Portfolio Management and complexity in organizations
Complexity management is a business methodology that deals with the analysis and optimization of complexity in enterprises. Effects of complexity pertain to all business processes along the value chain and hence complexity management requires a holistic approach. Effective complexity management is based on four pillars: a sound strategy, alignment with the overall company strategy, transparency over all costs and values of complexity, an approach which identifies the optimization benefits, related measures and management of the trade-offs between the total value chain functions, and finally ensurement of the sustainable infrastructure such as IT tools, incentives and processes. Generally, complexity management in product development is considered as the management of products variants. Many organizations tend to use differentiation of products, processes or services as the key enabler to outperform competitors. However, despite the obvious business rationale behind differentiation, only few firms are truly able to cope with the increasing complexity that comes with increased differentiation. A vital question in the product innovation battleground is, "How should corporations most effectively invest their R&D and new product development resources?" That is what portfolio management is all about: resource allocation to achieve corporate product innovation objectives.
Companies struggle with the sub-optimization and changes among their projects, even if various normative instructions and good practices have been introduced for project portfolio management.There are many different approaches with no easy answers. However, it is a problem that every company addresses to produce and maintain leading edge products. Portfolio management for new products is a dynamic decision process wherein the list of active new products and R&D projects is constantly revised. In this process, new projects are evaluated, selected, and prioritized. Existing projects may be accelerated, killed, or de-prioritized and resources are allocated (or reallocated) to the active projects.Building a complex portfolio of products can be beneficial for young firms due to increased sales growth and competitiveness. Yet, the benefits from product portfolio complexity (PPC) are often outweighed by rising costs, leading to an inverted U-shaped relationship between PPC and performance. Recent research has called for an increased understanding of how firms are able to better manage higher levels of PPC
Goals of Portfolio Management
While the portfolio methods vary greatly from company to company, the common denominator across firms are the goals executives are trying to achieve. According to 'best-practice' research by Dr. Cooper and Dr. Edgett, five main goals dominate the thinking of successful firms: 1. Value Maximization Allocate resources to maximize the value of the portfolio via a number of key objectives such as profitability, ROI, and acceptable risk. A variety of methods are used to achieve this maximization goal, ranging from financial methods to scoring models. 2. Balance Achieve a desired balance of projects via a number of parameters: risk versus return; short-term versus long-term; and across various markets, business arenas and technologies. Typical methods used to reveal balance include bubble diagrams, histograms and pie charts. 3. Business Strategy Alignment Ensure that the portfolio of projects reflects the company’s product innovation strategy and that the breakdown of spending aligns with the company’s strategic priorities. The three main approaches are: top-down (strategic buckets); bottom-up (effective gatekeeping and decision criteria) and top-down and bottom-up (strategic check). 4. Pipeline Balance Obtain the right number of projects to achieve the best balance between the pipeline resource demands and the resources available. The goal is to avoid pipeline gridlock (too many projects with too few resources) at any given time. A typical approach is to use a rank ordered priority list or a resource supply and demand assessment. 5. Sufficiency Ensure the revenue (or profit) goals set out in the product innovation strategy are achievable given the projects currently underway. Typically this is conducted via a financial analysis of the pipeline’s potential future value.
Benefits of Portfolio Management
When implemented properly and conducted on a regular basis, Portfolio Management is a high impact, high value activity:
• Maximizes the return on your product innovation investments • Maintains your competitive position • Achieves efficient and effective allocation of scarce resources • Forges a link between project selection and business strategy • Achieves focus • Communicates priorities • Achieves balance • Enables objective project selection
Output of Complexity Management
‘Complexity’ by itself does not exist, as it is merely the result of an expected outcome given a certain input. We therefore proposed to define complexity as: the results of the relation between invested organizational resources and received benefits for these investments. Furthermore, even though many consider complexity to be a negative phenomenon, it is not by definition undesirable, as certain levels of complexity may actually add some sort of value to an organization. We therefore focused on reducing ‘bad’ (i.e., non-value-adding) complexity, while allowing for ‘good’ (value-adding) complexity to exist within the organization.
Cost and Value matrix
High added value GOOD (Maintain) OVERCOMPLEX (Simplify) Low added value UNDERVALUED (Scale-up) BAD (Avoid) Low level of added complexity High level of added complexity Figure 3 – the nature of complexity Each quadrant encompasses organizational functions, processes and/or products that include a specific level of complexity and adds value to the organization. Each of the quadrants is briefly discussed. GOOD; a low level of added complexity that indeed yields high added value for the organization is most favourable, and organizations should strive to keep their functions, processes and/or products in this quadrant. UNDERVALUED; functions, processes and/or products with a low level of added complexity that only yields a limited level of added value to the organization should be scaled-up to achieve a high(er) level of added value without gaining complexity. OVERCOMPLEX; functions, processes and/or products that deliver significant added value to the organization with a high level of added complexity should be simplified to reduce complexity without comprising on the level of added value. BAD; a combination of low added value and high complexity is highly unfavorable and should be avoided by organizations whenever possible.
Anlysis of Complexity
Complexity is often driven by redundant variety – i.e. variation in the product portfolio that does not add value to the business. Basically, to analyze the complexity we need to ask ourselves two simple questions: • Do we offer the right product? • Do we provide these products in the most efficient way? Unfortunately, the answers to those questions are not that simple. The first question requires substantial market knowledge, analyses, statistics, and – very importantly – a well-defined strategy. The key to answering the second question is to consider the “fit” between the product design, the market demand, and the value chain. Product committees and project managers engaged in decision making are often burdened by the fact that a lack of overview is often a loyal companion to complexity. Thus, decision makers are forced to base their decisions on a patchwork of details without the big picture because they are not able to establish the overview required to do the job successfully.
Asset in businesses
An obvious task when trying to answer the two questions above is to try to establish an overview of the assets in the existing business. There is a series of different ways to gain such an overview. Several studies and practical cases from industry indicate that visual models can be a strong means to achieve an overview that can support decision making. In these models we try to capture the essence of the business from four important viewpoints: 1. The Customer Viewpoint Seeing the product portfolio from a customer perspective helps us when looking for redundancy and for the importance of various product variants and properties in the product range. 2. The Functional Viewpoint Studying how the various customer demands have been turned into design concepts, and how these different concepts are different and alike. We often find differences on a conceptual level pointing towards similar customer specifications, i.e. the situation in which two different design principles fulfill the same purpose. Such a situation often leads to a lot of redundant variety throughout the organization, because the variation starts on a relatively high level and migrates down through the design and propagates to the production and procurement departments. 3. The Part Viewpoint The part view is a detailed low level analysis of all the parts, bits and pieces in the product range. Often, we find different components such as screws, gaskets, O-rings etc. that are different for no reasons other than the fact that two different engineers looked at two different pages in the components catalog. 4. The Supply Chain & Process Viewpoint Taking the viewpoint of the value creation makes it possible to see when the variation and complexity starts to explode throughout the supply chain. Some product designs entail a high variety early in the supply chain. For instance a few design changes can turn out to make it possible to swap two processes and thereby reducing variation in items in stock or perhaps even remove a stock completely.
Linking the Views
Getting an overview from these different viewpoints often gives hints on complexity reductions on a relatively low level. However, once you start to link the different viewpoints, you get a strong tool to identify greater improvement potentials. You can start to answer the two questions above, and really begin to understand why you have a complex portfolio and where to do something about it. Later, when rationalizing the products it is important not to have a single-product focus. This will at best only lead to incremental improvements not nearly enough to secure successful implementation of any of the above mentioned later initiatives. The complexity analysis is a strong foundation for a multi-product initiative across a whole product range. Rationalization of the product portfolio Companies burdened by complexity are often tempted by initiatives such as lean production, just-in-time, build-to-order, etc. Unfortunately, many companies look intensely at their processes without addressing the product design. If the product portfolio is burdened by wasteful complexity, you will not get the full potential of the process improvements. An important first step before engaging in an implementation of process improvement initiatives such as lean should be to rationalize the product portfolio. Thus, a first step in a lean process should not only be to make value stream maps and flow charts, but to also understand the product portfolio in depth, and get to know the strengths and weaknesses in order to address the complexity issues before changing the processes in the company. We have developed a methodology to addresses each type of complexity, but we found that addressing the root cause of the problem many times requires tackling issues outside of the scope initially anticipated.
Complexity Reduction Related topics Description Methodology
The complexity in a big organization emanates mainly from the "nodes"–or the points where business units, functions, geographies and management layers cross. Nodal complexity of this sort hamstrings many companies–every one of these interactions adds cost and confusion, draining the focus and energy of senior executives and good managers. Traditional approaches to reducing structural costs and increasing efficiency usually fail to address nodal complexity. But there’s a bright side to this picture as well: An attack on nodal complexity–because it simultaneously affects all the elements that intersect at that node–has a large multiplier effect on business performance. In fact, in our experience, reducing complexity at the nodes creates between three and four times as much value as the traditional approaches to right-sizing and functional excellence. Complexity Reduction Related topics Description Methodology
• Business Process Reengineering • Decision Rights Tools • Focused Strategy • Repeatable Models • Spans and Layers Complexity Reduction helps companies simplify their strategy, organization, products, processes and information technology.
Reduction in any of these areas opens up opportunities for simplification in others. Unwieldy complexity often results from business expansions or bureaucracies that unnecessarily complicate a company’s operating model, leading to sluggish growth, higher costs and poor returns. Complexity Reduction finds in- flection points where products or services fully meet customer needs at the lowest costs. By streamlining product lines, for example, companies may be able to simplify organization structures and decision making to serve their core customers better while also reducing demands on business processes and information systems.
Complexity reduction requirements
Complexity Reduction requires managers to:
• Understand the sources of complexity and examine trade-offs between operations and variety or customization for customers • Identify opportunities to simplify products, organization structures, business processes and information systems to save costs while strengthening core capabilities and increasing the focus on customers • Take steps to stem the return of complexity by reexamining the hurdle rates for new products and other expansion activities • Simplify decision making by clarifying roles and processes Complexity Reduction helps reveal hidden costs and allows companies to determine which products are making money, what customers really value and which organizational or process bottlenecks are getting in the way of effective actions, setting the stage for greater growth and increased profits.
Common uses Selected references Companies typically use Complexity Reduction to: • Identify and strengthen core capabilities • Build the business around customer needs • Create a disciplined approach to releasing new products or services and trimming those that customers no longer value • Design an organizational structure to support critical decisions • Maximize process efficiency • Align information systems with business objectives
Portfolio management processes can be successfully developed to help executives in their attempts to obtain better results from scarce R&D dollars, achieve the balance needed between short term pressures and the future, longer term, needs of the organization and to ensure that R&D efforts are being directed towards helping the organization achieve its strategic objectives.In this process five forms of complexity have been emcpimyered that are highly interrelated: strategy, customer, product, organization and process, including IT. Most clients engage us to address the single most visible symptom of complexity; for example, fixing rampant SKU proliferation that is wreaking havoc in the supply chain and the sales channel, or streamlining an excessively complex process that is hampering their time to market.
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