Strategic Portfolio Management

A smart, realistic and relatively fast way to gain sustainable competitive advantage

Stephen J. Garfein
President, RPM Systems Corporation

Abstract

Project Management helps ensure that projects are done right. Strategic Portfolio Management determines the very future of the enterprise; its competitiveness, and ultimately, its survival. Think of strategic successes such as Microsoft, Costco, and Starbucks and strategic failures such as TWA, Digital Equipment, and WordPerfect. Each had a strategic portfolio. Each made strategic decisions on what to place in their portfolios and how to execute. Some have thrived. Some have not survived. This paper provides a framework for developing and maintaining an enterprise-wide Strategic Portfolio Management capability.

This paper defines and champions Strategic Portfolio Management which the author believes is the natural, evolutionary next step made possible by the foundational enterprise project management (EPM) tools and process currently being implemented in many organizations.

Strategic Portfolio Management Defined

Strategic Portfolio Management is a closed-loop process encompassing all enterprise investments. To illustrate, a company's portfolio options might include funding internally generated ideas, buying other companies, returning cash to stockholders as dividends, modernizing facilities, implementing a major IT system, increasing employee compensation, and paying down debt. Deciding which of the options to invest in is a core responsibility of company's executive leadership team. This paper presents a process for making those investment decisions and then translating the resulting strategic portfolio into great performance.

Part 1. Presents three brief case studies illustrating various aspects of Strategic Portfolio Management.
Part 2. Describes the AIM Process for developing and managing a strategic portfolio.
Part 3. Outlines the project management prerequisites for Strategic Portfolio Management.
Part 4. Discusses the importance of the leadership factor in Strategic Portfolio Management implementation.
Part 5. Offers seven best practices for translating great strategy into great performance.

Strategic Portfolio Management can be a vehicle for transformation and breakthrough. Bill Davidson writes in his book Breakthrough, “Think of breakthrough as enterprise-scale innovation—significant enough to shape an emerging enterprise or to reform the core of an existing organization”(2004, p. 4). Breakthroughs typically result from large-scale, long-term initiatives that use advanced technologies and radical process innovations to achieve leaps in operating performance, financial results, and market position as outlined in the following Apache, Yellow Roadway, and Boeing examples.

Enterprise project management (EPM) capability is an essential component of Strategic Portfolio Management. Exhibit 1 depicts the author's view of the emerging role of Strategic Portfolio Management that it is built on the foundation of enterprise project management. Exhibit 2 lists currently available EPM solutions. There are numerous enterprise project management solutions available today. All require significant tailoring and staff training to be successful. However, once an enterprise makes the investment and masters the EPM toolset, it is ready to use it strategically, as described in the paper. The Strategic Portfolio Management process is software independent and can be implemented with any of the solutions listed.

Strategic Portfolio Management is built on a foundation of enterprise project management (EPM)

Exhibit 1. Strategic Portfolio Management is built on a foundation of enterprise project management (EPM).

Enterprise Project Management Solutions commercially available in 2005

Exhibit 2: Enterprise Project Management Solutions commercially available in 2005

Part 1. Case Studies

This paper uses three brief case studies to illustrate the application of Strategic Portfolio Management. The three examples are: 1) the Apache Helicopter, 2) Yellow Roadway Corporation, and 3) the new Boeing 787 Dreamliner (Exhibit 3) and will ask the question: What will be impact of high-quality, low-cost, Internet-based collaboration tools on the demand for passenger aircraft?

The Apache was designed, developed and marketed using the concept of “Less is More.” But more on that later. As this paper was written, it became clear the Less Is More model also applied to the other two case studies – just an interesting coincidence or a useful strategic concept?

Three case studies: The Apache Helicopter, Yellow Roadway, and the Boeing 787

Exhibit 3. Three case studies: The Apache Helicopter, Yellow Roadway, and the Boeing 787

Case Study 1: The Apache Helicopter Program and a Bet the Company Strategy

The Apache helicopter was designed and built by what was then Howard Hughes’ Helicopter Company. It is a breathtaking example of wildly successful strategic decision-making. Before the Apache, Howard Hughes (and his heirs, after his death in 1976) had tried to give away the Helicopter Company to other aerospace companies. There were no takers. After winning the Apache production contract in 1984, Hughes’ heirs were able to sell the company for half a billion dollars.

The winning Apache design by Hughes Helicopter Company employed a design philosophy of “Less Is More.” Bell Helicopter was significantly heavier and slower. Exhibit 4 contrasts the two-rotor blade, heavy, slow design flown by Bell Helicopter (top) with the four-blade, agile design by Hughes that ultimately won the flyoff competition.

Exhibit 5 portrays the competitive environment at the time. The Apache had two types of competition: The first from other branches of the military for the basic mission, and the second from other Army programs; all competing for a finite development budget. (Here there were two portfolios operating: the Army's development portfolio had to fit within the overall DoD portfolio.) Exhibit 6 provides a model showing some of the external and internal factors impacting product design acting on the Apache helicopter program. The Apache was the largest component in the Helicopter Company's strategic portfolio, but as shown in Exhibit 7 there were a number of other important components in the portfolio. Lastly Exhibit 7 also looks at the Apache as one component in the company's strategic portfolio. The entire Helicopter Company was viewed as an aggregation of projects and programs by an organization that was then called Financial Planning and Control but today would probably be called an Enterprise Program Management Office

Apache design by Hughes Helicopter Company (bottom photo) Bell Helicopter (top photo)

Exhibit 4. Apache design by Hughes Helicopter Company (bottom photo) Bell Helicopter (top photo).

Apache's competition for development funding

Exhibit 5. Apache's competition for development funding.

Apache strategic model

Exhibit 6. Apache strategic model

Exhibit 7. The enterprise viewed as an aggregation of projects.

Case Study 2: Yellow Roadway Corporation

The Yellow Roadway stock price more than doubled in two years, and they have been the most admired company in their field for three years running according to FORTUNE magazine (Exhibit 8). One element of this success story has been leadership provided by the executive leadership team (see The Leadership Factor discussed later in Part 5 of this paper). Another factor has been the “Less Is More” philosophy that has been in operation in the trucking industry; twenty-five years ago the were sixty carriers, today there are one tenth that number and Yellow Roadway is number one. Less Is More in this case translated to fewer carriers equals greater market share. This growth at Yellow Roadway was facilitated by a robust information technology infrastructure that included an EPM solution, an Enterprise Program Management Office (EPMO), and experienced project managers. The Yellow Roadway strategic portfolio was created using the AIM process described in Part 2 of this paper.

Yellow Roadway stock price doubled in two years. and Yellow has been number one in its field for three years running on the FORTUNE list of most admired companies

Exhibit 8. Yellow Roadway stock price doubled in two years. and Yellow has been number one in its field for three years running on the FORTUNE list of most admired companies.

Case Study 3: The Boeing 787 versus the Airbus A380 – A Bet the Company Decision?

With the explosive growth of virtual teams in different locations and widely separated time zones, easy to use, seamless communications is becoming an essential tool in support of Strategic Portfolio Management. Exhibit 9 shows an example of a collaboration tool, Microsoft Communicator.

What effect will these real-time, Internet-based, low cost communications applications have on business travel? In the last century business travel on steamships and railroads was replaced by air travel. Over the next ten years what impact will high-speed Internet access, collaboration tools, and low cost video conferencing have on business-related air travel? How many 550-seat aircraft will the marketplace demand?

Virtual Travel: Microsoft Communicator

Exhibit 9. Virtual Travel: Microsoft Communicator.

Apache strategic model

Exhibit 10. Physical Travel: The Boeing 787
Dreamliner versus the 550 passenger Airbus A380.

Both Boeing and Airbus have made huge strategic portfolio bets on what the future of airline travel will look like. Exhibit 10 above contrasts the size of the two aircraft. As in the Apache Helicopter case, both Boeing and Airbus had to place these bets while taking into account all the other opportunities and demands in their strategic portfolios. And these bets by Airbus and Boeing could not be more different: Airbus has built and is conducting initial flight tests of its 550 passenger, two-deck A380. Boeing is building a single deck aircraft named the Dreamliner with half the passenger capacity. Adequately comparing the market potential of these two aircraft is beyond the scope of this paper; however, a brief synopsis follows:

The Airbus A380 has significant risks. The large wingspan requires most airports to widen taxiways so that two planes can pass each other. Many airports must add additional jetway bridges to accommodate the large number of passengers and baggage handling systems also need to be upgraded. A handful of airports at major international hubs are investing millions of dollars. Difficulties in manufacturing have delayed deliveries and pushed service entry back by at least a year to late 2006 or early 2007. These delays have also caused a significant cost overrun of nearly $1.5 billion driving up unit cost by about 25%. This overrun has hurt Airbus’ ability to investment in a B787 competitor.

The major risk for Boeing is the Dreamliner's large-scale composite fuselage structure; however the upside is that the B787 will use 20 percent less fuel than any other airplane of its size and will be half the cost of the A 380. It will provide breakthroughs in cabin comfort for its passengers and will permit economical direct point-to-point travel, not the hub and spoke travel system required to fill a 550-seat aircraft. And very important from a financial perspective, the engine design minimizes risk for leasing companies, if the aircraft is leased to another airline. Now that we have briefly looked at some of the strategic aspects of preceding examples, the remainder of this paper will provide a Strategic Portfolio Management framework.

Part 2. Developing and Managing a Strategic Portfolio: The AIM Process

According to Jack Welch, “When it comes to peering into the future, you can't be paranoid enough. I know that strategy is a living breathing, totally dynamic game. In real life, you pick a general direction and implement like hell.” (Welch, 2005, p. 138) The questions are 1) how do you pick that general direction, 2) translate it into actionable initiatives and, in the words of Jack Welch, 3) implement like hell with assurance that you are meeting your strategic objectives?

The Mesa Research AIM process is depicted in Exhibit 11, below. The right side of the diagram shows the standard project management functions and will not be addressed at any length in the paper. Instead we will address the three boxes in the diagram labeled Preferred Future State, Initiative Articulation, and Projectization of Initiatives. Experience has shown this framework is an effective tool to develop and implement strategic plans, but it requires an ongoing and firm commitment by the executive leadership team throughout the entire cycle of strategy formulation, readiness, and execution.

The AIM framework for Strategic Portfolio Management

Exhibit 11. The AIM framework for Strategic Portfolio Management.

Source: Mesa Research Group, LLC. Used with permission.

The AIM implementation schedule

Exhibit 12. The AIM implementation schedule.

The AIM cycle process as described in this paper was developed by the Mesa Research Group, LLC.

The closed-loop Strategic Portfolio Management process

Exhibit 13. The closed-loop Strategic Portfolio Management process.

Exhibit 12 depicts a typical nine-month implementation schedule. The AIM process can be implemented relatively quickly, however implementation of the resulting inititiaves can span a number of years. This can be accomplished concurrently with implementation of an EPM system, if one is not already in place.

The Strategic Portfolio Management process is a closed loop system that links enterprise strategy investments to project results and provides performance metrics feedback on strategic outcomes to the executive leadership team. (Exhibit 13).

Initiatives to achieve a preferred future state

Exhibit 14. Initiatives to achieve a preferred future state.

Initiative Articulation Diagram

Exhibit 15. Initiative Articulation Diagram.

An enterprise initiative diagram is shown in Exhibit 14. . Enterprise initiatives represent a long term strategic undertaking that supports the company's vision and mission These initiatives can have a wide range of objectives; they can be designed to deliver significant growth and change in the company's market coverage, offerings, competitiveness, market position, infrastructure, capabilities, and financial performance. Each core initiative is sponsored by a member of the executive leadership team. Each bubble in the diagram shown in Exhibit 15 represents a component that is needed to achieve the preferred future state. Each enterprise initiative is assigned to an Initiative Team to develop a roadmap (the diagram shown above) to reach the preferred future state. Some of these initiative components will be selected for funding by the executive leadership team and go on to become programs and projects. Two tools have been developed to facilitate this initiative development and filtering process.

The Initiative Articulation Workbook

Exhibit 16. The Initiative Articulation Workbook

The Opportunity Profile Workbook

Exhibit 17. The Opportunity Profile Workbook

The Initiative Articulation Workbook (Exhibit 16) is used by each initiative team to describe: 1) the preferred future state, 2) the current state, and 3) the components required to achieve the preferred future state – each component may in turn develop into one or more projects, depending on its opportunity profile. The Opportunity Profile Workbook, Exhibit 17, is completed by the Initiative Team for each candidate project. The workbook is used to prepare strategic, financial, and risk assessments for each proposed project. These assessments are summarized and prioritized in a database that provides the executive leadership team with the weighted value of each candidate project. The executive leadership team uses this portfolio of candidate projects as one of the factors in making their investment decisions.

An overview of a typical Strategic Portfolio Management implementation is shown below in Exhibit 18. The process is supported by an enterprise project management system (EPM) and a business metrics solution. In this example the EPM solution is based on Microsoft Project Server. Other EPM solutions were listed earlier in Exhibit 2.

Overview of AIM process implementation

Exhibit 18. Overview of AIM process implementation.

Part 3. Project Management Prerequisites for Sustainable SPM

A solid project management foundation is a prerequisite to successful Strategic Portfolio Management (Exhibit 19) In addition, an enterprise program management office (EPMO), whether it is actually called that or not, is also essential to success. Without a central EPMO-type capability, the executive leadership team will find it difficult to develop initiatives and assure their successful execution. Skills needed for Strategic Portfolio Management are an outgrowth of the project management skill set (Exhibit 20)

Strategic Program Management is built on a strong project management foundation

Exhibit 19. Strategic Program Management is built on a strong project management foundation.

The evolution from project management to Strategic Portfolio Management

Exhibit 20. The evolution from project management to Strategic Portfolio Management.

Part 4. The Leadership Factor

The success of Strategic Portfolio Management is dependent on the ability of executive leadership to work together as a team. The critical question is does senior leadership have the characteristics and qualities essential to ensure success? Here are questions to help you determine whether an organization's leadership has what it takes. Exhibit 21 shows executives from the preceding case studies in Strategic Portfolio Management.

Examples of strategic portfolio leadership. “Less is More.” “Synergies.” “A gutsy, bet-the-company move.”

Exhibit 21. Examples of strategic portfolio leadership. “Less is More.” “Synergies.” “A gutsy, bet-the-company move.”

1.   Can you make the painstaking effort to develop a highly articulated master plan for your strategy?

2.   Can you align the senior team to fully support that strategy?

3.   Can you stay focused on and committed to the same core strategic program for a minimum of three to five years? For the rest of your career?

4.   Will you intervene when necessary to remove roadblocks and obstacles to breakthrough?

5.   Can you balance day-to-day demands and distractions with your commitment to the breakthrough program?

6.   Can you ensure that the financial and organizational resources necessary to deliver breakthrough will be available as needed?

7.   Will you and your team monitor every gate in every series circuit in the organization to identify and address breakdowns?

8.   Would you, if necessary, remove your closest colleagues from their positions if they became the principal barrier to successful execution of the breakthrough strategy?

9.   Can you establish and manage 50 to 100 personal contracts with key executives who will deliver the key components of the strategy?

10. Can you give the same speech hundreds of times?

After investment decisions are made, perhaps the next most critical function of any executive leadership team to set the stage for great execution.

Part 5. Best Practices in Translating Great Strategy into Great Performance

Companies typically realize only about 60% of their strategies’ potential value because of defects and breakdowns in planning and execution (Kendall & Rollins, 2003). Application of the following seven best practices will help the executive leadership team maximize the returns on their portfolio investments.

1: Keep it simple, make it concrete.
Strategy is a highly abstract concept at most companies. Strategy is often confused with vision or aspiration. Strategy is not something that can be easily communicated or translated into action. But without a clear sense of where the company is headed and why, lower levels in the organization cannot put in place executable plans. In short, the link between strategy and performance can't be drawn because the strategy itself is not sufficiently concrete. The AIM process described earlier in this paper provides a framework to help the Initiative teams translate strategic initiatives into concrete, actionable projects. To start off the planning and execution process on the right track, high-performing companies avoid long, drawn-out descriptions of lofty goals and instead stick to clear language describing their course of action. By being clear about what the strategy is and isn't keeps the enterprise headed in the same direction. Resource and action planning becomes more effective; and accountabilities are easier to specify.

2: Debate assumptions, not forecasts
High-performing companies want their forecasts to drive the work they actually do. To make this possible, they have to ensure that the assumptions underlying their long-term plans reflect both the real economics of their markets and the performance experience of the company relative to competitors. Separating the process of building assumptions from that of preparing financial projections helps to ground the business unit–corporate center dialogue in economic reality. The Opportunity Profile Workbook, an integral part of the AIM process, provides a framework to help each Initiative Team quantify their assumptions. Fact-based discussion resulting from this kind of approach builds trust between the top team and each unit and removes barriers to fast and effective execution.

3: Use a rigorous framework, speak a common language.
To be productive, the dialogue between the corporate center and the business units about market trends and assumptions must be conducted within a rigorous framework. What is critical is that the framework establishes a common language for the dialogue between the corporate center and the units—one that the strategy, marketing, and finance teams all understand and use. The AIM process provides that rigorous framework; a framework tailored to the specific requirements of the enterprise. Without a rigorous framework to link a business's performance in the product markets with its financial performance over time, it is very difficult for top management to ascertain whether the financial projections that accompany a business unit's strategic plan are reasonable and realistically achievable.

4: Discuss resource deployments early.
Companies can create more realistic forecasts and more executable plans if they discuss up front the level and timing of critical resource deployments. Once agreement is reached on resource allocation and timing at the unit level, those elements are factored into the company's two-year plan (one year is usually too short a time horizon). Because the AIM process focuses on strategic opportunities, resource availability is almost always a significant challenge. The organization must continue to resource its ongoing operations, plus the new strategic initiatives. This is why an enterprise project management (EPM) system is essential to success of a Strategic Portfolio Management implementation. Early identification of resource demand and potential bottlenecks is required to maintaining initiative momentum. Challenging business units about when new resources need to be in place focuses the planning dialogue on what actually needs to happen across the company in order to execute each unit's strategy.

5: Clearly identify priorities.
To deliver any strategy successfully, managers must make thousands of tactical decisions and put them into action. But not all tactics are equally important. In most instances, a few key steps must be taken—at the right time and in the right way—to meet planned performance. An integral part of the AIM process involves summarizing all opportunities in terms of the strategic value, financial return, and risk. These assessments aid the executive leadership team in clearly identifying priorities – which projects will be funded and in what order. Leading companies make these priorities explicit so that each executive has a clear sense of where to direct his or her efforts. Large enterprises cannot control implementation from headquarters, but can work with the Initiative Teams to agree on the priorities, communicate relentlessly, and hold managers accountable for executing against their commitments. An enterprise program management office (EPMO) is usually required to provide this type of enterprise-wide integration.

6: Continuously monitor performance.
High-performing companies use real-time performance tracking. They continuously monitor their resource deployment patterns and their results against plan, using continuous feedback to reset planning assumptions and reallocate resources. This real-time information allows management to spot and remedy flaws in the plan and shortfalls in execution—and to avoid confusing one with the other. Two components are essential, in one form or another, to achieve this real-time performance tracking: They are an EPM system and an EPMO. Continuous monitoring of performance is particularly important in highly volatile industries, where events outside anyone's control can render a plan irrelevant. Under CEO Alan Mulally, Boeing Commercial Airplanes’ leadership team holds weekly business performance reviews to track the division's results against its multiyear plan. By tracking the deployment of resources as a leading indicator of whether a plan is being executed effectively, BCA‘s leadership team can make course corrections each week rather than waiting for quarterly results to roll in. Furthermore, by proactively monitoring the primary drivers of performance (such as passenger traffic patterns, airline yields and load factors, and new aircraft orders), BCA is better able to develop and deploy effective countermeasures when events throw its plans off course.

7: Reward and develop execution capabilities.
No list of rules on this topic would be complete without a reminder that companies have to motivate and develop their staffs. At the end of the day, no process can be better than the people who have to make it work. Companies that create tight links between their strategies, their plans, and ultimately their performance often experience a cultural multiplier effect. Integral to AIM framework, shown in earlier in Exhibit 11, are the people strategy and performance management components to link strategy to plans to management performance . Over time, as they turn their strategies into great performance, leaders in these organizations become much more confident in their own capabilities and much more willing to make the stretch commitments that inspire and transform large companies. In turn, individual managers who keep their commitments are rewarded—with faster progression and fatter paychecks—reinforcing the behaviors needed to drive any company forward.

Conclusion

Strategic Portfolio Management is the next big opportunity to achieve and sustain competitive advantage. To be successful, Strategic Portfolio Management must be built on top of a robust enterprise project management system that the organization is trained to use and actually finds indispensable for day-to-day management.

Davidson, B. (2004). Breakthrough: How great companies set Outrageous objectives and achieve them, Hoboken, New Jersey: John Wiley & Sons, Inc..

Welch, J. (2005, April 18,). Jack Welch It's All in the Sauce. [Review of the book ] Fortune 151(8) 138

Kendall, G. I. & Rollins, S. C. (2003) Advanced project portfolio management and the PMO. Ft. Lauderdale, FL: J. Ross Publishing.

Mankins, M. C. & Steele, R. (2005, July-August) Turning Great Strategy into Great Performance. Harvard Business Review 83 (7) 64-73

This material has been reproduced with the permission of the copyright owner. Unauthorized reproduction of this material is strictly prohibited. For permission to reproduce this material, please contact PMI or any listed author.

© 2004, Stephen Garfein
Originally published as part of the Proceedings 2005 PMI Global Congress – Toronto, Canada

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