Portfolio management plays a critical role in R&D management, as it structures a strategic process that allows management and R&D to make joint decisions that impact the range of R&D projects in the development funnel. The pooling of insights drives better decisions on the allocation of scarce technical resources based on the needs of the business and its capabilities. Portfolio management creates a dynamic capability to react purposefully to changes in the market, whether strategic, technological, or competitive. This requires clearly articulated projects that can link back to corporate strategy.
Companies often struggle to achieve balanced portfolios that align with company strategy. In this Advisor, we identify one common challenge in portfolio management — deciding the portfolio structure — presented as an anonymized case study.
Case Study: Deciding the Portfolio Structure
Company A is in the chemicals industry with a turnover of around US $5 billion; the company has refreshed its portfolio structure through the following initiatives.
Get Single View Across Company
Previously, Company A followed a distributed decision making process, making it difficult to get a good overview across the company and ensure that all decisions were undertaken on the same basis and with the same diligence. The company formed an innovation council under a single VP to resolve this challenge.
Company A considers its portfolio in terms of platforms, each with knowledge and projects associated with it, though some projects span multiple platforms. Strategy is crafted at a platform level, where each platform has a roadmap that covers a three- to five-year view for that area of activity, defining what new technology or knowledge is needed to deliver on the strategy.
Consider Funding Priorities
Company A’s BUs have strong input into the strategy and technology roadmaps. Innovation budgets are set yearly and correspond to a percentage of revenue. The target budget is delivered directly and not via BUs. The innovation council is responsible for allocating this budget to achieve the desired segment and market strategies. Moreover, a small portion is allocated to real “blue skies” thinking, which is external to current core business, to capture potential future needs that BUs and even customers may not currently appreciate. The benchmark aims to make a greater portion of this early-stage foundational research external to access a broader range of input.
Select Desired Balance
Company A accounts for portfolio balance with respect to the following elements: risk profile (high/low), time frame (short term, medium term, long term), and type of innovation. The business strategy dictates the target portfolio balance. The targets were set following a benchmarking exercise, with further consideration of industry- and company-specific challenges (e.g., typically 25% of the budget is on disruptive innovation). The benchmark targets 10%–15% of resources at early-stage, science-based R&D projects, but this can peak at 40% for high-growth areas. Balance is sought across four types of innovation:
- Sustainability and cost innovation — sustainability of raw materials, process, or cost improvements
- Incremental innovation — next generation of products
- Disruptive innovation — projects and solutions with the potential to create new markets or value networks
- Commercial innovation — use of existing tools or technologies to address a specific customer need
Actively Manage to Achieve Desired Balance
To achieve desired balance, Company A employs two key mechanisms:
- Portfolio governance and oversight. The innovation council meets twice a year, and most members are at the senior VP level. One meeting focuses on strategy and how that feeds into the roadmap, and the other on the efficiency and effectiveness of commercializing technology and delivering against this roadmap.
- Monthly decision-making council. The monthly working group is a subcommittee of the innovation council. It has more of a tactical role and is involved in barrier busting. The subcommittee reviews a high-level snapshot of the whole portfolio, with a focus on projects with issues or those approaching stage gates.
[For more from the authors on this topic, see “Best Practices in Portfolio Management.”]