Strategic Portfolio Management looks to the uncertain future
A new project idea?
Innovation is a high strategic priority for most companies. (see Exhibit 1 from McKinsey Quarterly 2007)
However these priorities are changing. Call it the credit crunch, stock market turmoil or natural desasters, priorities are always have a reason to change. What remains constant is the questions :
"Given limited resources and uncertainty, is this a product the company should fund now?"
To demonstrate this, here is a story of a radical new product idea: a solar teapot.
The “Saga of the Solar Teapot” is a simplified example of how we help companies use Value-based Management to address this challenge.
The teapot’s internal champions claim it heats water twice as fast as any product on the market, saves energy, can be used when camping and appeals to the green movement: “It is going to be a real winner for our company. We predict the market is at least $500 million and, as first to the market, we can grab 60 to 70% share within a year following launch.”
“Not so fast,” says the CFO, “you have to show me. Given your track record, if the market is as big as $200 million and if you can take 30%, I’d be truly surprised. Plus, I’m not sure you can pull this off technically. What I want to know is, is this a good investment for our company.”
There are proponents for a new product where there is little experience, little hard data and a lot of uncertainty. Champions make projections based on optimistic assumptions about technology, markets, price and so on; hey, they believe in their product and want to see it funded! On the other hand, others like the CFO are appropriately skeptical.
The challenge: how to assess business value as objectively as possible, obtaining buy-in from finance, marketing, R&D and others who must make it happen?
The teapot needs to be evaluated on two levels. Is it a potentially profitable product in itself? Does the teapot represent a good use of resources given other opportunities in the portfolio?
Two basic questions need to be answered: Can we do it? What is it worth IF we can do it?
These questions are usually addressed via spreadsheet business models driven by assumptions about the inputs. Our clients have found this approach to be unsatisfactory for a number of reasons:
- Decision makers distrust spreadsheet models, which they do not understand.
- Spreadsheet models take a huge amount of time, create version control problems, and are full of errors after a number of iterations.
- Spreadsheet models require the skills of a trained analyst; models are not directly accessible by stakeholders.
- Most models fail to deal explicitly with uncertainty and how it can affect value.
- Assumptions are subject to politics, endless argumentation, rework and gamesmanship.
"Value Based Management" to the Rescue
Value Based Management has proven to be a most effective way to address the above issues.
Value Based Management uses a Value Map. It is a graphic representation of a business model transparent to all stakeholders. Uniquely, value maps define the math needed to derive Expected Net Present Value (ENPV) — NPV weighted for the impact of risk and uncertainty.
Users access a library of Industry specific Value Maps, e.g., New Product, Product Extension, Cost Reduction, and other business models. The maps assure a consistent
approach to economic evaluation while clearly revealing the business model structure to users and decision makers.
Input templates representing each of the factors in the Value Map, enable users to interact with the business model and instantly see results on project and portfolio value. Web-based software encourages collaboration and understanding among various functions enabling, in the words of a Fortune 100 portfolio manager, “insightful conversations about value.”
For practical advice, coaching and technical demonstration on improving and developing your project’s business case with Zebrafish International, please send your request by e-mail to firstname.lastname@example.org.