the pdma handbook of new product development || new product portfolio planning and management

46

CHAPTER THREE

NEW PRODUCT PORTFOLIO PLANNINGAND MANAGEMENT

Marvin L. Patterson

3.1 Introduction

Business leaders have two overarching objectives for their new product pro-grams. First, they expect their investments in new products to create growth

for the enterprise. Increases in revenue and profits created by a steady streamof new products are needed to fund growth of the business. Second, businessleaders expect their new product efforts to increase the competitive strength ofthe firm, both now and in the future.

An effective new product program is, however, the result of many factors.New technology and R&D inventiveness are important, but these alone cannotensure business success. Effective portfolio-planning and management activitiesare also needed to: (1) aim the new product program at a profitable and suitablefuture, and (2) ensure the continuing effectiveness of current projects.

New product expenses are often the largest investments that a businessenterprise makes and, as with any investment, they should be managed care-fully—with due diligence. Yet, in many firms, new product activities get toolittle mind share from business leaders. The discussion that follows will outlinekey activities related to the effective tracking and management of these invest-ments, which the business leadership team must own and carry out effectively.

The PDMA Handbook of New Product Development, Second Edition. Edited by Kenneth B. KahnCopyright © 2005 John Wiley & Sons, Inc.

New Product Portfolio Planning and Management 47

FIGURE 3.1 PORTFOLIO PLANNING & MANAGEMENT WITHRELATED ACTIVITIES.

Strategic Planning

OpportunityScanning

TechnologyScanning

CapabilityDevelopment

OtherDemands

Portfolio Planning

PortfolioManagement

Portfolio Assessment

Portfolio ReviewResource

Management

Technology Roadmap Product Roadmap

Prog. Rvw.Process Other

PortfolioProcesses

InvestmentsNP Progs.

Other Efforts

3.2 Portfolio Planning and Management—A Useful Framework

An effective new product program is essentially a system for rapidly gatheringand assimilating information and then systemically adding value to it until itdescribes how to sell, make, use, and support an exciting new product or ser-vice (Patterson, 1999). From another perspective: ‘‘The ability to learn fasterthan your competitors may be the only sustainable competitive advantage’’(De Geus, 1988).

The portfolio planning and management framework depicted in Figure 3.1is one of the key learning systems in the business enterprise. Business leadersneed to lead, carry out, track, and manage this essential system.

This framework includes new product portfolio activities, shown inside ofthe dashed boundary, as well as other support functions and related efforts

48 The PDMA Handbook of New Product Development

shown outside this boundary as context. The portfolio work that concerns thebusiness leadership team includes a strategic process, labeled ‘‘portfolio plan-ning,’’ and several tactical tasks under the heading of portfolio management.Tactical tasks include portfolio assessment, resource management, and portfolioreview.

The overarching objective of this system is to transform the business strat-egy of a company into effective and specific new product investments. To beeffective, these investments must be directed at profitable and suitable businessopportunities, and they must involve competitive, perhaps newly emerging,technologies and practices. When added together, the portfolio of investmentsthe firm makes in new products and services should move the enterprise fromits present state into a strategically desirable future. Each of these investmentsmust result in a well-planned and managed project activity that first defines themost competitive response to an opportunity and then quickly and effectivelytransforms this definition into a deliverable product or service.

A second overall objective of this system is to provide strategic guidance tothe firm’s various capability development activities. These activities might in-clude: (1) hiring new employees, (2) training and development for the existingworkforce, (3) gaining new tools, (4) developing new business processes, (5) add-ing new manufacturing abilities, or (6) developing new strategic partnerships.Achieving this second objective will ensure that the firm’s capacity to competeimproves steadily over time.

The sections that follow describe each of the portfolio activities. A coupleof definitions will be useful in this discussion.

• Portfolio: The set of R&D projects, technology, and new product efforts cur-rently funded and underway.

• Roadmap: A ‘‘moving belt’’ representation of future products or technologiesversus time, starting now and extending into the future. Included in a road-map are projects in the current portfolio, as well as unfunded efforts envi-sioned for the future.

In portfolio planning, members of the business leadership team in a companyor business unit should own creation and execution of a portfolio planningprocess. The objective of this process is to create a strategic plan for new prod-ucts and technologies that is responsive to the firm’s overall business strategy.This plan sets the desired direction for future product and technology invest-ments (Cooper, 1998). The financial future of the enterprise is, to a large degree,fixed by this process. Key outputs from this activity include: (1) a roadmap offuture products and services, (2) a roadmap for future technology efforts, and


(3) high-quality decisions on whether or not to add candidate new product ortechnology efforts to the current portfolio (Wilyard, 1987). Other useful resultsmight include business insights such as market segmentation models andmarket-related business cycle understanding.

Each company needs to design its own portfolio planning process to fit thenature of its business and to compliment the relationships the firm typicallypreserves with its customers, key vendors and strategic partners. In generalterms, however, each portfolio planning process needs to gather and analyzeinternal and external information related to markets and technologies of interestto the firm. Information of interest will include: (1) conditions and trends incurrent markets, (2) factors related to emerging markets, (3) the state and actionsof competing firms, (4) local, national, and global business conditions andtrends, (5) trends and other factors related to technologies of current interest,and (6) emerging technologies and technical trends that might be of interest inthe future. Ideally, all members of the firm’s business leadership team, from theCEO or business unit general manager on down to first line managers, willtake part in gathering and processing this information. Members of the teamat each level will see issues from different and valuable perspectives. Effectiveintegration of these multiple perspectives leads to stronger product and tech-nology strategies.

Another important element of most portfolio planning processes is the in-tegration of market and technology perspectives. Primary responsibility for theproduct roadmap will belong to the marketing function, whereas technologyroadmap planning will belong to the R&D function. At various points in theprocess, these two functions should come together to share and integrate whatthey have learned. The resulting product roadmap will thus be responsive toR&D’s understanding of technology developments, and technology strategieswill reflect the firm’s knowledge of current and future market factors.

A third common attribute of portfolio planning is a periodic review andapproval of the resulting product and technology roadmaps by top manage-ment. Depending on circumstances this might be done as often as once a quar-ter, or only once a fiscal year.

Portfolio management is a set of activities that includes portfolio assessment,resource management, and portfolio review.

The primary objective of the portfolio assessment activity is to ensure thatthe current set of new product and technology investments: (1) is likely to pro-vide anticipated returns, (2) moves the firm along desired strategic directions,and (3) continues to reflect the best possible use of available resources in viewof changing conditions. A second objective of this activity is to evaluate thelearning rate of the enterprise for relevant market and technology issues.


Depending on the results of this evaluation, business leaders may decide tofocus a small fraction of available resources on specific investigation activitiesto ensure that the enterprise is learning faster than its competitors in key areas.These decisions would trigger projects in either the Opportunity Scanning orTechnology Scanning functions outside the dashed boundary in Figure 3.1.

A subset of the business leadership team does the portfolio assessment.Working together as a portfolio management team, this group should periodi-cally meet, perhaps once a month, to perform this evaluation. In this meetingthey should share, integrate, and bring to bear what they have individuallylearned about external and internal circumstances relevant to the current port-folio. They should consider each project in the portfolio and compare its currentstate: (1) to what was promised during its first proposal, and (2) to alternativeinvestments that might use the same resources. The portfolio management teammight take the following actions: (1) continue to invest in the current portfoliowithout change, (2) provide guidance or redirection to individual projects in theportfolio, or (3) cancel current investments whose performance has fallen toofar below expectations or that are no longer likely to create needed returns.

The responsibility for resource management efforts is distributed amongmanagers in the various new-product-related functions—for example, R&D,marketing, manufacturing, quality, and finance—with oversight by the portfoliomanagement team. The overall objective for these activities is to ensure thatavailable resources, both internal and external, are effectively applied to achievenew product portfolio goals. Achieving this objective requires: (1) a good un-derstanding of the workload implied by the current portfolio and by proposedadditions, and (2) clear understanding of the inherent capacity of each depart-ment and vendor to perform new-product-related assignments.

Portfolio review accomplishes the following objectives: (1) ensures that eachnew product investment remains on track relative to expectations, (2) enforcesa sense of urgency and accountability among project personnel, (3) providesopportunities for midcourse correction of project direction or performance, and(4) discovers excellent performance and provides proper and timely recognition.Periodic project reviews vary in frequency from once a month to once a quarter.Project phase-gate reviews are driven by project progress and provide portfoliomanagers with an opportunity to judge a project’s accomplishments comparedwith published expectations. All members of the business leadership teamshould also look for less formal opportunities, such as hallway conversations ormanagement by wandering around, to stay abreast of issues and developmentsrelated to new product activity.


3.3 New Product Portfolio Roles and Responsibilities

Setting up clear ownership of essential roles and responsibilities is crucial toeffective portfolio planning and management. This section outlines importantroles and suggests where ownership might best be placed.

Process ownership: Company executives should define a portfoliomanagement team responsible for the overall process of portfolio plan-ning and management. The team should delegate the tasks of developingand carrying out the various parts of portfolio planning and manage-ment. However, they must assume overall responsibility for the effective-ness of the integrated process and for the results that it produces. If anypart of the process performs short of expectations, this group should de-tect the problem and take corrective action.

Portfolio ownership: The portfolio management team also shouldown the efficacy of the current portfolio of new-product-related invest-ments. All parts of the portfolio are their responsibility. This includes: (1)the expected financial impact, (2) the implied strategic direction, (3) theoverall balance, and (4) the expected competitive impact. Portfolio bal-ance (Item 3) is an important part of the portfolio that will be specific toeach business (Cooper, 1998). The balance may reflect how investmentsare spread between market segments addressed by the firm. Alternatively,it might reflect how investment is spread between high-risk, breakthroughprojects and incremental product development projects. If the currentportfolio falls short in any of these areas, the portfolio management teamshould assume responsibility for detecting and correcting the situation.The gateway between product and technology roadmaps and the portfo-lio is the decision process used to evaluate candidate projects. The port-folio management team should own and carry out this process as welland use it to keep control over the contents of the portfolio.

Setting strategic directions: The responsibility for setting up an ef-fective strategic direction for new product efforts is distributed throughoutthe business leadership team. The R&D function has primary responsibil-ity for creating the technology roadmap, whereas marketing should as-sume ownership of the product roadmap. Each of these efforts should,however, strive to integrate the best strategic insights from members ofthe business leadership team at all levels. The portfolio managementteam should act as overseer, reviewing and approving the product andtechnology roadmaps.


Once strategic product and technology directions have been estab-lished, the portfolio management team should address the question,‘‘What capabilities do we need to support this future?’’ The answersmight imply adding new capabilities, closing down some that currentlyexist, or perhaps setting up new relationships with vendors or strategicpartners. In the 1990s, for instance, the Hewlett-Packard Companyfound that the shift to microprocessor control of instruments left it withtoo many electrical engineers (EEs) and not enough software engineers.An internal educational curriculum was developed to ‘‘retread’’ EE’s, andturn them into effective software engineers. Over several years, hundredsof EE’s volunteered for the program, which ran until the imbalance inthe workforce was corrected. New product and technology roadmapsshould provide long-term guidance for capability development efforts.The portfolio management team needs to make sure that this informa-tion is communicated to others in the enterprise and applied as appro-priate.

Resource management: The manager of each functional departmentinvolved in new-product-related activity should be able to estimate theresource impact of a proposed new project and decide whether it can besupported. In some departments, this can be as simple as deciding if theright person can be made available. In other functions, such as R&D,this may need a sophisticated estimation tool that embodies models oftypical project resource profiles versus time. In either case, accurate feed-back to the portfolio management team concerning resource availabilityis crucial. New projects should be added to the portfolio only when theneeded resources are available.

Knowing who is working on what is a second and important respon-sibility in resource management. In many firms, new projects often beginby ‘‘spontaneous combustion.’’ Perhaps an interesting idea in the engi-neering ranks leads to experimentation, which leads to a working proto-type. Higher-level managers are sometimes unaware of this activity untilthey are presented with an accomplished fact—a working system that hasperhaps cost hundreds of hours of engineering effort. A certain freedomfor experimentation is desirable and can lead to important learning, evenbreakthroughs. This activity should be a conscious part of the R&D in-vestment portfolio, though, not clandestine behavior. A key part of theportfolio management responsibility is ensuring that the R&D investmentis being spent as intended.


3.4 Assessment of Portfolio Planning &Management Capability

Previous sections have outlined key elements of the portfolio planning and man-agement process and described roles and responsibilities that must be imple-mented. This section addresses the critical success factors for performancerelated to this important business process. The intent is to provide businessleaders with information and insights useful in evaluating the performance oftheir own firm.

A comprehensive evaluation of portfolio planning and management capa-bility requires measuring levels of achievement in four critical performanceareas: (1) strategic direction, (2) portfolio level of merit, (3) project execution,and (4) new-product-related resources. A sparse set of quantitative tools areavailable for appraising performance in these areas but, in general, they do notoffer enough breadth and depth to achieve the comprehensive assessmentwanted here (Cooper, 1998; Patterson, 1999). Instead, a largely subjective ap-proach is suggested—that of comparing a firm’s performance to the earmarksof ideal performance, as described below. The following paragraphs outline keysymptoms of success in each of these four performance areas.

Strategic direction: Regular, well-planned and -executed strategic dis-cussions occur that involve key members of the business leadership team.A process is in place that creates product and technology roadmaps andperiodically updates them (Wilyard, 1987). These roadmaps exist and arecurrent. Each roadmap is supported by a coherent, insightful, well-explained rationale. The new product and technology strategies providebold objectives for the firm, are exciting, and extend well beyond thereach of current markets and currently applied technologies. The near-term strategies are stable and produce competitive, exciting, and fruitfulcandidates for addition to the R&D portfolio. The current new productand technology strategies reflect integrated and broadly held perspectiveson relevant market and technological factors. New product efforts com-monly achieve high revenue gain and profitability that meets or exceedstargets. The strategies provide clear, consistent direction for capability de-velopment efforts. The portfolio management team has determined thethree most important new-product-related performance issues that keepthe firm from being more competitive, has initiated corrective actions,and is measuring progress on these efforts.


FIGURE 3.2 VINTAGE CHART REPRESENTATION SHOWINGPORTFOLIO IMPACT.

Revenue Vintage Chart

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Impact of Current Portfolio

Portfolio level of merit: Targets and forecasts exist for the businessreturn expected from each project in the portfolio. A roll-up of this data,such as the new product vintage chart depicted in Figure 3.2, shows thatthe current portfolio will support the firm’s targets for financial growth(Patterson, 1998). Guidelines for portfolio balance exist and are evidentin the nature of the current portfolio (Cooper, 1998). The value proposi-tions for the projects in the portfolio, as an integrated set, promise excel-lent progress in chosen strategic directions. There are clear signs that theenterprise is learning faster than its competitors in key areas and that thecurrent portfolio of projects will be effective in growing competitive capa-bility. Each new product effort in the portfolio has clear targets for per-formance factors such as: (1) revenue gain, (2) project cost, (3) unitmanufacturing cost, (4) reliability, and (5) serviceability. Project schedulesand budgets are best estimates of expected performance, not constraintsimposed politically from the top down.


Project execution: Published plans exist for each product and technol-ogy project, and they are current and realistic. Means for tracking esti-mates of schedule and budget over time have been implemented, and thedata show that these estimates are stable for most projects (Patterson,1999). The few projects that display unstable estimates get close manage-ment scrutiny. Projects are managed through an institutionalized phase-gate process that aligns well with the firm’s new product business model.The quality of project deliverables for each development phase is rou-tinely assessed relative to published norms and is found acceptable. Therequirements and performance levels for each new product are stable andwell managed. The value proposition of each project in the portfolio—tothe firm’s customers, and to the firm itself—is well documented andtracked with other project attributes.

Project teams include strong representation from the R&D, market-ing, manufacturing, and quality functional departments. These teams areled well, effectively integrated, highly motivated, and largely in agreementabout project issues. Each individual has enough time to do good work.Project managers vigorously discourage ‘‘shortcuts,’’ such as skipping de-sign reviews or subsystem tests. Major performance shortfalls, comparedwith project targets, are rarely discovered in final project phases.

New-product-related resources: The firm is viewed as a preferredemployer by new product professionals throughout the industry. Attritionis low, especially among top performers, and this is a source of pridethroughout the enterprise. The working environment is free from fear soeveryone, including each individual contributor, feels comfortable speak-ing out and raising issues. The performance of individuals on eachproject often yields ‘‘nice surprises’’; ‘‘nasty surprises’’ are rare. Allindividuals in the new-product-related workforce invest a substantial partof their time—on the order of 40 hours or more per year—in profes-sional development activity, gaining important new job-related skills.

Project teams move quickly enough to create a reasonable level ofscrap as they go, but costly, stress-induced errors are rare. Each newproduct team works hard, but keeps the resilience needed to work harderin a crisis. The firm is skilled in setting up and managing strategic part-nerships that compliment its core competencies. These alliances are fruit-ful and substantially strengthen competitive capability. Root causes forchronic new product program bottlenecks are understood, correctivesteps are underway, and progress is being measured and tracked.

Assessment technique: Evaluation of a firm’s portfolio planning andmanagement capability involves comparing its performance with the


idealized attributes described in each of the four sections above. Thiscomparison includes two important elements: (1) evaluating how close orfar a firm is from ideal performance levels, and (2) identifying the mostimportant gaps between actual and ideal performance.

A simple 1 to 5 scale can be used to evaluate performance relative toeach attribute described above:

1 � Our performance threatens the firm’s long-term existence.

2 � Our performance causes us to lose ground to competitors.

3 � Our performance is enough to stay abreast of competitors.

4 � Our performance is a competitive advantage.

5 � Our performance is world class, a key differentiator for our firm

Each member of a firm’s business leadership team should first perform thisevaluation separately, then the group should meet to discuss and integrate theresults. During this discussion all individuals should summarize their perspec-tives on the key areas of strength and performance shortfall as they see themand offer a rationale for their scoring. Next, the group should discuss collectivelyeach of the noteworthy performance areas. The goal is to achieve a sharedperspective on the firm’s strengths and weaknesses and to understand the di-versity in views among members of the business leadership team.

The most critical performance gaps should be used to establish the strategicdirection for performance improvement efforts. The group should prioritize theshortfalls in their portfolio planning and management capability and pick onlythe three most important issues as a focus for attention. An owner should bedesignated for each issue to initiate the generation and execution of actionplans. As progress is made in these performance improvement efforts, additionalissues can be pulled from the list to be addressed by follow-on efforts. Thisprocess needs to continue, with occasional reassessment of current performance,until an effective portfolio planning and management capability has finally beenestablished.

3.5 Summary

A system view of portfolio planning and management has been presented thatembodies four key components:


• Portfolio planning• Portfolio assessment• Resource management• Portfolio review

The business objectives for each of these components were presented, and theroles of business leaders in carrying out these activities were described. Thesuggested owner of this system—the group eventually responsible for its effec-tive design, implementation, and operation—has been identified as the portfoliomanagement team, a designated subset of the firm’s business leadership team.The critical success factors for effective portfolio planning and managementwere discussed, and a technique for assessing the performance of this crucialbusiness process was outlined. Finally, a model for setting up effective perform-ance improvement initiatives was suggested that provides needed strategic di-rection, focus, and ownership.

Every firm that develops new products and services has each element inthe portfolio planning and management process already in place, either pur-posefully or unconsciously. New product investments are selected, either delib-erately and insightfully or otherwise. An investment portfolio exists that willcreate a return, either substantial or disappointing. Project teams create results,either efficiently or haphazardly. New product releases carry the firm to itsfuture, either along a well-chosen path or one that more resembles a randomwalk. The difference in business performance between one firm and the nextis often determined by the degree of planning and effort invested in makingthese existing process elements effective.

Business leaders can achieve significant gains in the long-term financial andcompetitive strength of their firm by improving portfolio planning and man-agement performance. These improvements will provide substantial gains inbusiness performance, including faster growth in revenue and profit and in thefirm’s ability to learn faster than its competitors. Overhauling this business proc-ess, though, requires knowledge, persistence, and hard work. The ideas pre-sented here can provide an effective framework for this worthwhile effort.

References

Cooper, Robert G., Edgett, Scott J., and Kleinschmidt, Elko J., Portfolio Management for New

Products. Reading, MA: Addison-Wesley, 1998.De Geus, Arie P., ‘‘Planning as Learning,’’ Harvard Business Review 70–74 (March/April 1988).


Patterson, Marvin L., ‘‘From Experience: Linking Product Innovation to Business Growth,’’Journal of Product Innovation Management (JPIM ), 15(5): 390–402 (September 1998).

Patterson, Marvin L., Leading Product Innovation: Accelerating Growth in a Product-based Business.New York NY: John Wiley & Sons, 1999.

Wilyard, Charles II and McClees, Cheryl W., ‘‘Motorola Technology Roadmap Process,’’Research-Technology Management 13–19 (September–October 1987).

Marvin L. Patterson is founder and president of Innovation Resultants In-ternational (IRI), a firm dedicated to helping client companies achieve greaterbusiness success through more competitive new product innovation. Prior toestablishing IRI, Marv enjoyed a 20-year career at the Hewlett-Packard Com-pany (HP). When he left HP he was director of Corporate Engineering, aninternal consulting group focused on improving the competitiveness of HP’sown worldwide new product development efforts.

Marv has written two books on managing new product development: Lead-

ing Product Innovation: Accelerating Growth in a Product-based Business ( John Wiley &Sons, 1999), and Accelerating Innovation: Improving the Process of Product Development

( John Wiley & Sons, 1997). He has served on the board of trustees for theNational Technological University and on the board of directors of the Amer-ican National Standards Institute (ANSI). Marv received his B.S.E.E. andM.S.E.E. degrees from the University of Washington, and is a graduate of theUniversity of Michigan Executive Program.

the pdma handbook of new product development || new product portfolio planning and management

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