2.4 Portofolio Management*

Project portfolio management refers to the systematic process of selecting, supporting, and managing a firm’s collection of projects. These projects are managed concurrently under a single umbrella and they may either be related or be independent of each other. The key to understanding portfolio analysis lies in recognizing that these projects share a common strategic purpose and the same scare resources (Dye and Pennypacker, 1999). The underlying theme of project portfolio management suggests that firms should not just concern themselves with managing projects as independent entities, they should also pay attention to the need to address their portfolio as a unified body with multiple, but shared objectives (Elton and Roe, 1998). Artto (2001) notes that in managing a project-oriented company, project portfolio analysis poses a constant challenge between balancing long-term strategic goals and short-term tactical constraints and requirements. Among the questions we routinely consider are issues such as:

What projects should we fund?
Do we have the resources to support them?
Do these projects reinforce our future strategic goals and directions?
Does this project make good business sense?
Is this project complementary to other projects we have undertaken?

Each of these questions has both short-term and long-term implications attached to them. Taken together, they form the basis for both strategic project management and effective risk management. Hence, portfolio management consists of decision-making, prioritization, review, realignment, and reprioritization of a firm’s projects. Decision-making – The decision of whether of not to proceed in specific strategic directions is often influenced by market decision, availability of capital, perceived opportunity, and acceptable risk. A variety of project alternatives may be considered reasonable alternatives at this stage.

Decision-making – The decision of whether of not to proceed in specific strategic directions is often influenced by market decision, availability of capital, perceived opportunity, and acceptable risk. A variety of project alternatives may be considered reasonable alternatives at this stage.
Prioritization – Because firms operate under conditions of limited resources, it is typically impossible to adequately fund every project opportunity. As a result, some attempt at project prioritization is necessary. We may prioritize our project opportunities by:

a. Cost – projects with lower development costs are viewed more favorably because they offer less up-front risk.
b. Opportunity – the chance to gain a big payout is a strong inducement for funding a project.
c. Top management pressure – political pressure from top managers possessing pet projects can tilt the decision toward their preferences.
d. Risk – projects must satisfy some threshold level of acceptable risk; those thought too risky are scratched.
e. Strategic “fit” – a firm may adopt a policy of pursuing a family of products; hence, all project opportunities are evaluated in terms of their complementarity, or strategic fit with existing product lines.
f. Desire for portfolio balance – A firm may wish to offset some project initiatives by funding other projects that: 1) balance, or offset, risk levels, 2) offer alternative market opportunities, or 3) promote innovation in other product lines.