KNOWBOT - INNOVATION PORTFOLIO OPTIMIZATION

The Traditional Approach and Need to Innovate

The term Portfolio is certainly borrowed from financial books where a financial portfolio is built using decisions on investments in equity, debt or hybrid funds. Similarly, for any business organization investment in R&D or a New Product or a New Machine is an investment. Traditionally, portfolio management has been used as a tool for strategic planning and management of projects, programs and operations. Very often organizations introduce portfolio management to merely manage projects, but there is a lack of mechanism to continuously monitor and optimize the portfolio. The pipeline is usually filled with projects that might not be very valuable, but they seem to provide results. The issue is the absence of a measurement system that can clearly evaluate and confirm the correct projects to keep and the ones to be let go. Typically, it is the lack of governance in the value and flow in the pipeline, that makes innovation portfolio management a necessity for all enterprises.

It is important to understand that portfolio management is done over the end-to-end value chain of any organization and it is not just limited to one business function. It can include services, products and even business models that can provide a competitive push to organizations whilst ensuring substantial return on investments on a consistent basis. This implies that strategy deployment and execution of projects with tangible results should be continuously integrated. Many businesses have struggled, not because their business strategy was flawed, but because they could not translate strategy into adequate projects integrated across the end-to-end value chain. Furthermore, the absence of due importance of innovation has often resulted in an imbalance of resource allocation, thereby making portfolios ineffective and missing their estimated potential.

Assessing the Current Portfolio Sufficiency

At any given point in time, every organization has a set of projects or initiatives running that are based on strategic targets, market trends, customer needs and brand strategy. These four inputs are precisely the source of all the opportunities that are used as a basis to develop the roadmap for a local and global generation plan. But before understanding the steps of generating an innovation portfolio optimization, let us discuss an important KPI (key performance indicator) for Innovation, known as Portfolio Sufficiency.

Portfolio Sufficiency is the ratio of total projected turnover or cumulative project margins against the total growth targets planned for the company. Measuring Portfolio Sufficiency gives a clear picture of the impact of existing projects/pipelines and visualizes the quantum of additional projects to be added to meet future growth targets. The chart below is an example of a current portfolio analysis of cumulative sales through all projects. It represents the projection of a company’s turnover/ cumulative margins from existing products/services and the ones currently in the pipeline (the coloured area). The grey area is the shortfall, or gap, between current turnover and the growth targets, indicating the insufficiency in the portfolio and highlights the need to add more projects / initiatives for the coming years.