Product Portfolio Management Defined
What is Product Portfolio Management?
Product Portfolio Management is an approach to managing the balance of investments in a company’s product initiatives to increase market share and revenues.
Typically, the makeup of the product portfolio is determined by overall investment level (R&D or new product development (NPD) budget), strategic alignment, and risk tolerance. Risk often comprises multiple variables such as market and technical risk.
There are two aspects to Product Portfolio Management:
- One focuses on new products, those currently in development.
- The other includes in-market products (product lifecycle management) as well as new products.
Product lifecycle management includes decisions that influence marketing and sales budgets (including promotion) and decisions are often made in real-time.
Product Portfolio Management Guide
Why Is Product Portfolio Management Important?
Product portfolio management is important because it fuels your strategy. The product development strategy is the roadmap, and product portfolio management is the fuel.
Product portfolio management answers these questions:
- Which programs deserve the biggest investment?
- How should we allocate our R&D and Marketing budgets?
- What should be our product mix
- Incremental improvements to core products
- Adjacent markets
- New-to-the-world products
- How should we shift to faster growing markets?
- How can we capture greater market share?
Product portfolios help you manage a market basket of potential NPD activities and helps to make sense of how an individual product fits in the overall strategy. They enable you to understand products in relationship to one another and to understand them in terms of risk/return. This is so you don’t invest in a single product in isolation. They help you leverage your product platforms and determine the level of funding for derivatives.
Product portfolios help fund winning ideas because they enable companies to tune their risk profile to align with their product development strategy. They can place different bets based on relative risk return. Highly innovative products, ones that create new markets, involve high risk and potentially high rewards.
Sustainable high growth means creating not only a great new product portfolio but creating successive generations of new offerings. Product portfolio management takes the long view. It stages and selects the best product concepts to maximize the total value of innovation, while balancing risk and reward. It accomplishes this through optimizing resource allocation.
Besides driving growth, product portfolio management can also reduce time to market by tilting investment towards shorter-term projects that emphasize incremental improvement to existing products.
Product Portfolio Management Allocates R&D and Product Development Budgets
The product portfolio management concept is derived from the basic principles of financial investing, namely that portfolios need to be diversified, appropriate to the risk you want to assume, and managed strategically to achieve defined objectives, often with a focus on how much investment should go into more risky product innovation projects.
Product portfolio management is about maximizing your return on investment in new product development. It aligns your set of products to your strategy and it reflects the risk your company is willing to take. The first step is to choose a management framework that aligns with your company’s maturity and market position.
Product Portfolio Management Examples
These are some common axes that used to define and shape a product portfolio mix:
- Investment versus market/technical risks (most common)
- Market growth versus market share (second most common)
- Revenue or profit versus strategic alignment
- Competitive position versus market maturity
- Industry attractiveness versus competitive strengths
If you are applying the most common approach — a risk-based approach, a company might allocate its investments into three categories:
- Core Products
A core product introduces a modification of an existing offering to create a new product or new product line. Often this core product has the highest market share and often delivers the most to the bottom line. Core products are sold to existing customers and leverage existing product technologies. Typically, they have the highest resource allocation in the product portfolio.
- Adjacent Products
Adjacent products are conceptually and functionally the same as core products, but they serve a market that is new to the company. Or they may consist of a substantial modification to a product, expanding the market the company has already entered. These are often variants or derivative products from an existing product line.
- Transformational Products
Transformational products innovate in products and markets simultaneously. They may involve a ground-up design or a new-to-the-world product. They often include dramatic improvement in functionality or performance.
McKinsey Study Supports Balanced Product Portfolio
A study by McKinsey and Co., published in the Harvard Business Review found that “Companies that allocated about 70% of their innovation activity to core initiatives, 20% to adjacent ones, and 10% to transformational ones outperformed their peers, typically realizing a P/E premium of 10% to 20%…Our subsequent conversations with buy-side analysts revealed that this allocation is attractive to capital markets because of what it implies about the balance between short-term, predictable growth and longer-term bets.”
“A comprehensive audit will reveal how much time, effort, and money are allocated to core, adjacent, and transformational initiatives—and how that allocation differs from the ideal ratio for the company in question. With the difference exposed, managers can identify ways to achieve the desired balance….”
Source: Harvard Business Review
Example: A consumer bicycle company might continue to improve the usability of its product line for the general market, and create a new product portfolio plan through a stream of incremental innovations. For example, the company might add disk brakes or electronic gear shifting.
This is innovation in their core offering, an opportunity to increase market share, and an obvious choice for their product portfolio. However, if the company wishes to expand, it might try to market existing bikes to the professional bike messenger market, or it might create an electric bike. The first project introduces market risk, the second approach introduces product risk.
A transformational product for the consumer bike company might be a ground-up design of a cargo transport bike for professional bike meal deliverers. This project would involve a clean sheet design, while marketing to a new audience. It introduces both market and product risk simultaneously.
An Agile bicycle company would be able to make changes to its portfolio in weeks or months, not years to be able to take advantage of new opportunities quickly.
Examples of Product Portfolio Management Investment areas
Example: a mature company in an established market might have a product portfolio resource allocation of 70% for core products, 20% for adjacent and 10% for transformational product lines. This is a relatively low-risk approach to growing market share and a strategy based on profitability versus growth.
“Takeaway: Tailor the ideal investment profile to your company’s type, its maturity, and its appetite for risk.”
Example: A growth company might have 40% invested in the core, 40% in adjacent, and 20% in transformational initiatives. Similar to mature companies, growth companies might have a “cash cow” (see The Boston Consulting Group matrix) that generates profits to fund emerging categories. The metrics that growth companies use to evaluate their success is tied to incremental growth, or year over year increase in Annual Recurring Revenues (ARR).
Example: A Tech startup might allocate all of its budget to transformational products because often startups are taking on enormous market and technical risk at the same time. The company might have one product. It does not have an established market and is willing to absorb greater risk. Focused on growth it might allocate 0% for Core products, 0% in adjacent offerings, and 100% for the next blockbuster.
Takeaway: Tailor the ideal investment profile to your company’s type, its maturity, and its appetite for risk.
How Do You Get Started?
Often the first place to get started is to capture what you’re currently doing. This begins with a product portfolio analysis including a baseline of product development spending levels, typically outlined by the financial plan for the company.
After knowing the overall budget, you would execute these 5 steps:
- Understand gaps in product performance that need to be addressed
- Determine the dimensions important to you (margin, share, new markets)
- Verify that your product strategy is up to date and product are aligned to strategy
- Capture the current spending of your various product teams
- Map your “To-Be” Product Portfolio (see below)
Mapping Your New Product Portfolio
This product portfolio management map drives an intentional and deliberate allocation of R&D and Marketing investments that realize a risk/reward mix among these different types of products as determined by overall corporate strategy. By diagramming these investments along market and product risk dimensions, the map displays the relative investment in the various types of initiatives.
It allows a company to adjust the product portfolio management strategy according to its innovation strategy and risk tolerance. The map displays the various types of projects according to the risk they introduce, in order to show how investments fit with your company’s risk profile. It provides a snapshot of the current portfolio and reveals any gaps, for example, a low commitment to transformational products.
The map also creates a data-connection that tracks the financial flow between the corporate strategy – usually the first step in the yearly planning process – and the budgeting process, which usually concludes it. For most companies, this means that you are managing the funding of the entire portfolio and many different products at the same time.
Product or market risk are not the only possible dimensions. The more important axes to track are relative alignment with strategy and relative financial impact of the new product. Modify the plot to reflect the factors most important to your company’s growth.
Download this spreadsheet-based template to help map your product portfolio.
Product Portfolio Manager Versus Product Manager Roles
One of the most important components of Product Portfolio Management is how it provides governance for your product line and describes who are the decision-makers. The Product Portfolio Manager is most frequently the leader of the product portfolio and works with a general management team to refine it by prioritization decisions and then making overall portfolio decisions. While the product manager creates the portfolio, the most senior management in the organization approves and manages it. While the product manager creates the portfolio, the most senior management in the organization approves and manages it.
There is often a Senior Product Manager who oversees strategic investments and reports to the top Executives. This Senior PM’s role is to realize the future of your products. This vision of the future can have many ramifications, from influencing who you want to hire, to a decision to disinvest from some product lines that aren’t growing. With the advice of the Senior Product Manager, an executive team then allocates investments in new products based on corporate strategy.
Sometimes project management oversees the product portfolio — especially where there is an emphasis on larger products that also include dependent projects. For example, a medical device company that develops and sells a measurement system and test kits. Often this oversight of the product portfolio operates out of a Project Management Office (PMO).
Product Portfolio Management Software [PPM]
Product Portfolio Management Software typically includes methodologies that integrates a portfolio view and a project view. Connecting the portfolio to individual project data improves execution and connects product managers to a larger product line.
Some tools enable scenario planning, allowing users to examine several possible portfolio management choices, and make more efficient decisions for product lines.
Other PPM tools help you track growth potential and risk, enabling managers to make better go/no-go decisions. Still others integrate product portfolio views with product roadmaps or other tools that enable collaboration in NPD.
Managing the Front End of Development
The aim of a product portfolio management is to realize the best and most innovative products in a way that aligns with the vision and overall strategic plan. Executing a comprehensive product development strategy also means having an ongoing process to manage the front end of development.
Many of the early stage concepts in your product portfolio are worth little or nothing to your company. Others might be the next iPhone or Amazon, ready to disrupt markets, open new categories, and earn enormous revenues. How can your company manage these vague concepts to leverage the best, weed out the rest, and develop the winners into viable products in a competitive marketplace?
Many companies maintain that the front end cannot have specific milestones and deliverables. We disagree. Just as projects within the product development pipeline have gates, reviews and timelines, you can manage the front end of development in a similar fashion.
An orderly front-end management process uses rational decision-making to select the right projects or right product idea to load into the pipeline. It has milestones and budgets that are the measure of progress because approved budgets unlock new projects.
To bring order to the front end of development, use product discovery techniques and create two decision points that help to:
- Manage orderly starting points for projects that:
- Arise from the planning process, or are
- New ideas congruent with that plan
- Staff projects with appropriate resources
- Ensure that projects address the major risks early in the process
- Evaluate objectively the commercial potential of new ideas
Product Portfolio Management Framework for Success
Product concepts, those germs of ideas that might become the next blockbuster, are of enormous value. Unfortunately, too many companies do a poor job of managing this portfolio of assets and as a result don’t get the market share they deserve. They leave vital product concepts to chance. There is another way:
- Understand your risk profile and balance risk and reward.
- Determine the relative investment you want to make in core, adjacent and transformative products.
- Map your product portfolio to create a visual image.
- Use the smallest appropriate product portfolio software package — don’t get hung up on the technology.
Product portfolio management does not have to be complicated or onerous, but it does need to reinforce the corporate vision, and support your company to deliver products that provide a differentiated experience in the marketplace.
Product Development Expert
John Carter is a widely respected expert on product development. He is an inventor of Bose’s Noise Cancelling Headphones and designer of Apple’s New Product Process. As Founder of TCGen Inc., he has consulted for Abbott, Amazon, Apple, Cisco, HP, IBM, Mozilla, Roche, and 3M.