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result is a lack of focus, too many projects, too few resources, and quality of execution
will suffer.4.2.1. Research on New Product Portfolio Management Methods
Portfolio management is fundamental to successful product development, and companies
outside the financial industry have used portfolio management techniques for decades.
After 30 years of research, both academic and real world, Cooper et al.^5 have found that
many methodologies exist, including the following:● Financial or economic models. These models treat project evaluation much like
a conventional investment decision. They include traditional computation approaches
such as: payback, breakeven analysis, return on investment, discounted cash flow
methods (net present value, internal rate of return), and Productivity Index. Most often
in such models, the net present value for each project is compared to cutoff criteria
for gate decisions. The present value used to rank projects resources are allocated
by rank. These methods also often make use of Economic Value Added (EVA) style
techniques.
● Scoring/ranking models and checklists. These models rely less on quantified data
and more on subjective assessments about strategic fit with corporate objectives,
competitive advantage, and market trends.
● Probabilistic financial models. These models include Monte Carlo simulation,
decision tree analysis, and options pricing theory. Gates are expirations on project
options. Top management can choose to let the option expire worthless or exercise
the options and fund continued development.
● Behavioral approaches. These methods include Delphi approaches, which provide
a systematic way of integrating the collective wisdom of a decision-making group.
● Optimization techniques. This type of model searches for an optimal mix of new
and existing projects, maximizing profit subject to resource constraints.
● Decision support systems. Such systems are mathematical models that rely on sta-
tistics, simulation, and optimization, but nevertheless permit management interac-
tion and intervention.
● Mapping approaches. These models use bubble diagrams to visualize projects on
a Cartesian plane, extending the stars/cash-cows/dogs/wildcats model. These dia-
grams typically plot potential reward against the probability of success.^5Research shows that portfolio management methods work. Businesses that have gone
to the trouble of installing a systematic, consistent, explicit, and formal portfolio man-
agement system are clear winners. Their portfolios outperform the rest on all six per-
formance metrics: higher-value projects, better balance, the right number of projects, a
strategically aligned portfolio, and so on. The message is clear: Step 1 is to make a com-
mitment to installing a rigorous portfolio management process in your business. Cooper
et al. have found that:● Financial models usually do not work well. Those businesses that use financial
models as the dominant portfolio selection method end up with the poorest-
performing portfolios. Because markets are stochastic, forecasting environments
and probability distributions are difficult at best.4.2. P O RTFOLIOS OF TRADING/INVESTMENT SYSTEMS