Exploring Portfolio Decision‐Making Processes*

Portfolio management is the set of activities that allows a firm to select, develop, and commercialize a pipeline of new products aligned with the firm's strategy that will enable it to continue to grow profitably over the long term. To appropriately manage the firm's new product portfolio, decisions must be made about which projects to fund, to what levels, at what point in time. Previous research has investigated portfolio management decisions as individually discrete decisions. Significant streams of research have investigated both project selection and project termination decisions. This research project shows, however, that portfolio decision making may be better understood if it is considered as an integrated system of processes that considers these decisions simultaneously, along with other decisions such as those to continue a project with reduced funding. Using in‐depth data from four diverse case studies, we use a grounded theory approach to develop a general model of how firms make new product portfolio decisions. According to the findings from these cases, effective portfolio decision‐making processes produce a portfolio mindset, focus effort on the right projects, and allow agile decision making across the portfolio's set of projects. Effective portfolio decision making is the result of the interaction between three types of decision‐making processes that managers use in making decisions: evidence‐, power‐, and opinion‐based. Being able to use each of these types of processes to make decisions depends upon having the data inputs that they require. Three domain‐based decision input‐generating processes (i.e., cross‐functional collaboration, practices of critical thinking, and practices of market immersion) are associated with making evidence‐based portfolio decisions. In addition, organizational politics produces the inputs that are associated with power‐based portfolio decision making, while managerial intuition is associated with opinion‐based portfolio decision making. Firm cultural factors, including trust, collective ambition, and leadership style, are associated with how these evidence‐, power‐ and opinion‐based processes are combined into an overall portfolio decision making process, and whether the firm's processes are more rational and objectively made, or more politically and intuitively made. The article presents propositions for how the decision‐making processes interact in their associations with decision‐making effectiveness.     

Financial Evaluation of the Product Line

When decisions are being made about adding or dropping a product, most managers will make a financial evaluation of the product and they may try to get some sense of the riskiness of the decision. They will also probably consider the effect of the add/drop decision on other products in the line. Seldom, however, do they consider the risk of a product mix decision in the context of the risk level of the overall product line. Professors Rabino and Wright argue that product managers should take a leaf from the analytical book of financial analysts and calculate a "product Beta" that shows the impact of the risk of the individual product on the risk of the whole portfolio of products. They also suggest some other ways of sharpening the financial picture in what are often strictly marketing evaluations. This is Professor Rabino's second article in JPIM . As in the previous one he coauthored with Howard Moskowitz, this one adds some interesting analytical methodology to managerial decision making.     

An Empirical Investigation of the Antecedents and Outcomes of NPD Portfolio Success

Managing new product development (NPD) portfolios is difficult and little is known about how successful NPD portfolio management can improve overall firm performance. Despite regular calls in the literature for more research on NPD portfolio management, what successful NPD portfolio management means and how firms can achieve it remains unclear. For this reason, this paper combines theory and previous empirical findings to build a model of the antecedents and outcomes of NPD portfolio success. We generate and test 12 hypotheses with empirical data from 189 paired dyads in Dutch firms. Our results show that all three dimensions of NPD portfolio decision‐making effectiveness (i.e., portfolio mindset, focus, and agility) are associated with achieving the three dimensions of NPD portfolio success (i.e., strategic alignment, maximal NPD portfolio value, and portfolio balance), which in turn influences market performance. While a portfolio mindset and agility are related to all three dimensions of NPD portfolio success, focus is related only to strategic alignment and maximal value. No one dimension of NPD portfolio decision‐making effectiveness or portfolio success is sufficient to achieve overall market performance. We also found several unexpected findings with important implications. For example, portfolio balance, one recommended measure of portfolio success, has no direct link to market performance, but operates through the other two dimensions of NPD portfolio success, i.e., strategic alignment and maximal portfolio value. We conclude our paper with implications for further theory development and testing on successful NPD portfolio decision‐making, and with implications for managerial practice.     

The Impact of Product Portfolio Strategy on Financial Performance: The Roles of Product Development and Market Entry Decisions

Innovation is one of the most important issues facing business today. The major difficulty in managing innovation is that managers must do so against a constantly shifting backdrop as technologies, competitors, and markets constantly evolve. Managers determine the product portfolio through key decisions about product development and market entry. Key strategic questions are what portfolio strategies provide the greatest reward. The purpose of this study is to understand the relative financial values of each component of a product portfolio. Specifically, the paper examines the short‐term and long‐term financial impacts of product development strategy and market entry strategy. These strategies reflect two critical tensions that must be balanced in product portfolio decision making and essentially determine a firm's product portfolio. In doing so, the paper also investigates how a firm's capabilities drive each component of a product portfolio. From the empirical analyses in the context of the biomedical device industry, the paper found important insights regarding product portfolio strategies. First, a large product portfolio helps a firm's financial performance. In particular, the pioneering new products have strongest impacts on short‐term performances, and nonpioneering mature products do not provide significant contribution. Second, the results indicate a persistent first‐mover advantage. The first‐to‐market new products yield not only an immediate effect, but also persistent long‐term effects, suggesting that it is important to be first in the market even though there may be short‐term losses. Third, the results suggest the need to balance between “mature” and “new” products. Also, firms need to balance “first‐to‐market” and “late‐entered” products. Because a new or pioneering product requires more resource, it may hurt other products in the portfolio. Thus, without support from mature or follower products, new products and pioneering products alone may not increase firm sales or profit. Fourth, from a long‐term perspective, the paper found that the financial market only rewards a firm's overall capability to deliver new products first in the marketplace. Thus, short‐term performance is mainly driven by product‐level innovativeness, whereas firm‐level innovativeness enhances forward‐looking long‐term performance. Fifth, the paper also found that pioneering new products are driven by integrating both primary and complementary technological capabilities. And nonpioneering new products are mainly driven by the capabilities in primary technology domain. These results provide important insight into the relative value and timing of return on investment in radical versus incremental innovation and alternative market entry strategies. By understanding the performance trade‐offs of these different factors in the short and long term, one can develop better guidelines for optimizing innovation strategies, and their dependence on both external and internal environmental conditions.     

New Product Portfolio Management: Practices and Performance

Effective portfolio management is vital to successful product innovation. Portfolio management is about making strategic choices—which markets, products, and technologies our business will invest in. It is about resource allocation—how you will spend your scarce engineering, R&D, and marketing resources. It focuses on project selection—on which new product or development projects you choose from the many opportunities you face. And it deals with balance—having the right balance between numbers of projects you do and the resources or capabilities you have available. In this article, the authors reveal the findings of their extensive study of portfolio management in industry. This study, the first of its kind, reports the portfolio management practices and performance of 205 U.S. companies. Its overall objective was to gain insights into what portfolio methods companies use, whether they are satisfied with them, the performance results they achieve with the different approaches, and suggestions for others who are considering implementing portfolio management. The research first assesses management's satisfaction with portfolio methods they employ and notes that some firms face major problems in portfolio management. Next, businesses are grouped or clustered into four groups according to management's view of portfolio management: Cowboys, Crossroads, Duds, and Benchmark businesses. The research first assesses management's satisfaction with portfolio methods they employ and notes that some firms face major problems in portfolio management. Next, businesses are grouped or clustered into four groups according to management's view of portfolio management: Cowboys, Crossroads, Duds, and Benchmark businesses. Various performance metrics are used to gauge the performance of the business's portfolio. The results reveal major differences between the best and the worst. Benchmark businesses are the top performers. Their new product portfolios consistently score the best in terms of performance—high-value projects, aligned with the business's strategy, the right balance of projects, and the right number of projects. The authors take a closer look at these benchmark businesses to determine what distinguishes their projects from the rest. Benchmark businesses employ a much more formal, explicit method to managing their portfolio of projects. They rely on clear, well-defined portfolio procedures, they consistently apply their portfolio method to all projects, and management buys into the approach. The relative popularity of various portfolio methods—from financial methods to strategic approaches, bubble diagrams, and scoring approaches—are investigated. Not surprisingly, financial approaches are the most popular and dominate the portfolio decision. But what is surprising is the dubious results achieved via financial approaches. Again, benchmark businesses stand out from the rest: they place less emphasis on financial approaches and more on strategic methods, and they tend to use multiple methods more so than the rest. Strategic methods, along with scoring approaches, yield the best portfolios; financial methods yield poorer portfolio results. The authors provide a number of recommendations and suggestions for anyone setting out to implement portfolio management in their business.     

The Effects of Decentralization in Strategy‐Making and National Culture on NPD Portfolio Planning

Traditionally, the understanding among scholars and practitioners has been that a portfolio of NPD projects is the expression of a firm's strategy and thus it must support the strategy. In keeping with this view, the current study focuses on new product development (NPD) portfolio planning, which is defined as a firm's effort to formulate portfolio decisions using a defined innovation strategy. Connecting portfolio decisions to a defined innovation strategy has been associated with higher innovation success. Surprisingly, empirical research indicates that portfolio decisions do not always support the company's innovation strategy. Furthermore, during recent years, an increasing number of authors underscore the importance of responsiveness and adaptability in portfolio decision‐making. The current study addresses these two issues by examining a direct effect of decentralization in strategy‐making on NPD portfolio planning, and a moderating effect of decentralization in strategy‐making on the relationship between NPD portfolio planning and NPD program success. The study also examines the influence of national culture on the proposed relationships. The theoretical model was tested using data from the 2012 PDMA Comparative Performance Assessment Study. Findings indicate that NPD portfolio planning positively influences NPD program success. Also, results revealed inverted U‐shaped direct and moderating effects, respectively, of decentralization in strategy‐making on NPD portfolio planning, and of decentralization in strategy‐making on the relationship between NPD portfolio planning and NPD program success. With regard to the moderating effect of national culture, results indicate that uncertainty avoidance does not moderate the relationship between NPD portfolio planning and NPD program success. Nonetheless, we found significant moderating effects of individualism and power distance on the curvilinear relationship between decentralization in strategy‐making and NPD portfolio planning.     

Managerial Political Behavior in Innovation Portfolio Management: A Sensegiving and Sensebreaking Process

By applying formalized innovation portfolio management systems, firms seek to ensure an alignment of their goals and strategy with their employees' different abilities, actions, and outcomes. However, research indicates that nonrational, political behavior also determines formalized innovation portfolio management decision‐making processes. Research on political behavior in respect of innovation portfolio management usually conceptualizes political behavior as a set of self‐serving activities, such as negotiation, bargaining, coalition building, and acquiring power, aimed at protecting, maintaining, or promoting an actor's self‐interest and power. Consequently, extant research tends to focus on political behavior's dysfunctional impacts on decision‐making processes and their subsequent outcomes. This paper challenges this negativity bias by exploring a novel, neutral specification of political behavior and its relation to innovation portfolio management decision‐making processes. By conducting an automotive industry case study focusing on the innovation portfolio management decision‐making processes, the paper analyzed the data from 43 interviewees. The conceptual model shows that managers' political capabilities determine their ability to behave politically. According to the results, political behavior comprises the activities that prepare the stage and orchestrate others in order to form a political coalition. Furthermore, results show that political behavior functions as a sensegiving and a sensebreaking process, with managers seeking to shape an innovation project's understanding according to their interests and to influence portfolio decisions. The resulting novel specification of political behavior extends the construct's scope and validity by investigating their functional and dysfunctional aspects, and by indicating that a political sensemaking process complements formalized innovation portfolio management decision‐making processes.     

Exploring new product portfolio management decisions: The role of managers' dispositional traits

Product strategy links to new product development (NPD) through new product portfolio management (NPPM). This dynamic decision process addresses the strategy implementation questions of identifying which new product ideas to pursue and their relative priorities. Despite the importance of NPPM in implementing product strategy, firms exhibit substantial performance-affecting differences. We investigate one potential source for such differences by examining the impact of managers' dispositional factors as a possible explanation. Using a case study research method, we examine differences in NPPM strategies and managers' revealed dispositional traits across three divisions of a single conglomerate firm operating in different business-to-business markets. Based on our analysis, we offer propositions relating managers' dispositions to NPPM strategy: analytic cognitive style is associated with balance, ambiguity tolerance is associated with strategic fit, and leadership style is associated with the relative weights applied to each dimension.     

The impact of technological convergence on firms' product portfolio strategy: an information-based imitation approach

Technological convergence in the electronics industry has enabled disparate new functionalities to be added to existing basic products. Although the main drivers of technological convergence have been examined by the technological change literature, the impact of technological convergence on firms' product portfolio strategies remains a largely unexplored issue. Drawing on the technological change and information-based imitation literatures, we develop hypotheses on how the introduction in the market of technologies from other product categories affects the way firms modify their product portfolio vis-à-vis the market leader. Data on nearly 300 imitation strategies at the product portfolio level, which cover over 3,500 handset models introduced by 55 mobile phone vendors from 1994 to 2010, show that the relationship between the level of technological convergence in a product category and the firms' level of imitation of the market leader product portfolio strategy is U-shaped. Data also show that the firm's prior experience plays an important role in moderating this curvilinear relationship.     

What Makes a Family Firm Innovative? CEO Risk‐Taking Propensity and the Organizational Context of Family Firms

Investigating the new product portfolio innovativeness of family firms connects two important topics that have recently received considerable attention in innovation and family firm research. First, new product portfolio innovativeness has been identified as a critical determinant of firm performance. Second, research on family firms has focused on the questions of if and why family firms are more or less innovative than other organizational forms. Research investigating the innovativeness of family firms has often applied a risk‐oriented perspective by identifying socioemotional wealth (SEW) as the main reference that determines firm behavior. Thus, prior research has mainly focused on the organizational context to predict innovation‐related family firm behavior and neglected the impact of preferences and the behavior of the chief executive officer (CEO), which have both been shown to affect firm outcomes. Hence, this study aims to extend the previous research by introducing the CEO's disposition to organizational context variables to explain the new product portfolio innovativeness of small and medium‐sized family firms. Specifically, this study explores how the organizational context (i.e., ownership by top management team [TMT] family members and generation in charge of the family firm) of family firms interacts with CEO risk‐taking propensity to affect new product portfolio innovativeness. Using a sample of 114 German CEOs of small and medium‐sized family firms operating in manufacturing industries, the results show that CEO risk‐taking propensity has a positive effect on new product portfolio innovativeness. Moreover, the analyses show that the organizational context of family firms impacts the relationship between CEO risk‐taking propensity and new product portfolio innovativeness. Specifically, the relationship between CEO risk‐taking propensity and new product portfolio innovativeness is weaker if levels of ownership by TMT family members are high (high SEW). Additionally, the effect of CEO risk‐taking propensity on new product portfolio innovativeness is stronger in family firms at earlier generational stages (high SEW). This result suggests that if SEW is a strong reference, family firm‐specific characteristics can affect individual dispositions and, in turn, the behaviors of executives. Therefore, this study helps extend the knowledge on the determinants of new product portfolio innovativeness of family firms by considering an individual CEO preference and the organizational context variables of family firms simultaneously.     

创新项目组合管理绩效关键影响因素的实证研究

为了维持长期的竞争优势,企业需要不断进行技术创新和产品创新。如何在有限的研发资源下使创新项目组合的绩效最大化是企业进行创新管理中面临的主要问题。本文从创新项目组合的战略一致性、平均项目绩效和业务协同3个指标来度量创新项目组合管理绩效,并从流程和管理者的视角研究其关键影响因素。通过实证研究发现,高管参与和项目组合管理流程的设计与实施对项目组合的战略一致性有显著的正向影响;高管参与、项目经理胜任力和项目终止质量对平均项目绩效有显著正向影响;项目经理胜任力、项目组合管理流程的设计与实施和项目中止质量对业务协同有显著正向影响。     

Portfolio management for new product development: results of an industry practices study

Portfolio management for product innovation – picking the right set of development projects – is critical to new product success. This article reports on the new product portfolio practices and performance of a large sample of firms in North America. Reasons why portfolio management is important are identified, followed by the relative popularity of the different portfolio techniques: financial methods are first, followed by business strategy methods, bubble diagrams and scoring models. Next, how the various portfolio methods fare in terms of six performance metrics is probed. Financial methods, although the most popular and rigorous, yield the worst results overall, while top performing firms rely more on non‐financial approaches – strategic and scoring methods. The details of how some of these more popular methods are employed by firms to rate and rank development projects are also provided. Finally, managerial implications, including suggestions for making portfolio management more effective in industry, are outlined.     

Venture capitalists' decision to withdraw: The role of portfolio configuration from a real options lens

When does a venture capital firm withdraw from an investment project prior to its completion? This study offers a real options view on this decision by examining the contingent effects of portfolio configuration. We explore how project withdrawal can be influenced by two distinct dimensions of portfolio configuration, portfolio focus in a strategic domain and portfolio diversity across multiple domains. The empirical analysis shows that while portfolio focus weakens the negative effect of industry‐level uncertainty on a venture capitalist's propensity to withdraw from a project, portfolio diversity strengthens the effect of uncertainty. This study informs current research on the boundary of real options theory and sheds light on the behavior of venture capitalists in financing entrepreneurship. Copyright © 2013 John Wiley & Sons, Ltd.     

项目组合选择研究：基于模糊理论的模型建构及验证

项目组合的选定与企业经营息息相关,然而传统的选择方法存在许多限制。本文应用模糊理论建构一个项目组合的决策模型,模型中纳入了成本、利润及风险等3个决策因子,探讨在资源有限的情况下项目成本及获利的交互影响关系,并利用模糊归属函数建构一个数学规划模型。为了验证模型的有效性,用此模型与传统模型进行求解比较,证实了所提出模型的实用性。     

Differences between industrial and consumer product managers

Marketing decision areas and general background characteristics of industrial and consumer product managers are examined in this article. A discriminant analysis identifies those marketing decision areas that separate industrial and consumer product managers. The position of industrial product manager was found to be more of a marketing coordinator while the consumer product manager was found to be a more active decision maker.     

Antecedents to Decision‐Making Quality and Agility in Innovation Portfolio Management

Innovation portfolio management (IPM) is a dynamic decision‐making process, in which projects are evaluated and selected, and resources are allocated. Previous research has developed an understanding of IPM success and its influencing factors. However, little research investigated the quality of the decision‐making process and the ability to quickly adapt the portfolio. This study focuses on the antecedents of decision‐making quality and agility (i.e., responsiveness to changes in the environment). Based on a decision‐making framework, five structural and cultural IPM components are derived as important antecedents of decision‐making quality, which in turn influences agility. The structural components (1) clarity of strategic goals, (2) formality of the IPM processes, and (3) controlling intensity serve a coordinating function. The cultural components (4) innovation climate and (5) risk climate serve a motivating function in IPM. An analysis of a sample of 179 firms and their innovation portfolios through structural equation modeling using a double‐informant design documents that these five components all positively influence portfolio decision‐making quality, which in turn positively influences agility. Results further show that environmental turbulence moderates some of these relationships. While the positive effect of process formality is weakened under increasing turbulence, the effects of controlling intensity and climate for innovation are strengthened by environmental turbulence. The findings have theoretical implications for the understanding of IPM as a dynamic capability and practical implications for the management of portfolios in turbulent environments.     

Designing Visual Recognition for the Brand*

The present paper examines how companies strategically employ design to create visual recognition of their brands' core values. To address this question, an explorative in‐depth case study was carried out concerning the strategic design efforts of two companies: Nokia (mobile phones) and Volvo (passenger cars). It was found that these two companies fostered design philosophies that lay out which approach to design and which design features are expressive of the core brand values. The communication of value through design was modeled as a process of semantic transformation. This process specifies how meaning is created by design in a three‐way relation among design features, brand values, and the interpretation by a potential customer. By analyzing the design effort of Nokia and Volvo with the help of this model, it is shown that control over the process of semantic transformation enabled managers in both companies to make strategic decisions over the type, strength, and generality of the relation between design features and brand values. Another result is that the embodiment of brand values in a design can be strategically organized around lead products. Such products serve as reference points for what the brand stands for and can be used as such during subsequent new product development (NPD) projects for other products in the brand portfolio. The design philosophy of Nokia was found to depart from that of Volvo. Nokia had a bigger product portfolio and served more market segments. It therefore had to apply its design features more flexibly over its product portfolio, and in many of its designs the relation between design features and brand values was more implicit. Six key drivers for the differences between the two companies were derived from the data. Two external drivers were identified that relate to the product category, and four internal drivers were found to stem from the companies' past and present brand management strategies. These drivers show that the design of visual recognition for the brand depends on the particular circumstances of the company and that it is tightly connected to strategic decision making on branding. These results are relevant for brand, product, and design managers, because they provide two good examples of companies that have organized their design efforts in such a way that they communicate the core values of their brands. Other companies can learn from these examples by considering why these two companies acted as they did and how their communication goals of product design were aligned to those of brand management.     

Linking account portfolio management to customer information: Using customer satisfaction metrics for portfolio analysis

When appropriate variables are used, account portfolio analyses engender a convenient framework for the relationship composition of companies and allow management to reconsider which customers and relationship dimensions need attention. Based on an industrial company's key account relationships, the portfolio approach considered in this study employs Customer Satisfaction (CS) metrics as a portfolio dimension and suggests a new and more customer oriented approach to account portfolio analysis. Proposed portfolio matrices provide insights into the strength and stability of customer relationships. Furthermore, the matrices force managers to adopt a future perspective on customer relationships by evaluating the business potential of customers along with CS information and allow prioritization with respect to resource allocation. The study attempts to put forward customer heterogeneity in industrial markets and offers a managerial guideline embracing customer specific marketing actions. In addition, the paper proposes a new use for CS information in strategic decision making.