Principles of strategic portfolio management

Principles of Strategic Portfolio
Management
David Matheson
President and CEO
www.smartorg.com

© 2000-2012 SmartOrg. | Confidential and Proprietary.2
David Matheson—Session Chairman
Dr. David Matheson has helped senior management of firms in the
United States and Europe improve their results from portfolio
management, product development, innovation, R&D, capital
investment and strategy, and is an expert on measuring value and
managing uncertainty.
His practical experience covers a wide variety of industries, including
printing, software
development, biotechnology, telecommunications, chemicals, pharma
ceuticals, medical devices, manufacturing, electric power and
entertainment.
He is co-author of the best selling book, The Smart Organization:
Creating Value through Strategic R&D (Harvard Business School Press)
and has authored numerous articles on innovation, portfolio
management and decision making.
In addition to SmartOrg, his executive roles include: currently member
of the board at Photozini, Inc. and prior to founding SmartOrg in 2000, a
principal at Strategic Decisions Group.
His Ph.D. is from Stanford University, where he currently teaches on
Strategic Portfolio Management and other topics at the Stanford
Center for Professional Development

Improving capability to discover value.
3
Life science Aerospace Technology Other
© 2000-2012 SmartOrg. | Confidential and Proprietary.

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SPD-Framework v15—5 © 2009 by Stanford Strategic Decision and Risk Management. All rights reserved.
Strategic Decision and Risk Management
A Professional Certificate Program

Principles of good strategic portfolio management.
Aligned
Decision
Forum
Value
Creation
Focus
Credible,
Comparable
Evaluations
Embraces
Uncertainty
and Dynamics
Clear
Communication
& Learning
Inclusive,
Collaborative
Process
Principles
of SPM

The three basic dimensions of great portfolio
results.
What
How
Process:
Milestones
Gates
Timeline
Reviews
Resources:
Assignment
Budgeting
Conflict
Economic:
Prioritization
Evaluation
Strategy
Great portfolio results
Who
Decisions

Delivering A Billion Dollars
– Lessons In
Portfolio Evaluation
Ken Edwardsson – Global Leader
Dow AgroSciences

Dow AgroSciences is a good example of a company –
Achieving more with less.
© 2000-2012 SmartOrg. | Confidential and Proprietary. 10

Decision Focused
— Choosing the Right Path by
Deciding Where To Spend
Long Learning Loop
Results Focused
— Running Well on the Chosen Path
By Managing How You Spend It
Short Learning Loop
Portfolio Management Best Practice
Strategy
Execution
Resource
Management
Charter
Projects
Development Stages
Review
Ideas
Value Capture
Project Review
Decision
Value
Promise
Create Projects
Portfolio Management Project Management
Gating Process:
• Singular projects
• In depth reviews
• Go/Kill decisions
• Standards based
Portfolio View:
• All Projects
• Investment Types
• Strategic Alignment
Requires – Both A Strategic View And A Tactical Focus
11

Identifying key project
Uncertainties and their
Impact (Value Drivers)
Valuing Projects and
Characterizing alternatives
Sensitivity
Analysis
Project Risk
Assessment
Technical
Market
Expected
Future Value
H
Likely
L
Issues &
Assumptions
•
•
•
•
•
•
•
•
Probability
Distribution
Decision
Analysis
Investment
Intensity
Risk Reward
Bal. Portfolio
Less
Emphasized
Decision and Risk Assessment Tools
Portfolio Management Best Practice
12

13
DAS Portfolio Management Results
EBIT* CAGR
SALES CAGR
16%
5%
2001-2010
CAGR Goal
6%
23%
2001-07
Actual CAGR
Growth + Return
*Non-GAAP financial measure, excludes certain items

The core of portfolio management:
making decisions.
Aligned
Decision
Forum
Value
Creation
Focus
Credible,
Comparable
Evaluations
Embraces
Uncertainty
and Dynamics
Clear
Communication
& Learning
Inclusive,
Collaborative
Process
Principles
of SPM

Portfolio Management = The discussion of what to do about the gap
between top-down aspiration and bottom-up reality
Top-Down
• Where do we want to go?
• What do we need to get
there?
Bottom-Up
• What do we have in our
portfolio?
• What should we keep,
modify, shut down?
Portfolio Manager Role
• Set funding priorities
• Allocate resources among
segments
• Balance innovation and
incremental projects
• Meet corporate financial
goals
• Assure a steady stream of
successful new products

$-
$50.0
$100.0
$150.0
$200.0
$250.0
$300.0
2004 2005 2006 2007 2008 2009 2010
Example top-down meets bottom-up: a growth
gap.

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Aligned Decision Forum. The process drives
real decision-making at all levels.
People
Structure
Information
Players compete to make
decisions or advance their own
agendas without an effective
forum for joint portfolio decisions.
Players deliberate, resolve
conflict, and take actions
based on cooperative
discussion.
The process is unclear
or most projects are
exceptions to the
process.
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Decisions are made using
―gut feel‖ based on
anecdotal information.
Meaningful and relevant
information is summarized at
appropriate level of detail for
decision at hand.
The process brings the right
people together, clarifies top-
down aspirations and bottom-up
reality, and frames decisions
about prioritization and strategy

About 40% of companies have difficulty with the Aligned
Decision Forum.
Take the survey at: http://spreadsheets.google.com/viewform?hl=en&formkey=dGk2TWdQUjJwT3J6YmIyUWU0VVYtU2c6MA#gid=0

Here’s a case where the key to success was shifting the
focus to value creation.
Aligned
Decision
Forum
Value
Creation
Focus
Credible,
Comparable
Evaluations
Embraces
Uncertainty
and Dynamics
Clear
Communication
& Learning
Inclusive,
Collaborative
Process
Principles
of SPM

Too many projects, not enough resources – what would
you do in this situation?
• A high-tech packaging company built on
tremendous innovation over decades in materials
and design.
• Increasing global competition and erosion of its
advantage.
— Its products were increasingly undifferentiated.
— Margins eroding dramatically.
— R&D and NPD had in recent years failed to produce.
• The portfolio was choked with R&D and NPD
proposals.
— CEO has asked for more innovation
— Largely cost reductions and incremental projects.
— New innovation was crowded out.
— Lots of churn and debate as projects struggled to get
resources.
— They had 70+ projects and could only support about 15.

Which approach produces the best result?
• Business cases – CFO created a business case process that
gathered relevant data and put it in financial terms. Modeled
after successful capital investment process.
• Project management – Assign clear project leadership
responsibility, form teams, create plans with clear milestones and
deliverables. Pursue the best plans, hold people accountable.
• Resource allocation – Core issue is that certain resources are
oversubscribed. Create resource managers to assign key
resources based on guidelines and situation specifics.
• Scoring rules – Define essential criteria, such as strategic fit, size of
opportunity, technical difficulty and investment. Assess score for
each project on scale of 1-5 on each dimension. Take weighted
average to get figure of merit.

Typical approaches often fail to resolve the real portfolio
issues
“Business cases strongly favored incremental projects.”
“Project management methods created more work on
projects we would cancel.”
“Resource allocation efforts abdicated the companies most
important investment decisions to relatively low-level
managers.”
“Weighted scoring rules simply elevated politics to a new
level of sophistication.”
“When we got clear about value, many project leaders
voluntarily cancelled their own projects; they realized they
could better direct their efforts to higher-value projects.”
“We reduced our portfolio from 70 to 20 projects, improving
the return by more than 100%.”
A High-Tech Packaging
Company
APPROACHES THAT DID NOT WORK
GOOD EVALUATION WORKED
Too many projects —
how to sort them out?
Reinventing the Product Portfolio: Session III – May 2010

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Value Creation Focus. The goal is to find the
strategy that maximize value creation.
People
Structure
Information
Objectives are driven by
personal agendas,
functional perspectives, and
individual biases.
Individuals and groups think
clearly about economic and
strategic issues and creatively
about how to improve value.
Metrics and analysis are not clearly
connected to value creation, or they
are manipulated to advance personal
agendas.
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Information selected to
support personal
agendas or positions.
Irrelevant information
brought to bear on
decisions.
All the information needed to
inform value creation, both
positive and negative, are
incorporated into a neutral
evaluations
Metrics and analysis inform
understanding of economic outcomes
and drive choices.

About 55% of companies have challenges with
Value Creation Focus.

Next we see an organization lacking comparable
evaluations and full collaboration in decision making.
Aligned
Decision
Forum
Value
Creation
Focus
Credible,
Comparable
Evaluations
Embraces
Uncertainty
and Dynamics
Clear
Communication
& Learning
Inclusive,
Collaborative
Process
Principles
of SPM

Accelerating the
Deployment of Technology
to Business Opportunities
Kevin Kimber –
ChevronTexaco

Role of Portfolio Optimization Process & Tools
for Heavy Oil Technology
Like many organizations, we faced significant
challenges…
• Business needs for technology were not being met in a
timely fashion
• Corporate growth objectives demanding more for less
• Technologists keeping projects alive too long
• Inconsistent project evaluations
• Not enough project failures
• Difficulty comparing projects of different types
• Limitations of thumbs up / down approach to project
prioritization 30

The existing portfolio process was primarily a
―roll-up‖ of business cases to justify projects.
Project
Justifications
• Business Cases
Portfolio
Decisions
• Subjective
Factors
This was a competitive, adversarial process, with very little quality in
the data, which severely hampered decision-making.
31

CT Heavy Oil met the challenges by implementing a
value-based, portfolio management process.
Value-based, Portfolio Management Process
Project
Evaluations
• Specify & quantify
uncertainty
• Clear standards
• Give teams real
direction
Peer & Expert
Review
• Transparency
• Credibility &
comparability
Portfolio
Decisions
• Value-based
• Solid information
• Strategic
alignment
Uncertainty
Tracking
• Baseline
assessments
• Updates based
on evidence
32

A transparent process helped address the
―garbage-in, garbage-out‖ problem.
Commercial Value Given Technical Success
Range of Uncertainty ($million)
Improving Computational Capability
Shearing
LSTS
Performance Prediction
Dow nhole Steam Profile Control
2D NMR
Thin Sand Thermal
Dow nhole Steam Profile - New Wells
Catalyst
Remote Sensing
Steam Inj Well BP
Steam Distribution
Bio-Upgrading
Heat Management
Improve Hydrocoking Process
Well Gauging
High Mobility Ratio Waterflood
HOSGD
Reservoir Opportunity Identification
VAPEX
Cold Flow
Heavy Oil Chemistry
Sulfur & Metals Removal
CASH
-100 0 100 200 300 400 500 600
Project 1
Project 2
Project 3
Project 4
Project 5
Project 6
Project 7
Project 8
Project 9
Project 10
Project 11
Project 12
Project 13
Project 14
Project 15
Project 16
Project 17
Project 18
Project 19
Project 20
Project 21
Project 22
Project 23
Probability of Technical Success
Shearing
Heavy Oil Chemistry
Improving Computational Capability
Bio-Upgrading
Thin Sand Thermal
Sulfur & Metals Removal
VAPEX
Catalyst
High Mobility Ratio Waterflood
LSTS
Improve Hydrocoking Process
Performance Prediction
HOSGD
Steam Inj Well BP
Reservoir Opportunity Identification
Cold Flow
CASH
2D NMR
Dow nhole Steam Profile - New Wells
Heat Management
Remote Sensing
Steam Distribution
Well Gauging
Dow nhole Steam Profile Control
0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80
Project 1
Project 2
Project 3
Project 4
Project 5
Project 6
Project 7
Project 8
Project 9
Project 10
Project 11
Project 12
Project 13
Project 14
Project 15
Project 16
Project 17
Project 18
Project 19
Project 20
Project 21
Project 22
Project 23
Project 24
• Historically this was one of the most
challenging issues
• Process and tools key to overcoming
Project
Evaluations
• Specify & quantify
uncertainty
• Clear standards
• Give teams real
direction
Peer & Expert
Review
• Transparency
• Credibility and
Comparability
Portfolio
Decisions
• Value-based
• Solid information
• Strategic
Alignment
Uncertainty
Tracking
• Baseline
assessments
• Updates based
on evidence
After: a value-based management process
Project Comparison Tools
33

The result: acceleration of technology to
business opportunity.
2003 2004 Improvement
New ideas
screened
22 35 60%
Projects
initiated
6 9 50%
Projects
Deployed
1 2 100%
Projects
Terminated
3 6 100%
34

A major challenge in portfolio management:
Saying ―no‖ to a good idea…
In order to fund a better one…
How do you make a ―no‖ stick?
• Power
• Persuasion

The gold standard of persuasion:
The political loser comes to the same
conclusion himself.
This sucks for
me but I have to
agree it is the
right priority.

The silver standard of pursuasion:
The political loser accepts that the process was
fair and accurate.
This sucks for me
and I think it’s the
wrong choice, but
at least they heard
the full story and
made a tough call.

Credible, Comparable Evaluations. The process
allows participants to make and accept decisions.
People
Structure
Information
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Project evaluations are
internally inconsistent
without underlying
mental models or logic.
Information is selected to
support individual
projects without regard
for consistency across
projects.
Information comes from
knowledgeable sources,
and is shared, vetted, and
understood across the
projects.
Common evaluation
framework follows clear
and comprehensible
logic; common issues are
treated in common ways.
Significant advocacy: the objective
is to ―win‖ by having requests
granted and gaming the system is
tolerated.
Those whose preferred
alternatives are rejected
find the basis for the
decision convincing.

Explicitly evaluating uncertainty was key to unlocking value in the
next company’s portfolio.
Aligned
Decision
Forum
Value
Creation
Focus
Credible,
Comparable
Evaluations
Embraces
Uncertainty
and Dynamics
Clear
Communication
& Learning
Inclusive,
Collaborative
Process
Principles
of SPM

Reinventing the Product Portfolio: Session III – May 2010

Go/No Go: Knowing What to Bank On Version 10.0, 6/07
© 2006 Sprint Nextel. All Rights Reserved.
41
Before: The valuation guessing game…
2007 2008 2009
Revenue 3M 6M 9M
Costs 6M 7M 8M
Margin (3M) (1M) 1M
PRO FORMA
Effects of this approach
 Does not allow you to innovate around the business model, here the
business model is constant – subscription model
 Hides high areas of certainty
 Not the correct tool for highly uncertain businesses opportunities.
 Gives impression of precision based on difficult to support
assumptions.
Assumptions:
 Take Rate
 Market Size
 Market Share
 Ramp Up
 …

Go/No Go: Knowing What to Bank On Version 10.0, 6/07
© 2006 Sprint Nextel. All Rights Reserved.
42
After: Focusing on driving value up
Effects of this approach
 Each variable accounts for the range of
variability
 Top three variables are clearly illustrated
 Helps to filter non-essential data and stay
focused!
1: What is known / unknown
about key economic factors?
e.g. Channel deal
 High: we use own channel,
we go direct, we do deal
with X or Y
 Low: we stay in traditional
channel, we do deal with P
or Q, we need lots of
floorspace
2: What is the possible range of
the factor given our uncertainty?
e.g. Channel deal
 High: 25%
 Base: 10%
 Low: 5%
NPV
―GRAND SLAM‖ VALUATION
$100M $450M$0M
Channel
Deal
Margin
Monthly
Fee
5% 25%
10%5%
$5 $15
3: What is economic impact of that uncertainty?

A company set up a new lab, with high expectations. Later they
asked, ―Is the new lab on track?‖
• A Fortune 100 company acquired several
smaller companies with good products in the
market, but not much of an R&D pipeline.
• A new R&D laboratory was established with
the goal of “researching their way” to
becoming a world-class firm.
• Since the lab was new, and the technical
areas were leading edge, they picked easy
targets to get them onto the map soon.
Is the lab on track? Will their lab
generate the hits required?

A 1-month quantitative evaluation revealed a lack of the ―oysters‖
needed to create block-buster products.
Probability of
Development
Success
.1
.2
.3
.4
.5
.6
.7
.8
.9
1.0
0
Expected Commercial Value Given Development Success
($ millions)
0 100 200 300 400 500 600 700 800 900 1,000
PearlsBread & Butter
OystersWhite Elephants
Innovation Screen

After a quarter spent identifying more valuable commercial
targets, their portfolio had better odds of winning.
Probability of
Development
Success
.1
.2
.3
.4
.5
.6
.7
.8
.9
1.0
0
Expected Commercial Value Given Development Success
($ millions)
0 100 200 300 400 500 600 700 800 900 1,000
PearlsBread & Butter
OystersWhite Elephants
Innovation Screen

Uncertainty
ranges tend to be
base case + 10%.
Embraces Uncertainty and Dynamics. All
uncertainties are treated explicitly over time.
People
Structure
Information
Deterministic thinking
and risk aversion
drive a quest for
certainty.
Robust thinking about
upside, downside, and
options. Willingness to take
prudent calculated risks.
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Assumptions co-mingle
discussions about
knowledge,
commitments and
aspirations into point
estimates.
Assumptions are made to
defend a position.
Disconfirming information
is suppressed.
Information is robustly
represented in terms of
ranges and probabilities
with supporting rationales
for the assessments.
Discussion of uncertain
knowledge are separated
from discussions about
commitments and
aspirations.

About 60% of companies have challenges with
Embracing Uncertainty.

Unless carefully managed, the portfolio process can
create unintended burdens.
Aligned
Decision
Forum
Value
Creation
Focus
Credible,
Comparable
Evaluations
Embraces
Uncertainty
and Dynamics
Clear
Communication
& Learning
Inclusive
Collaborative
Process
Principles
of SPM

Have you ever encountered a spreadsheet with
hundreds of inputs?
Simplified
logical map of a
spreadsheet
once in common
use at Boeing
(the actual
spreadsheet is
too large to
show).

Spreadsheet models can spin out of control creating
drudgery and overhead.
Spreadsheet model
lacks a feature
needed in a
case, feature is
added
Data requirements
increase for
everyone to support
more complex
model
Broader Analysis
Expansion in scope
of portfolio
More projects of
different types
added
New portfolio insight
Benefits
increase for
every project
added
Overhead
increases as the
square of the
number of
projects
―Death by a
thousand
cuts‖

Adversarial processes – a spiral of increasing
overhead and distrust.
Pressure to create a
winning pitch creates
a search for an
advantage and
tendency to
exaggerate
Concern of being
misled creates need
for extra scrutiny
Staff and process
created to oversee
and make sure
pitches are good
ones
―You are asking for the rope you
are going to use to hang me.‖

Information available but
biased and not vetted.
Documented for large Units
only.
Inclusive, Collaborative Process. All stake-holders
participate and derive value from the process.
People
Structure
Information
Portfolio process serves some
people (e.g. executives) and is
not in the interest of others (e.g.
project leaders).
All participants find the
portfolio process useful
in accomplishing their
work.
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Participants experience
large scale drudgery in
support of portfolio
process
Basis of decisions
lost or information
is privileged.
Basis of decision is
stored and becomes
a common repository
of knowledge.
Tools,
methods,
practices, etc.
are efficient.

Finally, it is all about clear commination and learning.
Aligned
Decision
Forum
Value
Creation
Focus
Credible,
Comparable
Evaluations
Embraces
Uncertainty
and Dynamics
Clear
Communication
& Learning
Inclusive,
Collaborative
Process
Principles
of SPM

Reinventing the Product Portfolio: Session III – May 2010Reinventing the Product Portfolio: Session III – May 2010

BIG MISTAKES IN EVALUATION
PEOPLE Treating a project evaluation as an analysis rather than as a
conversation. Not having the right people in the room for the
conversation. Not having a process for making the decision.
TOOLS Use of scoring grids, strategic buckets or other tools that lack the
power to provide real insight and drive a lasting business decision.
VALUE Failing to bring an evaluation to the bottom line prevents real
discussion of business issues and tradeoffs. Narrow view of value
as NPV. Undocumented assumptions lead people to believe that a
particular value metric is more comprehensive than warranted.
UNCERTAINTY Critical issues are covered up using assumptions rather than
explicitly quantified as uncertainty. Failure to evaluate, vet, and
learn about uncertainties. No understanding of the businesses
ability to manage risk and uncertainty.
Source: Robin Karol, CEO of PDMA
Strategic and Operational Portfolio Management Conference, 2006
© 2000-2012 SmartOrg. | Confidential
and Proprietary. 56

© Inspire Pharmaceuticals Inc., all rights reserved. Used with permission. 57
New Corporate Strategy
Patent
Granted
Competitive
Product Approved
Technical Setback
NPV Given Technical Success
ProbabilityofTechnicalSuccess
What can we do with this asset?
Bread & Butter Pearls
White Elephants Oysters
Innovation screen
Positive
Phase 1
Positive
Phase 2
Regulatory
Set-back
Initial
Perception
IP
uncertainty
addressed
Improved
Strategy

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Clear Communication and Learning. Information
is freely shared and updated.
People
Structure
Information
Results are
used to blame,
punish,
reward, etc.
Results are used
to improve
project and
portfolio value.
Results are used to
measure progress
and hold people
accountable.
No mechanisms
for tracking,
feedback, and
learning.
Variance
and cost /
schedule
tracking only
The focus is
on the most
available
information
Information is gathered
based on the quantified
benefits of filling
information gaps.
Uncertainties are tracked
and updated based on
new evidence, and
decisions are updated
appropriately

The design challenge is applying these principles in a
way that best fits the situation.
Aligned Decision
Forum
The process drives real decision-making at all
levels.
Value Creation Focus The goal is to find the portfolio strategy that
maximizes value created for the organization.
Credible, Comparable
Evaluations
The information and evaluations in the process
allow participants to make and accept decisions.
Embraces Uncertainty
and Dynamics
All uncertainties are treated explicitly and
updated over time.
Clear Communication
and Learning
Information is share freely, performance is
tracked, and assessments are routinely updated.
Inclusive,
Collaborative Process
All stakeholders participate openly and derive
value from the process.
Principles of Strategic Portfolio Management

Try assessing your own organization:
www.smartorg.com/PrinciplesSurvey
Aligned
Decision
Forum
Value
Creation
Focus
Credible,
Comparable
Evaluations
Embraces
Uncertainty
and Dynamics
Clear
Communication
& Learning
Inclusive,
Collaborative
Process
Principles
of SPM

SmartOrg® provides software and services to help companies evaluate their opportunities
and make the best decisions about where to invest, especially when the future is clouded
with uncertainty. Customers use SmartOrg® to build their capability in driving innovation
from idea to commercial results and in selecting projects, improving returns in their
portfolio.
SmartOrg® helps companies to attain the highest value from projects and portfolios.
855 Oak Grove, Suite 202
Menlo Park, CA 94025 USA
T: +1.650.470.0120
info@smartorg.com
www.linkedin.com/company/smartorg
@smartorginc

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