Lesson 2: Strategy, Portfolio, and Program Management

2.1 Introduction

The purpose of this lesson is to highlight the manner in which a firm’s strategic use of projects must attain complementarily across multiple levels.  That is, if we think of a project as the basic “building block” of strategy, it must be considered in relation to the manner that it contributes to achieving any organization’s overall strategic objectives and mission.  We noted in Lesson One that the philosophy underlying the “management of projects” necessitates a broadening out of the context for project-based work, forcing us to alter our perception of the traditional view of project management into one that is more inclusive.  Thus, because projects are generally initiated with the goal of achieving strategic objectives, it becomes necessary to understand the positioning of projects to align with strategic portfolios and programs.  Likewise, until and unless we can come to a firmer recognition of the goals a project is intended to support, it will be difficult and frustrating to ascribe notions of success or failure to any particular project venture.

2.2 of Definition of Terms

There are some key terms that we must understand as we discuss the linkage between an organization’s strategy, its portfolio of projects, and program management.  Briefly, consider the following definitions:

• Strategy – The art and science of formulating, implementing, and evaluating cross-functional decisions that enable an organization to achieve its objectives.  (David, 2001, p. 5)
• Portfolio – A firm’s current set of in-process projects, intended to correspond with strategic initiatives.
• Program – An endeavor of considerable scope that requires a number of projects. (PMBOK, 2005).

2.3 Corporate Strategy and the Management of Projects

Let us first define our terms as they relate to managing strategic project portfolios.  When we talk of an organization’s strategy, we typically define strategic management in the following terms:

Strategic management is defined as: the method by which corporate, business, unit, function, organizational units and projects formulate, implement and evaluate their strategies.

This definition is important because it gives us a three-part perspective on the strategic management process.  First, it is concerned with formulating strategy.  The fundamental question here is the means by which an organization determines what strategies are appropriate, how they determine them, how they self-analyze their own competitive posture, and so forth.  In other words, the first and, many would argue, most critical step in strategic management consists of the process of determining what strategies are most likely to further company goals.  Second, strategic management concerns the implementation of these strategies.  It is useful to think of the implementation stage as the project development process; in that projects are often the means by which organizations operationalize their strategic vision.  Finally, strategic management consists of an evaluation step, where the aforementioned strategies are assessed periodically to ensure that they are still relevant, useful, and in line with corporate priorities.

We can demonstrate visually the manner in which an organization’s projects build on the theme of complementarity through the use of Figure 8.2.1.  In the figure, referred to as the “Strategy Puzzle” we note that if we adopt a perspective whereby the organization operates at three different levels (corporate, business unit, and project), we must constantly think of how we can ensure that each level operates in accordance with the overall themes and priorities of the other two.  In this puzzle we see that the organization is represented by the overall square.  Each of the levels depicted fit to make a unified whole.  If the strategic actions at any level are not in alignment with the other levels, the organization will experience wasted effort.

Figure 8.2.1

8.2.2 Another Perspective on the Strategy Puzzle

We can adopt a similar model shown in Figure 8.2.2 of the Strategy Puzzle, in which the organization’s complementarity depends upon internal reference and agreement among its Strategic Business Units (SBUs) as they link to the overall corporate strategy.  In this puzzle the corporation consists of three strategic business units (SBUs).  Each of the three SBU strategies should be consistent with the overall objectives of the corporation as well as among the SBUs.  An example of consistency between SBU and corporate strategies is the development of a vertical integration strategy.  Changes in the processing capacities both up and down stream should be purposefully determined through a strategy that is integrated and aligned between and among the corporate levels and SBUs.

Figure 8.2.2 – Another Perspective on the Strategy Puzzle

The Strategy Puzzle and Projects

A third way of visualizing the Strategy Puzzle, as it relates to projects, is shown in Figure 8.2.3.  Again, the key to understanding this puzzle is to observe that, unlike the Figure shown above, in this puzzle we directly link projects to our overall corporate strategic mission.  Thus, this final figure most directly demonstrates that projects offer a fundamental means for attaining strategic objectives.  Further, however, as the puzzle shows, it is imperative that we understand that this complementarity must operate across our portfolio of projects; each of which should demonstrate linkages to each other (the idea of “leverage”) while contributing to our overall goals. It is this complementarity that often drives the development and organization of a firm’s portfolio of projects.

Figure 8.2.3 – The Strategy Puzzle and Projects

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.

1. 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.

2. 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.

Portfolio Management Continued

3. Review – All project alternatives are evaluated based on their adherence to the company’s prioritization scheme.  The projects that offer maximum return based on those priorities are selected and added to the firm’s portfolio.

4. Realignment – Altering the project portfolio by adding new projects necessitates a reexamination of company priorities.  Does this new project addition significantly realign the firm’s strategic goals or direction?  Does the portfolio now require additional rebalancing?  The decision to change the portfolio through new project initiatives requires the concomitant commitment to critically assess the updated project mix in order to gain clues for additional restructuring.

5. Reprioritization – If the results of strategic realignment signal the need to shift the company’s focus, it will be necessary to effect a reprioritization of corporate goals and objectives.  In this manner, the project portfolio requires a shared reassessment of the overall company strategy in light of new project initiatives.

Portfolio management represents an important component in strategic project management.  At their most basic level, projects form the “building blocks” of strategy, as was noted previously.  However, beyond the ability to manage specific projects well, organizations are routinely faced with the need to establish a strategic direction for firm profitability, often through the strategic management of projects.  One of the most effective methods for establishing strategic direction lies in the proactive development of a project portfolio, or integrated family of projects, usually with a common strategic theme or purpose.  Such a portfolio supports a degree of overall strategic integration, rather than simply moving from project opportunity to opportunity, without operating with regard to an overall theme or direction. 

An Example of Portfolio Management

Consider the example of the large pharmaceutical firm, Pfizer.  Pfizer and all its competitors routinely manage large families of projects in an integrated manner.  The overall integration of their project management efforts are done to address and compensate for the realities of the pharmaceutical industry, one fraught with extremely high development costs and long lead times for product introduction.  For example, at any particular point in time Pfizer will have numerous projects under research and development, some smaller number entering various stages of clinical trials, and finally, a small set that are commercially introduced.  Each step of this development cycle is fraught with risks and uncertainties.  Will the drug work effectively in clinical trials?  Will it have minimal negative side effects?  Can it be produced in a cost-effective manner?  Is the drug’s release time sensitive in that there is a limited market opportunity for it to address?  The answers to these and numerous other questions serve to rapidly trim down Pfizer’s on-going portfolio of development projects.  In fact, as Figure 1.4 shows, the lead-time necessary to bring a new drug to the marketplace can easily stretch out over 15 years and the success rate of drugs actually being commercially developed is estimated to be less than 0.002%.

Source: Lehtonen, (2001), in Artto, et. Al (Eds.): p. 41

An Example in Portfolio Management Continued

Under circumstances this risky, in which costs of failure are huge, and success is never certain, it is mandatory that pharmaceutical firms use highly sophisticated project portfolio management to ensure a steady supply of new drugs in the pipeline, for the simple reason that because failure rates are high and wash-outs are constant, the need for a continuous set of new drug opportunities is critical.

An illustrative example of this development process, which resembles a funnel, is shown in Figure 8.2.5.  Drug companies anticipate the lengthy lead times necessary to get final approval on a new drug by simultaneously funding and managing literally scores of development efforts.  The expectation is that some small proportion of the R&D portfolio will show sufficient promise and move ahead to clinical trials.  Many of the projects are further weeded out during clinical phases, resulting in ever smaller and smaller numbers of projects moving to final commercial rollout.

Pfizer uses portfolio management in order to actively manage the flow of development projects through their operations, much as Nokia or Erickson use a similar approach for keeping track of their product lines.  These portfolios of projects are necessary because some percentage of projects will be cancelled prior to full funding, others will be eliminated during development, and another set will likely suffer poor commercial results, leaving some few projects responsible for the firm’s return on investment.  Put another way, the company that puts all its eggs in one basket in the form of a single project, runs huge risks should the project fail or prove a disappointing performer in the marketplace.  Rather than take the risk, creating and constantly addressing and updating a portfolio of projects offers companies fallback options, greater financial stability, and the chance to respond to multiple opportunities.

Keys to Successful Project Portfolio Management

Although examples of successfully managed project portfolios are numerous, few researchers have investigated the key reasons why some companies appear to be better at managing this challenging process than others.  Brown and Eisenhardt (1997) recently undertook at study of six firms in the computer industry, all involved in multiple project development activities.  They determined that successfully managed project portfolios are usually the result of three factors, such as:

• Limited structure and communication freedom.  Successful multiple-project environments cannot effectively operate when they are constrained by restrictive layers of hierarchy, bureaucracy, rules, narrow communication channels, and rigid development processes.  In fact, successful portfolios emerge from an environment of flexibility and open communication.  The more personnel can build on improving existing product lines through improvisation and freedom to experiment, the more innovative new project ideas emerge.

• Low-cost environmental scanning devices.  Many firms devote considerable time and money toward developing their attempt at the “home run.”  They put all their eggs in one project basket and aim to take the marketplace by storm, often without having spent sufficient time analyzing future opportunities or noting the direction of commercial development.  On the other hand, successful project portfolio strategies involve making a number of low-cost “probes” into the future, through creating a number of experimental project prototypes to market testing and creating strategic alliances with potential partners.  The successful firms do not rely on home runs and narrowly-concentrated efforts; they are constantly building numerous new projects to test for acceptance prior to full-scale development.  RubberMaid, Inc., for example, routinely brings dozens and dozens of new product ideas to the market, samples the commercial response, and uses this information to make corrections to potential winners while deleting those ideas that did not measure up.

• Linking present and future through time-paced transition.  Successful portfolio management requires a rhythm, or sense of timing, as firms transition from one project development to the next.  Successful firms routinely develop long lead times and proactive planning aimed at affecting the smoothest possible sequencing from one project to its follow-on upgrade.  This transition is not done is a “herky-jerky” fashion; it is the result of creating and maintaining a seamless rhythm to innovation.

Additionally, Edgett and Cooper (2001) argue for the primacy of linking project portfolio thinking to the organizations strategic goals.  When projects do not support the corporate mission, vision, or goals, they support a “disconnect” between the operational staff and a firm’s top management.  The best way to evaluate a firm’s portfolio of projects lies in assessing them as a holistic body, aimed collectively at accomplishing the organization’s strategic goals.

Problems with Implementing Portfolio Management

What are some of the best-known problems with creating an effective project portfolio management system with organizations?  While there are numerous factors that can negatively affect the use of portfolio management, recent research seems to suggest that the following are some of the most likely problem areas that need to be properly addressed in order to gain maximum benefit from a portfolio of projects.  Common problems include:

• A technical community that will not give up projects.  Within many organizations is the technical core of project engineers, research scientists, and other technical personnel who work to develop the firm’s project prototypes.  One common phenomenon is this technical cadre’s unwillingness, often due to pride or sheer stubbornness, to give up on project ideas that are deemed too risky, too costly, or inappropriately aligned with strategic goals.  Top management may seek to trim the catalog of ongoing projects for sound strategic reasons.  Getting the engineers and scientists to accept this reasoning is, however, another problem.

• Projects and/or the portfolio no longer reflect the company strategy.  Sometimes a firm can begin the process of realigning and reprioritizing its strategic outlook yet continue to develop projects or invest in a portfolio that no longer accurately reflects the new strategic vision.  Strategy and portfolio management must accurately reflect a similar outlook.  When they out of alignment, either the project portfolio will lead to the continued pursuit of outmoded goals or the firm’s strategy will de facto, shift back to earlier emphases.

• Poor quality projects.  The worst-case situation is for a company to populate its portfolio of project initiatives with poor quality or unnecessary projects.  Portfolio management within the context of product lines adheres to the notion that a firm’s product portfolio must be routinely rebalanced to ensure that a sufficient number of products of differing type are available to offset each others’ weaknesses.  For example, “cash cows” are used to support and fund the costs associated with innovative new products.  In project portfolio analysis, a similar need for ensuring balance is required.  Sometimes, the critical analysis of a firm’s portfolio requires hard decisions, project cancellations, and readjusting resources.  But it is precisely this attention to the ongoing status of the portfolio that can prevent it from becoming over-populated with the wrong kinds of projects.

• Resources are too scarce.  One of the key resources for all projects is human beings.  Personnel costs comprise one of the highest sources of project expense.  Prior to spending large amounts of time creating a project portfolio, it is necessary to ensure that the required resources, when needed, will be available.  A principle cause of project portfolios that under perform is a lack of adequate resources, especially personnel, to support the development of the portfolio.

Portfolio management is the tool that project organizations use to more closely align overall corporate strategy with their project management practices.  By creating a sense of complementarity among all ongoing projects, these companies can start reaping the potential benefits from having their project management teams working together, rather than at cross purposes.  Portfolio management is a visible symbol of the strategic direction and commercial goals of a firm.  By the projects they promote and develop, they send a clear signal to the rest of the company regarding priorities, resource commitment, and future directions.  Finally, portfolio management offers an alternative and useful method for managing overall project risks by seeking continuous balance within the portfolio among various families of projects, risk versus return trade-offs, and efficiently run projects versus non-performers.  As more and more organizations reorient their work toward project management, it is highly likely that ever-larger numbers will take the next logical step, towards organizing their projects using portfolio management.

Project Selection Procedures – A Cross-Industry Sampler

The “art” and science of selecting projects is one that organizations take extremely seriously.  Good project selection can result in creating a portfolio of profitable ventures while poor choices, even if well managed through their development, are costly and do most companies little good.  Firms in a variety of industries have developed highly sophisticated methods for project screening and selection in order to best ensure that the projects they choose to fund offer the best promise of success.  As part of this screening process, organizations often evolve their own particular methods, based on technical concerns, available data, and corporate culture and preferences.  To give a sense of the lengths to which some organizations go with project selection, the following list offers examples of a diverse collection of companies and their project screening techniques:

• Hoechst AG, a pharmaceutical firm, uses a scoring portfolio model with 19 questions in five major categories when rating project opportunities.  The five categories include: probability of technical success, probability of commercial success, reward to the company, business strategy fit, and strategic leverage (ability of the project to employ and elevate company resources and skills).  Within each of these factors are a number of specific questions which are scored on a 1 – 10 scale by management.
• The Royal Bank of Canada has developed a scoring model to rate its project opportunities.  The criteria for their portfolio scoring include project importance (strategic importance, magnitude of impact, and economic benefits) and ease of doing (cost of development, project complexity, and resource availability).  Expected annual expenditure and total project spending are then added to this rank-ordered list to prioritize the project options.  Decision rules are used (e.g., projects of low importance that are difficult to execute get a “no go” rating).
• The Weyerhaeuser corporate R&D program has put processes in place to align and prioritize their R&D projects.  The program has three types of activities: technology assessment (changes in external environment and impact to the company); research (building knowledge bases and competencies in core technical areas); and development (development of specific commercial opportunities).  Four key inputs are considered when establishing priorities: significant changes in the external environment; long-term future needs of lead customers; business strategies, priorities, and technology needs; and corporate strategic direction.
• Mobil Chemical uses six categories of projects to determine the right balance of projects that will enter their portfolio: 1) cost reductions and process improvements; 2) product improvements, product modifications, and customer satisfaction; 3) new products; 4) new platform projects and fundamental/breakthrough research projects; 5) plant support; and 6) technical support for customers.  Senior management reviews all project proposals and determine the division of capital funding across these six project types.  One of their key decision variables involves a comparison of “what is” with “what should be.”
• At 3M’s Traffic Control Materials Division, during project screening and selection, management uses a project viability chart to score project alternatives.  As part of the profile and scoring exercise, personnel must address how the project accomplishes strategic project objectives and critical business issues affecting a specific group within the target market.  Projected project return on investment is always counterbalanced with riskiness of the project option.
• Exxon Chemical’s management begins evaluating all new project proposals in light of the business unit’s strategy and strategic priorities.  Target spending is decided according to the overall project mix portfolio.  As the year progresses, all projects are reprioritized using a scoring model.  As significant differences between projected and actual spending are uncovered, the top management group makes adjustments for next year’s portfolio.

Lesson 2 Activities :

1. You will now need to go to the Lessons tab and to the Lesson 2 Activities folder and finally to the Lesson 2 Discussion Forum..

Please answer the questions in the Discussion Forum

• A number of these companies directly link new project proposals and market opportunities with their current portfolio of ongoing projects.  What are the advantages to seeking complementarity between existing projects and new opportunities?
• If you were to design a set of criteria for project selection of an IT software developer when they examine their project opportunities, what are the criteria you would select?  Why?

Sources: Foti, R., (2002), “Priority Decisions,” PMNetwork, vol. 16 (4): pp. 24-29.

Crawford, J.K. (2001), “Portfolio Management: Overview and Best Practices,” in J. Knutson (Ed.), Project Management for Business Professionals, Wiley: New York, pp. 33-48.

2. Next you will need to read:

• the PDF file of the GM/EDS Case Study which can also be found by going to the lessons tab and clicking on the Lesson 2 Activities folder.
• After reading please answer the questions in the GM/EDS Case Study Discussion Forum

 

References:

Artto, K.A., Martinsuo, M. and Aalto, T. (Eds.), (2001), Project portfolio management: Strategic management through projects.  Helsinki, Project Management Association.

Artto, K.A. (2001), “Management of project-oriented organization – conceptual analysis,” in Artto, K.A., Martinsuo, M. and Aalto, T. (Eds.), (2001), Project portfolio management: Strategic management through projects.  Helsinki, Project Management Association.

Brown, S.L. and Eisenhardt, K.M. (1997), “The art of continuous change: linking complexity theory and time-paced evolution in relentlessly shifting organizations,” Administrative Science Quarterly, Vol. 42 (1): pp: 1-34.

Cooper, R. and Edgett, S. (1997), “Portfolio management in new product development: Lesson from the leaders I,” Research Technology Management, Vol. 40 (5), pp: 16-28.

Dobson, M. (1999), The Juggler’s Guide to Managing Multiple Projects.  Newtown Square, PA: Project Management Institute.

Dye, L.D. and Pennypacker, J.S. (Eds.), (1999), Project portfolio management: Selecting and prioritizing project for competitive advantage.  West Chester, PA: Center for Business Practices.

Edgett, S.J. and R.G. Cooper, 2001, Portfolio Management for New Products, 2nd Ed., Perseus Books: New York

Elton, J. and Roe, J. (1998), “Bringing discipline to project management,” Harvard Business Review, March-April.

Foti, R. (2001), “Picking projects for profitability,” PMNetwork, vol. 15 (12), pp. 23-26.