Six Principles of Strategic Portfolio Management – Part 5: Embracing Uncertainty and Dynamics

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By Don Creswell, SmartOrg

Take SurveyIn last month’s installment of ValuePoint, we addressed the fourth principle of strategic portfolio management: conducting credible, comparable evaluations. Now, let’s take a look at how the process of embracing uncertainty and dynamics, and how explicitly evaluating the uncertainties is the key to unlocking value.

In the business world, we strive to make sound decisions. We want to be confident that we have done all of our research and that, by the time we are launching a new product, we have addressed every aspect of it to ensure its success. During the product development cycle, things change that make updating and tracking our assessments a vital part of the process. It requires that we address the uncertainties that arise. Whether we are experiencing fluctuations in our market, there is instability in the economy, or consumer trends are changing before our product reaches them, we must carefully examine all of the uncertainties. By embracing uncertainty rather than fighting against it, we put ourselves in a better position to achieve successful outcomes. This is what we mean when we refer to dynamics.

Here’s a case study:
A Fortune 100 company acquired several smaller companies that each had good products in the market, but there was an apparent lack of new concepts in the R&D pipeline. The company established a new R&D lab with the goal of researching their way to become a world-class firm. Since the lab was new and the technical areas they were researching were cutting edge, they picked easy targets to fast-track their way onto the map. But was that sustainable? Was the lab on track? Would that method generate the hits they needed to fill the pipeline?

A quantitative evaluation of the lab’s procedures revealed they had a lab full of “white elephants” and “bread-and-butter products,” but they lacked sufficient “oysters” to create blockbuster products (“pearls”). They developed a strategy to identify additional valuable targets, redirect or kill the white elephants and balance their portfolio to improve the odds of winning.

Example of portfolio evaluation produced by Rangal software

When we allow deterministic thinking and aversion to risk to drive the quest for certainty, assumptions tend to be made to defend a position and the ability to confirm information is suppressed. This leads to assumptions comingling discussions about knowledge, commitments and aspirations into point estimates.

Step 5: Embracing Uncertainty and DynamicsHowever, when we embrace uncertainty and dynamics, and address the uncertainties explicitly over time, we create an opportunity for robust thinking about upsides, downsides and options. There is more of a willingness to take prudent, calculated risks. Discussions around uncertain factors are separated from discussions about commitments and aspirations. Information is represented in terms of ranges and probabilities, with supporting rationales for the assessments.

Even the best-researched decision making can result in failure. No matter how you try to control uncertainty, things do not always work out. If you are intolerant to uncertainty, you may create unnecessary stress and anxiety for yourself and your colleagues. If, instead, you recognize that uncertainty is a normal condition, factor it into your analyses and adapt as changes arise, you will find that you are in a better position to defend your decision.

* Frost and Sullivan Best Practice Guidebook “Innovation Portfolio Management: Balancing Value and Risk”