Importance of Portfolio Management in Innovation

The primary purpose of a strategic management system is to maximize the overall performance of the firm. However, a survey of Fortune 500 companies revealed that poor implementation has been the primary cause of strategic failures. Over time, portfolio management has gradually entered the strategic management system to become an essential part of it to resolve this issue of the performance gap between strategy formulation and implementation, and to help align and integrate these two elements of strategic management.

When companies desire to generate a competitive advantage internally, they may choose the path of internal commercialization (innovation). Innovation can offer tremendous potential for growth and value creation. However, companies can have difficulty in developing new products if they do not have the knowledge to strategically manage technology and innovation. One of the toughest challenges a company faces in the new product development (NPD) area is in managing the messy initial starting period or the front end (also called the fuzzy front-end) of the NPD process. Strategic portfolio management can effectively be used to resolve the issues of front-end design: from generating innovative ideas (the discovery stage) through the “go-to development stage” where projects are selected for development or killed before substantial resources are committed.

The innovation process begins with the strategic planning process for innovation or the product planning process for innovation. Portfolio management, which is a part of the strategic management system and is also known as innovation portfolio management in the domain of product innovation, has two basic elements: (1) strategic portfolio management or, portfolio planning and (2) tactical portfolio management. These two elements are equivalent to the two end pillars of an imaginary bridge that bridges the gap between strategy formulation and strategy implementation of the strategic management system. Strategic portfolio management for innovation or new product development process begins with an innovation strategy, which is part of the strategic planning process for innovation, can be disaggregated into three basic strategic elements: (1) strategic arenas (or areas)–these are the areas (markets, technologies, and product types) on which the company chooses to strategically focus its limited innovation resources (2) strategic buckets—which is about optimum resource allocation, and (3) strategic portfolio roadmaps—initiatives or plans that depict timelines and milestones.

The strategic portfolio management system provides a systematic and structured disaggregation of the firm’s product innovation strategy and goals into strategically crucial elements as described above, out of which strategic arenas is the most important one through which the firm focuses its new product development efforts on strategically important arenas to realize its strategic goals and objectives. Portfolio management provides this focus to the innovation strategy. A firm can successfully innovate without portfolio management; however, it will achieve a low probability of commercial success. Without identifying and choosing the right arenas can lead to an unfocused condition. As a result, the company will have many unrelated development projects in a portfolio—which will destroy value instead of creating it.

It is important to note here that portfolio management as part of the strategic management process supports both the corporate strategy, and the business strategy in improving the overall performance of the business, and one way to achieve this is by maximizing the overall value of the portfolios containing new product projects. Choosing high opportunity and high-value strategic arenas where rates of return are higher can support the corporate strategy (attractiveness) provided that these arenas match with the company’s core and distinctive competencies. Additionally, selecting high opportunity strategic arenas that fit with the company’s core and distinctive competencies can also support the business strategy, because the company’s product innovation efforts that are based on design and technology strengths can roll out lower cost and highly differentiated products that can command profitable returns. Therefore, using portfolio management to manage innovation can certainly help the firm to choose attractive markets for higher returns, and to attain a position of competitive advantage through differentiation and lower costs.

On the strategy implementation side (the second pillar of the bridge), the management of portfolios, programs, and projects (at the tactical level) is accomplished through tactical portfolio management. Tactical portfolio management helps to identify, select, and prioritize projects and tactically allocate resources. Portfolio meetings are held periodically to evaluate all projects in the portfolio for strategic alignment, portfolio balance, project priorities, and appropriateness of resource allocations, to ensure that all resources are in place to complete the projects within the allocated time. Thus, tactical portfolio management can help in doing the right projects that can improve overall business performance on the strategy implementation side.

Portfolio management is considered a part of the strategic management system and implementing innovation and new product development (NPD) strategies through portfolio management considerably improves the overall effectiveness of the strategic management system and business performance.

References and Further Reading

1. T. L. Wheelen and J. D. Hunger, Strategic Management & Business Policy (NJ: Prentice-Hall, 2000), Chapters 5 and 11.
2. R. M. Grant, Contemporary Strategy Analysis (United Kingdom: John Wiley & Sons, Ltd., 2008), Chapters 1, 7 and 9.
3. Robert G. Cooper and Scott J. Edgett, Product Innovation and Technology Strategy (USA: Product Development Institute Inc., 2009), Chapters 1, 4 and 6.
4. Robert G. Cooper and Scott J. Edgett and E. J. Kleinschmidt, Portfolio Management for New Products (NY: Basic Books, 2002), Chapter 10.
5. The Standard for Portfolio Management, Project Management Institute, 3^rd Edition (Pennsylvania: Project Management Institute Inc., 2013).
6. Ashok N., “Strategy Implementation through Portfolio Management,” A&N Strategy Consulting (December 15, 2014).
7. Anna Kathrin Meifort, “The Relationship of New Product Development and Innovation Portfolio Management – An Empirical Investigation of the German Electronics Industry.”