489: Product Portfolio Management: Third of Seven Knowledge Areas of Product Mastery – with Chad McAllister, PhD

Product Mastery Now for Product Managers, Leaders, and Innovators

How product managers can master product portfolio management

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TLDR

Portfolio management is a crucial aspect of product development that helps organizations strategically allocate resources, balance projects, and align their product innovation efforts with overall business goals. By understanding the essentials of portfolio management, product managers and leaders can better position their ideas, defend resources for their projects, and contribute to the organization’s success. This article explores the fundamentals of portfolio management, its goals, and frameworks for structuring portfolios, and provides insights on aligning product innovation projects with organizational strategy. It also discusses the importance of portfolio management for product managers, the characteristics and goals of portfolios, and the common approaches to linking portfolios to strategy.

Introduction

In the world of product development, portfolio management plays a vital role in helping organizations prioritize projects, allocate resources effectively, and ensure that their product innovation efforts align with the overall business strategy. As Peter Drucker famously stated, “Because the purpose of business is to create a customer, the business enterprise has two–and only two–basic functions: marketing and innovation.” Portfolio management is the key to driving successful innovation and creating products that customers love.

For product managers and leaders, understanding the essentials of portfolio management is crucial. It not only helps them better position their ideas and defend resources for their projects but also enables them to contribute more effectively to the organization’s success. By mastering portfolio management, product professionals can ensure that their organizations focus on creating the right products that drive innovation and deliver value to customers.

Understanding Portfolio Management

What is a Portfolio?

A portfolio is a collection of projects or products that a company invests in and manages strategically. These projects may or may not be related to each other and can be categorized based on various criteria, such as new product ideas, enhancements to existing products, fixes, or research and development initiatives. The portfolio represents the organization’s investment in innovation and its commitment to creating value for customers.

The Role of Portfolio Management

Portfolio management is a decision-making process that involves continuously reviewing and revising the list of active projects to ensure that resources are allocated optimally and aligned with the organization’s strategy. It aims to maximize the value of the portfolio, balance projects based on predetermined criteria, and maintain the right number of projects to avoid spreading resources too thinly.

Portfolio management operates in a dynamic environment where projects are at different stages of completion, and there is no certainty of success for each individual project. However, by managing the portfolio effectively, organizations can increase the overall odds of success across the full range of projects and products.

Why Portfolio Management Matters for Product Managers

Product managers play a critical role in driving innovation within their organizations. They are responsible for creating products that generate revenue, satisfy customer needs, and contribute to the organization’s growth. Understanding portfolio management is essential for product managers for several reasons:

1. Positioning Ideas: By understanding the principles of portfolio management, product managers can better position their ideas and align them with the organization’s strategic goals. This increases the chances of securing support and resources for their projects.
2. Defending Resources: When projects face competition for resources, product managers who understand portfolio management can effectively defend the resources their projects need. They can articulate how their projects contribute to the overall portfolio value and align with the organization’s strategy.
3. Career Growth: Product managers are well-positioned to become leaders within their organizations. As they progress in their careers, understanding portfolio management becomes increasingly important. It enables them to make strategic decisions, allocate resources effectively, and drive the organization’s product innovation efforts.

Goals of Portfolio Management

Value Maximization

One of the primary goals of portfolio management is to allocate resources in a way that maximizes the overall value of the portfolio. This involves considering the commercial worth of individual projects and the associated risks. By prioritizing projects with the highest potential value and managing risks effectively, organizations can optimize the return on their innovation investments.

Balance

Achieving the right balance of projects within the portfolio is another key goal of portfolio management. This balance may include a mix of new product ideas, enhancements to existing products, and maintenance projects. By maintaining a balanced portfolio, organizations can ensure that they are investing in both short-term and long-term opportunities while managing risks effectively.

Strategic Alignment

Portfolio management plays a crucial role in ensuring that the overall portfolio reflects the business strategy and that investments and projects align with the organization’s strategic objectives. By linking the portfolio to the strategy, organizations can ensure that their innovation efforts are focused on the areas that matter most and contribute to the achievement of business goals.

Right Number of Projects

Having the optimal number of projects in the portfolio is essential to avoid spreading resources too thinly and hindering progress. Portfolio management helps organizations maintain a manageable number of projects based on available resources. By regularly reviewing and adjusting the portfolio, organizations can ensure that they are investing in the right projects and not overextending themselves.

Characteristics and Goals of Portfolios

Dynamic Decision-Making Process

Portfolio management is a dynamic decision-making process that requires ongoing review and adjustment. As market conditions change, customer needs evolve, and new opportunities arise, organizations must be able to adapt their portfolios accordingly. Regular portfolio reviews and a flexible approach to resource allocation are essential for staying agile and responsive to changing circumstances.

Projects at Different Stages

A portfolio typically consists of projects at different stages of completion. Some projects may be in the ideation phase, while others are nearing launch or are already in the market. Portfolio management must take into account the unique needs and challenges of projects at different stages and allocate resources accordingly.

Increasing Overall Odds of Success

While not every project in a portfolio will be successful, effective portfolio management aims to increase the overall odds of success across the full range of projects and products. By diversifying the portfolio, managing risks, and allocating resources strategically, organizations can improve their chances of achieving their innovation goals.

Limited Resources

Resources for product development and management are limited, even in large organizations. Portfolio management helps organizations make the best use of these limited resources by prioritizing projects with the highest potential value and strategic importance. By allocating resources wisely, organizations can maximize the impact of their innovation efforts.

Frameworks for Structuring Portfolios

Categorizing Projects

One approach to structuring a portfolio is to categorize projects based on their nature, such as new product ideas, product enhancements, maintenance and support, and research and development. This categorization helps organizations ensure that they have a balanced mix of projects and are investing in both short-term and long-term opportunities.

Innovation Landscape Model

The innovation landscape model is another framework for structuring portfolios. It categorizes projects based on the level of newness of the business model and the technology involved. The four categories in this model are:

1. Routine Innovation: Projects that leverage existing business models and technologies.
2. Radical Innovation: Projects that introduce new technologies within existing business models.
3. Disruptive Innovation: Projects that introduce new business models while leveraging existing technologies.
4. Architectural Innovation: Projects that introduce both new business models and new technologies.

By using the innovation landscape model, organizations can ensure that they are investing in a diverse range of innovation projects and managing risks appropriately.

Three Horizons Model

The three horizons model, developed by McKinsey & Company, organizes projects based on the need for innovation rather than timeframe. The three horizons are:

1. Horizon 1: Extending the core business by making incremental improvements to existing products and services.
2. Horizon 2: Developing new opportunities by exploring adjacent markets or leveraging new technologies.
3. Horizon 3: Creating viable options for the future by investing in transformational activities aligned with the organization’s long-term vision.

The three horizons model helps organizations balance their innovation efforts across different time horizons and ensures that they are investing in both short-term and long-term growth opportunities.

Aligning Product Innovation Projects with Strategy

The Importance of Strategic Alignment

Ensuring that the portfolio of projects aligns with the organization’s strategy is critical for success. Without a clear link between portfolio management and strategy, projects may lack direction, and the organization may struggle to achieve its goals. Strategic alignment ensures that innovation efforts are focused on the areas that matter most and contribute to the achievement of business objectives.

Approaches to Linking Portfolio to Strategy

There are three common approaches to linking a portfolio of projects to strategy:

1. Top-Down (Bucket) Model: In this approach, the organization’s strategy is used to define “buckets” or categories of projects, and resources are allocated to each bucket based on strategic priorities.
2. Bottom-Up Model: This approach involves identifying and prioritizing projects based on emerging opportunities and customer needs, and then aligning them with the overall strategy.
3. Hybrid Approach: A combination of the top-down and bottom-up approaches, where the organization defines strategic buckets but also allows for flexibility to pursue emerging opportunities.

The choice of approach depends on factors such as the stage of the company, the industry dynamics, and the need for flexibility. However, research by the Product Development and Management Association (PDMA) has shown that the most successful innovators often use a hybrid approach, combining strategic planning with the ability to adapt to changing circumstances.

Conclusion

Portfolio management is a strategic activity that plays a vital role in driving successful product innovation. By understanding the essentials of portfolio management, product managers and leaders can better position their ideas, defend resources for their projects, and contribute to the organization’s overall success.

Adopting a portfolio management approach that aligns with the organization’s strategy and leverages appropriate frameworks for structuring portfolios can help companies optimize their product development efforts and create products that customers love. By mastering portfolio management, product professionals can ensure that their organizations focus on creating the right products that drive innovation, deliver value to customers, and contribute to long-term business success.

As Mark Andreessen, the creator of the Mosaic browser and now a venture capital partner, stated, “Brand will not save you, marketing will not save you, and account control will not save you. It’s the products.” Portfolio management is the key to ensuring that organizations are investing in the right products and driving meaningful innovation. By embracing portfolio management and making it a core part of their product development process, companies can position themselves for success in an increasingly competitive and dynamic business landscape.

Useful links:

• Check out the 2024 Product Development and Management Body of Knowledge by Allan Anderson, Chad McAllister, and Ernie Harris
• Find out how the Rapid Product Mastery Experience, the fastest path to higher-performing product managers and teams, can help your team

Innovation Quote

“Brand will not save you, marketing will not save you, and account control will not save you. It’s the products.” – Marc Andreessen

Chad’s Bio

Chad McAllister, PhD, is a product management professor, practitioner, trainer, and host of Product Mastery Now, a top 1% podcast with a global audience of product managers, leaders, and innovators. Since 2014, each episode dissects the art and science of product management, exploring the seven research-backed knowledge areas for product mastery. Listen to Product Mastery Now on your podcast player and find the detailed show notes at https://productmasterynow.com/mastery/.

Chad is the coauthor of Product Development and Management Body of Knowledge: A Guide Book for Product Innovation Training and Certification. The book distills five decades of industry research and current practice into actionable wisdom, empowering product professionals to innovate and excel. He also wrote Turning Ideas into Market-Winning Products: What You Need to Know to be a Product Developer, Manager, and Innovator and contributed to PDMA Toolbook 3.

With 30+ years of professional experience in product and leadership roles across large and small organizations and dynamic startups, he now devotes time to teaching and helping others improve. Using his Rapid Product Mastery Experience, he facilitated innovation growth in organizations such as Motorola, Panasonic, Praxair, EnerSys, and HAAS. Further, his training programs have been instrumental for countless product managers, with key offerings including:

1. Rapid Product Mastery for Individuals: A comprehensive program to learn and apply the seven knowledge areas of product mastery, paving the way for the New Product Development Professional certification from PDMA.
2. Certified Innovation Leader: A strategic course designed to teach the innovation process and enhance organizational innovation capabilities, complemented by professional recognition from AIPMM.
3. Product Innovation for Senior-Level Leaders: An examination of how conventional leadership inhibits innovation and what must leaders do to foster innovation in their organization.

Chad also teaches the next generation of product leaders through advanced graduate courses at institutions including Boston University and Colorado State University and notably re-engineered the Innovation MBA program at the University of Fredericton, significantly broadening its impact.

Recognized as a Top 40 Product Management Influencer and a Top 10 Innovation blogger, his journey began with a natural curiosity, taking apart gadgets in his youth, which evolved into formal studies in Electrical Engineering. As his career progressed, he became more involved in business decisions and yet continued encountering frustrations common to innovators as he strived to consistently develop products customers loved. His path led him back to additional graduate studies to delve deeper into the complexities of innovation, culminating in a PhD in Organization and Management, with an emphasis in Innovation. His dissertation received special recognition. He is also a certified New Product Development Professional (from PDMA), Project Management Professional (from PMI), and Certified Innovation Leader (from AIPMM).

Chad lives in Colorado, where his favorite seasons are fall and spring, as they bring change. He and his family have enjoyed many RV road trips, exploring the US and Canada. One of these trips was the precursor to the Product Mastery Now podcast, when they traveled the US for a year, and Chad interviewed product innovators he met along the way.

You can find more details and connect with Chad at his LinkedIn profile: https://www.linkedin.com/in/chadmcallister.

Thanks!

Thank you for taking the journey to product mastery and learning with me from the successes and failures of product innovators, managers, and developers. If you enjoyed the discussion, help out a fellow product manager by sharing it using the social media buttons you see below.