Did You Know That Your Product Portfolio Is in Trouble?

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Surprisingly enough, smart, market-responsive digital media companies suffer from the same symptoms, albeit for different reasons. The product divisions of such market-savvy organizations can end up carpet bombing the market with multiple products and product lines. As a result, these product divisions are unable to figure out when is the right time to pull the plug on any one of them and focus on just the strategic few. For example, a digital division of one large publishing company that I worked with managed an annual portfolio of thirty or more market-facing apps and sites and had a difficult time identifying the ones that actually made strategic sense.

Product Teams Tend to Avoid Financial Messiness
Surprisingly, many portfolio managers do not like to get into financially messy predicaments, and they rely on a lot of hand waving with respect to the ROI calculations for any given product.  Because of insufficient and unreliable data, there is always the risk of miscalculating the net present value (NPV) for new innovative products that are not yet launched. Even the more stable, established product lines need financial wizardry to calculate the true total cost of ownership (TCO), and the product owners often do not have enough time of the day to focus on that. In this case, the product managers often take a shortcut and they match the NPV to the internal limit required for the development and marketing budget to be approved. Behavioral scientists frequently use the term ostrich effect to highlight the human tendency of avoiding apparently risky financial situations by pretending they do not exist.

For any given product, the business model is critical to success, and a key part of the business model is making decent financial calculations. The lack of financial prudence can lead to unstructured decision making in terms of portfolio management, which can result in utter disasters. In 2010, the United States Department of Energy (DoE) provided a $535 million loan guarantee to the thin-film solar cell manufacturer Solyndra in order to build a new 28,000 square meter plant without properly investigating the true cost of producing the innovative cylindrical solar panels. The DoE expected Solyndra’s fabrication plant to produce almost seven gigawatts worth of these solar cells in its lifetime, producing roughly 110 megawatts per year. Instead, Solyndra produced only 500,000 panels before closing down. It so happened that the cost of producing a solar panel by Solyandra was estimated at more than $3 per watt (as per SEC filings) while competitors were producing similar grade panels for $1.20 per watt due to a fall in prices of the necessary raw materials.

Insufficient Available Data
A few years ago, the Harvard Business Review Blog Network published the outputs of a Babson Executive Education study of innovation team leaders at twenty-one science and engineering-based companies (http://blogs.hbr.org/research/2010/02/innovation-teams-lack-data.html) Only six respondents reported that their innovation teams make decisions in a structured and data-driven way, while eighteen reported that their organization-wide innovation process—a stage gate or a drug pipeline, for example—tends to be much more disciplined and data driven. Though the sample size is remarkably small, this shows that most small teams and start-ups do not always have sufficient data to make structured decisions.

Portfolio managers are taught in schools to spend an inordinate amount of valuable time collecting and maintaining data before they delve into scope analysis or an ROI calculation. However, with the high frequency of new technologies, products, and competitors hitting the market, there always seems to be a case where enough data points are not available to make intelligent decisions. The lack of relevant data substitutes fact-based decision making with gut-fueled instincts that may often lead to an imbalance in the portfolio.

About the author

Anupam Kundu's picture Anupam Kundu

Anupam Kundu is currently employed as a lead consultant with ThoughtWorks North America. In the current role, Anupam’s goal is to help clients get the most bang for their buck in developing new and innovative products following lean/agile software development principles and practices.

Anupam has more than thirteen years of experience in various stages of software development life-cycle and post-implementation activities as a programmer, business analyst, project/program manager, and change management consulting.

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