product portfolio risk management

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A view of how to assess risks in product portfolio based on risk and return models used with financial investment vehicles

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  • 1. Assessing and Managing Risks of Product Portfolios Ruedi Klein, NPDP, PMP Product Manager Alcatel-Lucent
  • 2. Agenda 1. Efficient Frontier of New Product Portfolios 2. Portfolio Risk Assessments 3. Integration of Portfolio and Project Risk Management 2 | Assessing and Managing Risks of Product Portfolios | May 2008 All Rights Reserved Alcatel-Lucent 2007
  • 3. State of the Mobility Market Double digit growth is a thing of the past Market Growth Growth areas for voice are China and India In NAR, declining voice ARPU will be countered with blended offers driving data usage Data adoption remains a major opportunity Beginning to see data demand in enterprises Market Trends Driven by lifestyle applications for mass market IMS enables operators to capture these segments with blended services 3G alternatives continue to generate interest Technologies EV-DO has first to market advantage Wi-Fi and WiMAX distract the DO market Cost control and revenue growth still top priority Operator Challenges Capex and Opex efficiency still key in maturing markets Squeezing value from embedded base while moving to Packet Market consolidation Landscape Challenges Non-traditional competitors entering to own telecom wallet Legislative impacts 3 | Assessing and Managing Risks of Product Portfolios | May 2008 All Rights Reserved Alcatel-Lucent 2007
  • 4. 1 Efficient Frontier of New Product Portfolios 4 | Assessing and Managing Risks of Product Portfolios | May 2008 All Rights Reserved Alcatel-Lucent 2007
  • 5. What is Product Portfolio Management? Portfolio Management A method to compare the attractiveness of alternative investments. Unknown Product Portfolio Management Portfolio management is a dynamic decision process, whereby a businesss list of active new product (and R&D) projects is constantly updated and revised. In this process, new projects are evaluated, selected, and prioritized; existing projects may be accelerated, killed, or deprioritized; and resources are allocated and reallocated to the active projects. Bob Cooper 5 | Assessing and Managing Risks of Product Portfolios | May 2008 All Rights Reserved Alcatel-Lucent 2007
  • 6. Objectives of Portfolio Management (*) 1. Maximization of Value Allocate Resources to maximize the Value of the Portfolio in terms of some Company Objective 2. Balance Achieve a balance of Projects in terms of a Number of Parameters 3. Strategic Direction Portfolio is strategically aligned and truly reflects the Businesss Strategy Strategic Projects A project is strategic, when the money will come outside the planning horizon. In business case lingo the project has a Terminal Value. (*) Cooper, Robert G.; Edgett, Scott J.; Kleinschmidt, Elko J. Portfolio Management for New Products, 1998, Addison-Wesley 6 | Assessing and Managing Risks of Product Portfolios | May 2008 All Rights Reserved Alcatel-Lucent 2007
  • 7. Two Asset Investment Decision R2 A2 = -1 =0 = 1 R1 A1 Return Risk X1 X2 7 | Assessing and Managing Risks of Product Portfolios | May 2008 All Rights Reserved Alcatel-Lucent 2007
  • 8. Varying Investment Levels, result in varying Rate of Returns New Product Return E(rG) Asset Return Return WACC Investment Level New Products are better evaluated as Projects, not as ongoing Businesses 8 | Assessing and Managing Risks of Product Portfolios | May 2008 All Rights Reserved Alcatel-Lucent 2007
  • 9. Comparing Product to Asset Investments R2 P2 = -1 Threats to Independence =0 = 1 1.Markets 2.Product Lines R1 3.Technology or P1 Platforms Return 4.Resources 5.Project Types Risk X1 X2 Put all your eggs in one basket and watch that basket! & Diversification is a hedge against stupidity! Warren Buffet 9 | Assessing and Managing Risks of Product Portfolios | May 2008 All Rights Reserved Alcatel-Lucent 2007
  • 10. Efficient Frontier for New Products (*) Two Portfolios E(rG) O2 O1 Individual Projects Return rf = WACC Efficient Frontier Risk G (*) Efficient Portfolios were first mentioned in H.M. Markowitz, Portfolio Selection, Journal of Finance, 7:77-91 (March 1952) 10 | Assessing and Man