Value-Based Portfolio Management
Transforming Your Business & Improving Your Competitive Advantage
Product portfolio management is fundamental to business success. In any economic environment, companies are challenged with optimizing their portfolio to ensure that their product development pipeline reflects business objectives and growth targets. Senior managers observe business case presentations by enthusiastic product and market managers that forecast optimistic market share gains and growth projections. Unfortunately, nearly 50% of these new products never achieve market success, as measured by sales and profits.1 Managers need to address the following questions
- Were the financial projections realistic?
- Did companies choose the right products to develop and/or projects to pursue?
- Did the new products hit the mark – as measured by the creation of real customer value?
Financial versus Value Based Metrics
Without quantifiable alternatives, most companies continue to depend on sales estimates, market share projections and net present value calculations. While these measures are important components of a business case, these figures typically comprise an uncomfortable amount of speculation and guesswork.
Market Edge believes there is a better and more reliable way to select the right products to include in a business, division and company portfolio. Business leaders who want to improve chances of developing sustainable sales growth and profitability must include customer value based measures into portfolio development and management. Furthermore, companies should approach portfolio management holistically, considering how resource allocations and priorities align to create products that create value for the target customers.
Value Based Portfolio Management
With a Value Based Portfolio Management (VBPM) approach, portfolio management never stands alone. Strategic planning, capability assessment and gathering actionable customer insights are ‘hard-wired’ to the development and management of a value-based portfolio. Market Edge utilizes this ‘VBPM’ approach to help clients build and sustain a leading position in the marketplace.
Value Based: The fundamental driver for pursuing an opportunity (new products and/or services) should be based on the value created for the customer. This is the foundation that will enable the creation of new product and service offers that have a competition advantage – because they start with the identification of problems and underserved needs rather than product features and attributes.
Portfolio: The entire collection of products, services and support that is required to create the value realized by the target customer(s).
Management: It is essential that senior management is active in the process of creating and supporting the organizational framework and process that enables the creation of a value-based portfolio.
Far more encompassing than the traditional portfolio management, VBPM leads to a product portfolio that:
- Satisfies customers at a greater level by delivering products and services that address their most important problems and leads to innovation opportunities
- Aligns new products and service offers with the overall business strategy
- Optimizes portfolio decisions to ensure the appropriate amount of investment and resources are in the right places to enable success
The key building block to portfolio management is a deep understanding of your target customers and deep understanding of their requirements. Furthermore, you must have insight that enables you to uncover customer needs, their future direction and future requirements so you can provide significant customer value and not just peer-competitive offers or simply fill a gap in a product line. Perhaps an equally significant problem is that portfolio management often is treated only as a tactical activity related to allocating engineering resources and accelerating individual development projects.
A Change is Needed
Portfolio management is not a new discipline. There are many books and papers that suggest methods for determining which projects and products will be the most successful. Unfortunately, many of these accepted tools (e.g. GE/McKinsey Matrix and BCG Matrix) are useful for classifying existing products and business opportunities but not as useful for determining the future composition of a product portfolio. Even tools that appear to take an external (i.e. customer / market) view by including customer meetings or expert focus groups often fail to capture the customer’s true, unspoken and latent needs beyond simple feedback regarding product features or attributes.
Many companies have become very comfortable with a phased review process or stage-gate model and the milestone meetings that address project plans and execution. These models are effective at managing individual projects but may not effectively address or challenge broader strategic decisions about the portfolio and the value generated for the target customers.
Value Based Portfolio Management provides your business with the actionable insights to evaluate a product or service solution – not just whether it meets a set of internal specifications, but whether it provides enough customer value such that it influences their behavior (i.e. start, stop or continue to use a specific product or service). Furthermore, it can lead to the discovery of customers’ latent requirements or delighters that can enable companies to introduce truly innovative products and services. Offers are not innovative because they include a technology or capability that is unique to your company; an offer is innovative when it addresses an underserved need or problem that is significant to your customers.
A World-Class Portfolio Requires World-Class Customer Insights
When times get tough, customer focus typically becomes a casualty of financial constraints. There is no longer money spent on customer visits dedicated solely to gathering customer insights. As a result, the next new products may not generate significant value and will likely be an upgrade of existing features or a reaction to a competitor’s product launch. When financial constraints increase, companies need to sharpen their focus and align resources to the opportunities that will enable a competitive advantage.
The only way to ensure you have the best portfolio is to ensure that you continue gathering world-class insight through continuous engagement with your target customers. While slashing expenses across the board may result in short term savings, the long term consequence may be a significant devaluing of the business as your business loses ‘touch’ with customers and misses the mark with the next generation of products and services.
Action Plan
When customer value considerations are integrated into every stage of your business planning process, your company or business can begin to create an optimal portfolio that delivers value to the customer while also supporting the business strategy. Properly aligning the portfolio with the vision and strategy is not easy or simple. However, Value Based Portfolio Management will enable your company to stay ahead of peers and develop a sustainable competitive advantage that results in above-average industry sales growth and profits.
Market Edge collaborates with client teams to lead the application of the VBPM process that will lead to the following:
- A project portfolio that is aligned with company and/or business strategy
- Products in your portfolio that offer a high degree of customer value
- A Portfolio that has the appropriate balance of risk and value
- Aligned resources that match the portfolio priorities
- Clear performance metrics