Implementing Strategies through Portfolio Management

Strategy implementation is the most difficult part of the strategy. Hrebiniak states that “Making strategy work-executing or implementing it through the organization is even more difficult. Without effective implementation, no business strategy can succeed.” ^[1] Prior to this work, Henry Mintzberg introduced intended and realized strategy to help clarify this implementation challenge. According to him, there is a difference between intended strategy (as conceived by top management) and realized strategy (the actual strategy that is implemented), and only 10-30% of the intended strategy is realized. ^[2] This difference or gap between intended strategy and realized strategy is usually caused due to uncertainty in the firm’s external environment, lack of information available during strategy formulation, or the inability of top management to assess the external and internal environment during strategy formulation. In this article, we focus on the internal gap that is caused due to the internal environment and how to reduce this gap to align the organization behind the intended strategy.

Further, to end this impasse of the internal gap at this point, portfolio management comes into the picture that can be successfully used for the reasons described below to implement the intended strategy through project and program portfolios. The portfolio management framework becomes the right choice to implement strategies because it matches the three key fundamental principles of strategy as defined by Michael Porter. These key principles of strategy are: “creation of a unique and valuable position,” “make trade-offs in competing—to choose what not to do,” and “creating fit among company’s activities” by aligning company activities6 with its strategy to gain an advantage. ^[3] Portfolio management supports and preserves these fundamental principles of strategy and therefore becomes the fundamental framework to effectively implement strategies. Portfolio management deepens the firm’s strategic position, improves the focus of direction, helps to make trade-offs in decision making, creates a fit between strategy formulation and implementing implementation activities, and helps to select and prioritize the right work to perform.

The concept of “portfolio” in analyzing and managing business portfolios is not new. It was extensively used before the 1980s by multi businesses and during that time was known as portfolio analysis and corporate portfolio management to develop and manage corporate strategies. In this regard, senior management views business units and product lines as portfolios of investments and is responsible for generating maximum returns from these portfolios. Portfolio management in practice also combines the use of balanced scorecards that include both financial and non-financial measures to forecast and drive a firm’s future financial performance.

The term “portfolio” in reference to this subject is the combination, collection, or grouping of components (such as assets, programs, projects), and portfolio management is the management of these combined components to realize certain benefits that are not otherwise available by managing these components independently. It includes evaluation, prioritization, and selection of programs and projects that are in line with or support the firm’s strategy. Portfolio management techniques can be applied to any type of organization in which multiple projects are managed simultaneously to enhance its short-term and long-term business success. In addition to strategy implementation, other specific application areas of portfolio management include new product development (NPD) and information technology.

The implementation process begins by transforming the firm’s goals, objectives, and strategy into initiatives (identification, selection, and prioritization process) to establish portfolios of programs and projects. Further, programs and projects are evaluated for technical performance as well as against the selection criteria.

The benefits of implementing strategies through portfolio management are summarized below:

• Portfolio management helps to bridge the gap between strategy formulation and implementation.
• Aligns strategic goals and strategies to projects, portfolios, and programs.
• Helps in effective allocation and use of scarce resources.
• Portfolios can be balanced to reduce risk and create the best value for the organization.
• Helps to generate synergies, integrate activities, and enhance business success.

Additionally, as the fundamental purpose of any business is to create value, and through value profit, portfolio management also contributes towards value creation to the firm by choosing and doing the right activities. From the profitability standpoint, portfolio management is used to select and manage portfolios of projects and programs to realize two important additional benefits: it improves the efficiency of investment by eliminating wasteful projects-through prioritizing and selecting the right projects and programs, that is doing the right thing, and also by choosing what not to do. Second, by making investments in high return portfolios.

References and Further Reading:

1. L.G. Hrebiniak, “Obstacles to Effective Strategy Implementation,” Organizational Dynamics Vol. 35, No.1 (2006), pp. 12-31.
2. R. M. Grant, Contemporary Strategy Analysis (United Kingdom: John Wiley & Sons, Ltd., 2013), p. 22.
3. Porter, Michael E. (1996), “What is Strategy,” Harvard Business Review (November–December 1996), pp. 1-21.
4. Harvey A. Levine, Project Portfolio Management (CA, John Wiley & Sons, LTD., 2005).
5. The Standard for Portfolio Management, Project Management Institute, 3rd Edition.
6. H. Mintzberg, “Patterns of Strategy Formulation,” Management Science 24(1978): 934-48; “Of Strategies: Deliberate and Emergent,” Strategic        Management Journal 6 (1985): 257-72.
7. J. Balogun, V. Hope Hailey, and S. Gustafsson, Exploring Strategic Change (United Kingdom: Pearson Education Ltd., 2016), Chapter 1.