What I Learned: Shifting Portfolio Management Focus Tactical? Not.

What I learned this week … came from
some recent conversations about portfolio management with some of
my more knowledgeable friends. Our conversation had to do with the
need for companies to rationalize their product portfolios based on
the global economic downturn. We
started discussing whether stripping out complexity and dead wood
from the portfolio was tactical or strategic. Which brought me to a
fundamental question I struggle with - is portfolio
management intended to optimize new product investment or optimize
the entire portfolio (including existing products)?
Regardless of how it intended, how is it really used? Although I
have seen a lot of focus on NPD  (new product
development) and R&D investments of late, I believe the answer
is “all of the above.” I also believe I am seeing a trend
in portfolio strategy based on the economy, and I am
sharing my thoughts here to spark conversation and get some
additional opinions on the subject.

Managing New Product Investment, Existing Portfolios, or
All of the Above?
Over the years I have had the opportunity to research how
companies use portfolio management processes and solutions
and also manage products and product lines (although in
the software industry, not in consumer goods). In this time, I have
always been intrigued at a fundamental question. Am I making
decisions on my new products, my existing products, or both
concurrently? Clearly there is a need to do both of those.
There are two very clear needs:

• Managing NPD and R&D investment
• Managing the full portfolio of existing
  products, technologies, and markets

Maybe the analogy is managing a financial portfolio. You need to
decide what new investments you might make, and you want to make
those decisions are made in the context of the existing
investments. But there are also times (such as the current economy)
where you need to reevaluate and re-balance your entire
portfolio.

My conclusion is that from my experience - and I am looking for
more insight here - these are typically approached as
different activities. The first, focusing on new
investments, is about pursuing new value. The
second, managing the whole portfolio, is about ensuring that
existing assets are optimized. Is one strategic
and the other tactical? I think absolutely not. While companies
have focused on new investments more heavily in the past, companies
are now taking a hard, strategic look at their existing business.
This leads to an interesting conclusion - that time is an
important element of the discussion.

Shifting Focus on Product Portfolio
Management
I believe that companies’ focus on portfolio management has
shifted with the times (see graphic). I have tried to
illustrate my thoughts in a graphic, but this more theoretical and
is by no means based on scientific research. But I believe it tells
the right story that I have observed. There are four phases of time
on the graph, two past, one present, and the next future. They
break down as follows:

• Top Line Growth: During strong economic times,
  companies were focused on growth. It was an expanding market, and
  executives were being rewarded for growing business. Perhaps, at
  least in some cases, growing business at all costs. The business
  strategy made focusing on new investments the most
  important choice.

• Profitability: During the beginning of the
  downturn, companies were more focused on profits than growth as the
  measure of their value. At this point, the focus turned toward
  product and market rationalization. This is a
  healthy strategy, but it can also reduce investment in
  innovation, which is a poor long-term position for any
  company.

• Cost / Complexity Reduction: Today, I believe
  most companies are ripe for rationalization and consolidation of
  markets, customers, and products. Focus on profitability is
  important. I think there needs to be a hybrid phase allows
  companies to strip out whatever dead wood they might be
  carrying, but also prepare themselves for long-term
  growth.

• Return to Innovation Focus: By reducing
  complexity and stripping out unnecessary cost, my belief is that
  leading companies will be able to redeploy their scarce
  financial and human resources toward product innovation to
  keep an eye on the future and prepare to grow in the recovering
  economy.

So is there a shift going on? I believe there is, but I also
think that there are companies shifting strategically. Instead of
reacting and pulling cost out of the business and hunkering down to
weather the storm, they are stripping out the least profitable
assets from their portfolios in order to focus their company
resources on rebuilding the future. I am sure there are many
companies in purely tactical cost-cutting mode, but I am hopeful
there are more that are trimming away the excess of a boom economy
to lean out and fight for future growth.

Implications for Manufacturers
As
manufacturers look to weather the economic storm, maybe now is the
right time to exit less profitable lines of business. Shed product
lines, markets, and customers that drive higher cost and lower
revenue. Then, after removing the clutter of the past focus once
again on driving new value from the portfolio. I believe the key is
to shift toward rationalization, but as a means to an end, and as a
concentrated phase of portfolio management activity. Then,
continuing to manage future investments based on value (and in
context), while also reviewing the existing portfolio for
opportunities.

So that is what I learned this week, or perhaps what I am
learning. I hope you found it interesting. Let me know what
you think.