . . bad on all fronts. Of the four groups of busi-nesses, they fare the worst in terms of the per-ceived effectiveness of their method and its lackof fit with management’s decision style. More-over, their portfolio approach is perceived bymanagement to be inefficient—wastes time (tiedfor worst). Additionally, these businesses ratetheir portfolio approach as unrealistic, not usedby management, and not user friendly. Finally,dud businesses do not recommend their approachto others, and they rate it far from excellent.Fortunately, dud businesses are a relatively smallgroup, representing only 18.1% of the sample.

Benchmarks:Benchmarks are the “good” business-es—the ones held up as benchmarks or standardsagainst which to compare oneself and/or to em-ulate. They fare remarkably well across theboard. Their portfolio method scores the best interms of quality: it is rated the most realistic of allbusinesses; it comes highly recommended and israted as excellent (the best of all businesses); it isused by management to make go/kill decisions;and it is user friendly—the best of all four clus-ters (Table 1). The method also fits managementwell: it is perceived by management to be veryeffective (highest of all clusters) and is well un-derstood by management; and benchmark busi-nesses’ portfolio approaches fit management’sstyle and are perceived to be efficient in use (theydo not waste time), tied for best across the fourgroups. Benchmark businesses are also the larg-est cluster, representing 41.8% of the sample,thereby demonstrating that effective, quality port-folio approaches are not an elusive goal attainedby a small minority of businesses. Note, however,that the sample of firms is biased toward leadingR&D firms in America, which also might ex-plain, in part, the large size of the benchmarkcluster.

Portfolio Performance of the Four Types

What are the various performance results achieved bythe four types of businesses? Portfolio performancewas measured on six metrics, based largely on theperformance goals identified during the exploratorystudy (the far right box of Figure 1). These six per-

Table 1. Management Perceptions and Satisfaction with Portfolio Management Methods

Measures of ManagementPerception and Satisfaction

Cowboys(1)

Crossroads(2)

Duds(3)

Benchmarks(4)

Duncan MultipleRange Test*

It is a realistic method 1.68 3.45 2.24 3.78 4. 1,2,3; 2. 1,3; 3. 1Would recommend method to others 1.63 3.03 1.96 3.72 4. 1,2,3; 2. 1,3Rate method as excellent 2.00 2.88 2.30 3.78 4. 1,2,3; 2. 1,3Truly used to make go/kill decisions 2.13 2.96 2.12 3.55 4. 1,2,3; 2. 1,3It is user friendly 2.59 3.15 2.51 3.56 4. 1,2,3; 2. 1,3Fit management’s decision-making style 4.09 2.78 3.27 4.13 1,4. 2,3; 3. 2It is efficient 3.86 2.52 2.57 3.82 4. 1,2; 1. 2,3It is effective 3.27 2.94 2.57 4.01 4. 2,3; 3. 2Method is understood by management 2.54 2.49 2.21 3.97 4. 1,2,3

* Duncan Multiple Range Test, significant atp 5 .05.Mean perception/satisfaction scores on 1–5 scale, where 55 high and 15 low.To be read as ‘‘It is a realistic method’’ the Benchmarks were significantly different from the Cowboys, Crossroads and Duds, whereas the Crossroads weresignificantly different from the Cowboys and Duds, and finally the Cowboys were significantly different from the Duds.


formance goals for portfolio management are as fol-lows:

• having the right number of projects in the portfoliofor the resources available,

• avoiding pipeline gridlock in the portfolio—under-taking projects on time and in a time-efficient man-ner,

• having a portfolio of high-value projects (or maxi-mizing the value of the portfolio)—profitable, high-return projects with solid commercial prospects,

• having a balanced portfolio—long term versusshort term, high risk versus low risk, and acrossmarkets and technologies,

• having a portfolio of projects that are aligned withthe business’s strategy, and

• having a portfolio whose spending breakdown mir-rors the business’s strategy and strategic priorities.

Portfolio performance gauged on these six metricsis very clearly and strongly linked to managements’perception and satisfaction with their portfolio tools.Figure 5 shows the same two-factor map as before, butthis time with the six performance metrics shown as

vectors (the X and Y coordinates of each vector are thecorrelation coefficients between each performancemetric and the two perception factors; thus, the lengthand direction of each vector denote the loadings).

Table 2 shows how the sample of businesses didoverall when gauged on these six metrics and specif-ically how each of the four clusters of businessesperformed:

1. Not surprisingly, the benchmark businesses scoretop marks in terms of performance, significantlybetter than any of the other three clusters and on allsix performance metrics (based on ANOVAs andDuncan range tests; see Table 2). Specifically . . .

• Benchmark firms end up with a portfolio ofvery-high-value projects—profitable, high-return projectswith solid commercial prospects, the best of all fourclusters;

• Strategically, these businesses’ portfolios are alsothe best—projects in benchmark businesses’ port-folios are aligned with the business strategyandobjectives, while thespending breakdownacross

Figure 5. Two-factor map with performance metrics displayed as vectors.


projects in these portfoliosmirrors the businessstrategy;

• The portfolio has anexcellent balance of projectsinterms of long term versus short term, high riskversus low risk, across markets and technologies,and so on; and

• These benchmark businesses portfolios contain anappropriate number of projects—there are the rightnumber of projects given the businesses resources;as a result, projects are done on time (no portfolioor pipeline gridlock).

All in all, this is a very enviable portfolio performance.

2. In contrast, the dud businesses—those with a poor-quality portfolio method and that management per-ceived as not well suited to them—do not performwell at all. They achieve poor portfolio perfor-mance on the six metrics shown in Table 2. Simi-larly, cowboys perform poorly and in particularachieve a very poor balance of projects.

3. Crossroads businesses, surprisingly, perform well:that is, they fare second best, next to benchmarkbusinesses, but still significantly lower.

The message is that where a business is located onthe perception/satisfaction map is very closed tied tothe ultimate performance of the portfolio, and in theexpected way. Second, certain businesses, namely,those we labeled benchmarks, are the clear winners interms of portfolio performance results. Their practicesand approaches merit a closer look. Next, using ahigh-quality portfolio method and one that fits man-agement’s style seem to be the two key dimensionsthat drive portfolio performance. But the most impor-

tant of these is using a highly rated method, whereasmanagement fit, although connected to performance,does not have near the same impact. This last conclu-sion is based on the loadings of performance metrics inFigure 5 and the fact that crossroad businesses, al-though relying on portfolio methods that lack manage-ment fit, still perform quite well.

Characteristics of the Portfolio MethodEmployed

What types of portfolio approaches are used by thebenchmark businesses—the ones that achieve suchpositive portfolio performance? And how are thesemethods different than the other three clusters of busi-nesses? Various characteristics of the portfolio meth-ods used were measured (left boxes in Figure 1), andtheir impact was assessed.

What stands out in an analysis of the various char-acteristics of portfolio methods used is that benchmarkbusinesses use muchmore formal and explicit portfo-lio approachesthan do the other firms. Table 3 showsthe large and statistically significant differences be-tween business clusters, and in particular, how bench-mark businesses are distinguished from the rest interms of their portfolio practices:

• Benchmark businesses have anestablished, explicitmethodfor portfolio management, much more sothan for other businesses. Cowboys and dud busi-nesses rate very low here.

• Benchmark businesses usemuch more formal ap-proachesto portfolio management; cowboy busi-nesses use the least formal, indeed almost no pro-cess at all!

Table 2. Performance Results Achieved by Portfolios of the Four Business Types

Portfolio Performance Measure or Metric Cowboys Crossroads Duds Benchmarks

The right number of projects for the resources available 2.362 2.691 2.092 3.1511No gridlock in the portfolio—projects done on time 2.662 2.961 2.402 3.3011Portfolio contains high-value projects—profitable, high-return,

solid commercial prospects 3.182 3.601 3.032 3.9311Portfolio has an excellent balance of projects (long term

versus short term, risk, etc.) 1.9522 3.021 2.482 3.4111Projects are aligned with the business’s strategy 3.502 3.772 3.402 4.2711Spending breakdown of projects in portfolio reflects the

business’s strategy 2.952 3.322 3.062 4.1011

Mean performance scores on 1–5 scale, where 55 high and 15 low.The four clusters of businesses have significantly different portfolio performance results on all six performance metrics (ANOVAs significant at the .0001level). Based on Duncan Multiple Range Test (p , .05).11 Indicates top performance (or tied for top) on that metric;1 indicates second best;22 indicates worse performance (or tied for worst);2 indicatessecond worst.


• Portfolio methods used by benchmarks featureveryclear and well-defined rules and proceduresforportfolio management. Cowboy businesses rate dis-mally here.

• Benchmarks consistently apply their portfoliomethod, for example, toall appropriate projects;cowboys score also very low here, followed by dudbusinesses.

• The portfolio method used by benchmark busi-nesses treats all projects as a portfolio—considersall projects togetherand compares them againsteach other.

• Finally, managementbuys intothe portfolio meth-ods used at benchmark businesses much more so.

The message is this: A formal, explicit portfoliomanagement method yields better portfolio results...much better than an informal, undefined process.There is now solid evidence that senior managementmust adopt and embrace portfolio management as amanagement principle. Such explicit portfolio meth-ods should have clear and well-defined rules and pro-cedures (for example, how projects will be selectedand prioritized, how resources will be allocated, etc).Effective portfolio management methods should beconsistently applied across all appropriate projects,treat all projects together (comparing them againsteach other), and management must buy into the pro-cess.

What Specific Portfolio Techniques Are Used?

Popularity of the Methods

No one portfolio method has a monopoly in the fieldof portfolio management. Virtually every business in

the survey uses multiple methods or techniques forportfolio management. These techniques, in rank orderof popularity, are as follows:

• Financial methods, where profitability, return, pay-back, or economic value of the project is deter-mined, and projects are judged and rank ordered onthis criterion: 77.3% of businesses use this ap-proach.

• Business strategy methods, where the business’sstrategy is the basis for allocating money for dif-ferent types of projects. For example, having de-cided strategy, different buckets or envelopes ofmoney for different project types are established,and projects are rank ordered within buckets [6]:64.8% of businesses use a strategic approach.

• Bubble diagrams, where projects are plotted on anX–Y portfolio map (the X–Y axes are various di-mensions of interest, such as reward versus proba-bility of success [19]): 40.6% of businesses employbubble diagrams.

• Scoring models, where projects are rated or scoredon a number of criteria on scales, then the ratingsare added to yield a project score (this score thenbecomes the basis for making prioritizing or go/killdecisions): 37.9% of businesses employ scoringmodels for portfolio management.

• Checklists, where projects are evaluated via a list ofyes/no questions (and each project must achieve allor a certain percentageof “yes” answers): only20.9% of businesses use checklists for project se-lection and portfolio management.

The percentages cited add up to well over 100%(241.5%), suggesting that, on average, the typicalbusiness relies on about 2.4 different portfolio man-

Table 3. Explicitness and Formality of the Portfolio Management Methods Used by the Five Clusters ofBusinesses

Measures of Satisfaction andManagement Perception Cowboys Crossroads Duds Benchmarks

Established, explicit method 2.2222 3.451 2.932 3.8611Formality of method 2.2022 3.481 3.161 3.161Method has clearly defined rules and procedures 1.9022 3.211 2.632 3.501Method is consistently applied to all appropriate projects 1.772 3.001 2.242 3.4311All projects are considered together (e.g., compares

them against each other) 2.092 3.001 2.392 3.5311Management buys into the portfolio maanagement

method (e.g., via actions) 2.182 3.151 2.692 3.8211

Mean values on 1–5 scale, where 55 high and 15 low.The four clusters of businesses are significantly different in terms of these six measures of the satisfaction and perceptions of the portfolio method used(ANOVAs significant at the .0001 level). Based on Duncan Multiple Range Test (p , .05).11 Indicates top score (or tied for top) on that characteristic;1 indicates second highest score;22 indicates lowest score (or tied for lowest);2 indicatessecond lowest score.


agement methods. Using multiple methods—the no-tion of a hybrid approach to portfolio management—appears to be the right answer, however. Cowboybusinesses, for example, rely on the fewest number ofportfolio methods (on average, 1.8 methods per busi-ness), significantly less than benchmark businesses(2.5 methods) and crossroads firms (2.6 methods).

Multiple Methods: Popularity by Cluster

The combinations of portfolio methods that yield thebest results were investigated. Table 4 shows the re-sults. Here:

• The majority of both benchmark businesses(56.6%) and crossroads firms (54.9%) use both astrategic and a financial approach for portfoliomanagement (significantly more so). In contrast,only 36.4% of cowboys uses these two methodstogether.

• A strategic approachcombined with abubble dia-gram is the portfolio combination relied on bysignificantly more benchmark and crossroads busi-nesses (28.9% and 33.3%, respectively).

• Significantly more benchmark businesses rely onthree portfolio methods in conjunction—a financialmethod, a strategic approach, and ascoring model(21.1% of benchmarks). The other three clusters ofbusinesses do so much less frequently.

The Link Between Dominant Method Used andPortfolio Performance

Because of the multiple methods used by businesses, itproves difficult to discern a relationship betweenanyone portfolio technique employedand the four clustersof firms, and ultimately the link to portfolio perfor-mance results. In an attempt to overcome this problem,managers were asked to indicate which method wasthedominant method used. Figure 6 shows the break-down. Not surprisingly, the most dominant method is

the financial approach (40.4% of businesses), followedby strategic approaches and scoring models. But nosignificant differences were uncovered in use of aspecific dominant method by the four clusters. How-ever, there was a distinct link between ultimate per-formance results and which portfolio method wasdominant (Table 5):

• Financial methods of portfolio management (e.g.,using a financial measure or index to rate and rankprojects) yield thepoorest performance resultswhen gauged on three important metrics: poorvalue projects in the portfolio, too many projects forthe resources available, and projects not done ontime (gridlock in the portfolio).

• In contrast, strategic approaches (letting the busi-ness’s strategy decide resource allocation and evenchoice of projects) perform the best (significantlyso) on these same three metrics: project value,number of projects, and time to market.

• Scoring models produce positive performance andfare the best (significantly so) in terms of yieldinga portfolio containing high-value projects—profit-able, high-return projects with solid economic pros-pects (statistically tied with strategic approaches,but even a little better).

It is ironic that financial models, presumably chosento select higher-return, higher-profit projects, yieldprecisely the opposite—a portfolio with the worst eco-nomic value. Financial approaches fare the worse on 5of 6 of the portfolio performance metrics shown inTable 5. Scoring models and strategic approaches dovery well, yielding the best or second best results on 5of the 6 performance metrics. Finally, bubble diagramsperform moderately well on some performance met-rics, but excel in terms of yielding a balanced portfolio(tied for best) and strategic alignment (best, but notsignificantly so).

Table 4. Impact of Combined Portfolio Methods on Clusters

Methods Combined Cowboys Crossroads Duds BenchmarksDuncan Multiple

Range Test*

Strategic and financial 36.4% 54.9% 45.5% 56.6% Benchmarks. CowboysStrategic and bubble diagrams 17.3% 33.3% 12.1% 28.9% Crossroads and Benchmarks. Duds

Strategic, financial, and scoring model 13.6% 15.7% 18.2% 21.1%Benchmarks. Duds, Cowboys,

and Crossroads

To be read as: Cowboys use a combined strategic and financial portfolio method 36.4% of the time.* Significant differences between clusters based on ANOVAs and Duncan Multiple Range Tests (p 5 .05).


Importance of Portfolio Methods

Although portfolio management recently has been her-alded as one of the most important facets of manage-ment leadership [19], it is clear that not every seniormanager has received the message. How importantportfolio management was perceived to be by varioussenior managements was gauged in the study. Theresults are provocative.

Portfolio management is a critical task in the busi-ness, at least according to the majority of senior man-agements. Table 6 provides the mean importancescores for the four clusters of businesses, broken downby executive function. Not surprisingly, senior man-agements in technology (CTOs, VPs of R&D, etc.)give portfolio management the highest importance rat-ings of all functions; they are followed by seniormanagement overall and then by corporate executives(all three management groups score in excess of 4 of5, where 55 critically important). Note that bothmarketing/sales management and operations/produc-tion management rate portfolio management as less

important. The fact that marketing/sales senior peopleare not perceived to have bought into the concept andimportance of portfolio management represents a po-tential deficiency in the widespread acceptance andimplementation of portfolio management, especiallygiven the vital role that marketing/sales resources playin the business’s total new product effort.

Here again, benchmark businesses are distinguishedfrom the rest. Portfolio management is accorded muchgreater importance in benchmark businesses than inthe other businesses (Table 6). This is true across theboard, regardless of the functional area. Crossroadsbusinesses come second: in these businesses, seniormanagement and technology management view port-folio management as vital. In contrast, corporate ex-ecutives and senior management in cowboy businessesplace very little importance on portfolio management(the lowest of all four clusters), whereas technologymanagement, marketing/sales management, and oper-ations/production managements in dud businesses seeportfolio management as relatively unimportant.

Figure 6. Dominant portfolio method employed.

Table 5. Relationships Between Dominant Methods and Portfolio Performance

Performance MetricFinancialMethods

StrategicMethods

ScoringModel

BubbleDiagrams

Methods ThatAre Better

Projects are aligned with business’s objectives 3.74 4.08 3.95 4.11 —Portfolio contains very-high-value projects 3.37 3.77 3.82 3.70 Scoring and Strategic. FinancialSpending reflects the business’s strategy 3.50 3.72 3.59 3.00 —Projects are done on time—no gridlock 2.79 3.22 3.13 2.90 Strategic. FinancialPrortfolio has good balance of projects 2.80 3.08 3.20 3.20 —Portfolio has right number of projects 2.50 2.93 2.70 2.50 Strategic. Financial

Ratings are 1–5 mean scores for each method, when used as dominant portfolio method where, 15 poor and 55 excellent.Checklist methods are used too infrequently to include here. Last column is based on Duncan Multiple Range Test (p 5 .05).


The message is that theimportance that manage-ment accords portfolio managementis directly relatedto the end result—to the explicitness and formality ofthe portfolio management process, to management’sperception and satisfaction with the outcome, and evento the performance of the portfolio itself.

Some of the reasons why portfolio management isthought to be important were gauged. Table 7 showsthe results overall and then broken down by the fourclusters of businesses. The top four reasons are virtu-ally tied in importance:

• Competitive position,because portfolio manage-ment and project selection are vital to maintainingthe business’s competitive position.

• Efficient resource allocation,because developmentresources—people, time, and money—are veryscarce, and the business does not want to wastethese on the wrong projects.

• Strategic,because project selection is closely linkedto the business’s strategy.

• Focus,because the business wants to be focused—not do too many projects for the limited resourcesavailable.

When it comes to a breakdown of these reasons bybusiness cluster, again the familiar pattern is evident.Benchmark businesses score higher than the rest on 5of the 6 reasons for the importance of portfolio man-agement. In particular, benchmark businesses are sig-nificantly higher than the other three clusters on thestrategic dimension—portfolio management is linkedto strategy, and tied for highest on another three ele-ments (Table 7). Crossroads businesses are in secondplace on most elements of importance. Only on onedimension—strategy begins when you start spendingmoney—are there no significant difference betweenclusters.

Table 6. Importance of Portfolio Management by Functional Area

Perceived Importance ofPortfolio Management by

Cowboys(1)

Crossroads(2)

Duds(3)

Benchmarks(4)

MeanValue

Significance(ANOVA)

Corporate executives 3.00 3.57 3.34 3.73 3.52 4. 1(.05)

Senior management in the business 3.04 3.96 3.45 3.90 3.74 2, 4. 1, 3(.001)

Technology management(e.g., CTOs, VPs, R&D)

3.80 4.21 3.78 4.25 4.10 4. 3(.05)

Marketing/sales management(e.g., VP marketing)

2.76 3.15 2.72 3.25 3.07 4. 3(.10)

Operations/production management(e.g., VP operations)

2.23 2.66 2.21 2.75 2.56 4. 3(.05)

Mean importance values on 1–5 scale; where 55 critical importance and 15 not too important.

Table 7. Reasons Why Portfolio Management is Important Linked to Cluster Membership

Reasons Why Portfolio ManagementIs Important

Cowboys(1)

Crossroads(2)

Duds(3)

Benchmarks(4)

MeanValue

Significance(ANOVA)

Project selection is closely linked to business strategy 3.54 4.07 3.78 4.42 4.10 4,2. 1,3(.0001)

Strategy begins when you start spending money—resource allocation is how strategy is implemented

3.31 3.58 3.21 3.61 3.49 NS

Project selection is important to maintaining ourcompetitive position

3.95 4.43 4.03 4.44 4.30 4,2. 1,3(.01)

We want to be focused—not do too many projectsfor the resources we have available

3.50 4.31 3.75 4.21 4.07 4,2. 1,3(.002)

Our new product resources are very scarce, and wedo not want to waste then on the wrong projects

3.81 4.33 3.84 4.32 4.18 4,2. 1,3(.02)

It is important to have the right balance of projects 3.04 4.00 3.54 4.00 3.80 4,2. 1,3(.001)

Mean importance values on 1–5 scale, where 55 a major reason and 15 not a reason.The four clusters of businesses are significantly different in terms of (5 of the 6 reasons) why management thinks that portfolio management is important.Based on Duncan Multiple Range Tests (p , .05).


Conclusions and Implications forManagement

The research has identified which portfolio manage-ment methods are used and their relative popularities.Financial models are used most often, both overall andas the dominant method, but theydo not yieldthe bestresults. They produce portfolios with poor-valueprojects, too many projects for the resources available,and gridlock in the pipeline. Strategic approaches fol-lowed by scoring models are next in popularity; theytend to produce much better portfolios in terms of thevarious performance metrics.

Four clusters of businesses were identified in termsof where they were located on a perception/satisfac-tion map. These are as follows:

• Benchmarks, a large group of businesses (41.8% ofthe businesses), whose portfolio methods are ratedas high quality and they fit management well.

• Cowboy businesses, which rely on an informal (orno) method to select their portfolio—shoot from thehip—but this fits management’s style well.

• Crossroads businesses, which employ a well-rated,high-quality portfolio approach, but it does notseem to fit management well . . . management seesit as inefficient and ineffective, and really does notunderstand the method.

• Duds rate their portfolio approach poor on justabout every metric.

Benchmark firms are worth taking a much closerlook at. After all, they are the ones to emulate. Man-agement scores their portfolio approaches better thanthe other businesses: they rate the portfolio methods asexcellent and would recommend them to others; themethods are more realistic; they are really used tomake go/kill decisions; and they are user friendly.Additionally, the methods are perceived by manage-ment to be both effective and efficient, and the meth-ods are well understood by management. The goodnews continues: benchmark businesses also achievethe best portfolio results. Their portfolios have the bestvalue projects (economic value to the firm) andachieve the best strategic alignment (projects fit thebusiness’s strategy, and spending mirrors strategic pri-orities). Their portfolios are rated best in terms ofbalance of projects, and there is the right number ofprojects for the resources . . . nogridlock. All in all,these benchmark businesses are to be admired forproficient portfolio management.

What distinguishes these benchmark businessesfrom the rest?

• First, managements in benchmark companies viewportfolio management asvery important. This istrue across the board regardless of functional area,with benchmark businesses scoring significantlyhigher than other and lower performing businesses.

• Second, benchmark businesses have anestablished,explicit, and formal methodfor portfolio manage-ment. The method they use features very clear andwell-defined rulesand procedures for portfoliomanagement; these businessesconsistently applytheir portfolio methods to all appropriate projects,they treatall projects togetheras a portfolio, and,finally, management buys intothe method. In con-trast, lower performing businesses tended to lack anexplicit, formal, well-defined, consistently appliedportfolio method.

• Third, benchmarks tend to usemultiple portfoliomethodsmore so than other and lower performingbusinesses. Note that, on average, all businesses usemultiple methods, but benchmarks do so evenmore: strategic and financial approaches; strategicapproaches combined with bubble diagrams; andfinancial, strategic, and scoring models together.

One more conclusion: the quality of the portfoliomethod appears to have much more impact on perfor-mance results than whether or not the method fitsmanagement’s style. Recall that two underlying di-mensions were uncovered that define the perception/satisfaction map; however, one of these, namely, qual-ity of the portfolio method, dominated. The message isthis: if you have implemented a solid, high-qualityportfolio process but continue to see management re-sistance, do not give up. This situation yield relativepositive results, even if top management does nottotally buy into the process. Obviously the best situa-tion is where the process fits management (there is buyin) and the portfolio method is a high-quality one. Butsecond best is having a good portfolio process—thelocation occupied by crossroads businesses.

Here are some possiblemanagement actionsthatemerge from the research results.

First, try to assess where your business might belocated on the perception/satisfaction map (Figure 4).Imagine that your business had taken part in the study,and rate yourself on the nine questions in Figures 2and 3 to determine your location.

If you are located in the enviable top right quadrantin Figure 3, along with benchmark businesses, you can


take some pride in your portfolio approach. If you aretypical, chances are that, besides having a high-qualityportfolio method and one that fits management well,your portfolio results are very positive. For example,your portfolio should contain . . .

• high economic value projects (high return on in-vestment, solid NPVs, and good financial pros-pects),

• the right balance of projects (long term versus shortterm, high risk versus low risk, and so on), and

• projects that are strategically aligned with yourbusiness’s strategy.

Moreover, your portfolio should . . .

• have a spending breakdown that reflects strategicpriorities of your business,

• have the right number of projects for your limitedresources, and

• be free from pipeline gridlock—projects done ontime.

Second, if you are not one of these envied bench-mark firms, then take steps to move toward that quad-rant. Here are some specific actions you should con-sider:

1. Recognize that portfolio management is vital tonew product success. And challenge your busi-ness’s leadership team to recognize its importancetoo. If your senior people have not yet heard themessage, emphasize the importance of portfoliomanagement for the reasons highlighted by man-agements in our study (and which were outlined inthis article), namely: Portfolio management is crit-ical because . . .

• portfolio management and picking the right newproduct projects is vital to maintaining your busi-ness’s competitive position,

• efficient resource allocation is essential (your re-sources are scarce and must be devoted to the rightprojects; you cannot afford to dissipate them on thewrong projects),

• project selection is closely linked to your business’sstrategy, and

• your business must be focused—not do too manyprojects for the resources you have available.

2. Move toward a formal, articulated, explicit, andconsistently applied portfolio management ap-proach in your business. The mere fact that com-

panies with formal portfolio methods seem to dobetter—regardless of the method—is encouraging.At least recognizing the need for formal portfoliomanagement appears to be a step in the right direc-tion.

3. Next, as you design your portfolio managementprocess, recall the intermediate metrics—the per-ception and satisfaction ones—that were sostrongly linked to ultimate performance. For exam-ple, strive for a portfolio management method thatis a high-quality, proficient method and, at thesame time, fits the management style of your busi-ness. That is, strive for a method that scores well onthe following items:

• is realistic—captures key facets of the decisionsituation,

• is truly used to make go/kill decisions on projects,and

• is effective—yields the right decisions,

and, at the same time . . .

• is user friendly,• is efficient—does not waste time,• is easily understood by management, and• fits management’s decision-making style.

This is a difficult balancing act, according to managersinterviewed: Finding one method that rates well on allseven of these characteristics is a challenge!

4. Thus, consider multiple portfolio methods—a hy-brid approach. No one method seems to provide theuniversal answer here. Benchmark firms employedalmost three methods per business, on average. Ourresults suggest a combination of:

• Financial methods,such as using NPV, IRR, or theProductivity Index. We suggest a financial ap-proach, not that it yields the best results, but simplybecause it is so popular (and someone at the top ofyour organization is certain to demand that projectsbe rank ordered according to financial value to thecorporation!).

• Strategic approaches,where the business’s strategydetermines buckets of money or resources for dif-ferent types of projects, and projects are selectedbecause of their strategic importance. We recom-mend such an approach partly because it makesintuitive sense, partly because it yields positiveresults, and also because the method is quite pop-ular.


• Scoring models, where all projects are rated onmultiple criteria, and projects are ranked accordingto the resulting project scores. This approach is lesspopular but yields surprisingly good performanceresults, especially in terms of producing a portfolioof high-value projects. You cannot ignore a scoringmodel approach!

• Bubble diagrams, where projects are plotted onX–Y plots on a variety of parameters. These meth-ods we recommend because they produce goodresults in terms of portfolio balance and strategicalignment. Besides, a picture is worth a thousandwords.

Effective portfolio management in new product andR&D management remains an elusive goal. Witnessthe less than enthusiastic ratings that managementaccord their portfolio approaches. But portfolio man-agement is essential to winning at new products. With-out an effective portfolio management process inplace, the business suffers many evils: poor-qualityprojects, too many short-term and lower-risk projects,too many projects for the resources at hand, ultimatelyresulting in pipeline gridlock, and an investment port-folio that does not mirror the strategic priorities of thebusiness. Thus, the quest for the right portfolio man-agement method must continue: the stakes are too highand the challenge is too important to ignore.

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