Revision as of 16:42, 23 November 2014

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The role of Bubble Charts in Portfolio Management

Introduction to Portfolio Management

In order to maintain a profitable business in the 21th century, an organisation must excel in countless fields, from strategic management to everyday planning and scheduling. One example of this is the interest that has been put in the area of project management for decades and for good reason []. It is evident that a company that does not have the capability to execute projects swift and efficiently will not be able to maintain a profitable business for long. Constant global competition, ever changing technologies together with shorter life cycles make rivalry even harder and it is not enough to execute projects right, but you also have to execute the right projects.

What is Portfolio Management

Portfolio Management (PoMa) can be defined in many ways, and meaning and benefit of it is also somewhat dependent on in which area of business it is applied []. Robert et al. (1999) argues that for a company perspective PoMa is all about how to invest money in order to make more money. In practice this is showed when potential projects often have to compete for the scarce resources available as there usually are not enough resources to fund them all. The few projects chosen must therefore be perfect for the organisation. The use of PoMa can aid top management in the process of choosing the right projects to invest in. Choosing the right projects and building the best portfolio is much more complicated than selecting the most profitable projects based on a cost-benefit analysis, as the most profitable projects do not necessarily create the most profitable business. One of the most important trades of PoMa tools is how it can assist in making strategic choices. It is of greatest importance that all the projects, small as big, are aligned internally and do not counter work, but instead assist the overall corporate strategy []. Another trade of PoMa is the overview it can give regarding the current and future projects as well as products. This overview can be used to balance the portfolio in regards to risk in order to have a profile that suits the market that you operate in.

Bubble Chart/Diagram

The Bubble Chart (BC) is one of the tools that exist which can be used to support PoMa. A BC is a two-dimensional chart where bubbles are plotted instead of dots as in the regular xy-plot. As it can be seen in Cooper et al (2001 - Class) the representation of the axes differs depending on which version that it used. However one version of the BC is clearly dominant with more than 44% of the ones using BC using this version. Other varieties can be seen in table……. In this version the horizontal axis represents the value some years after launch or simple referred to NPV or the rewards of the project. The vertical axis represents the probability of success. This create a chart that can be defined into 4 quadrant/areas, low-low, low-high, high-low and high-high. This has great similarity to the Boston Matrix made in 1970 by Bruce Henderson ^[1]

which (https://www.bcgperspectives.com/content/classics/strategy_the_product_portfolio/) also works as a tool to assist in portfolio decisions.

Apparent is it that the projects within the high-high area are often desired and opposite projects within the low-low quadrant are unwanted. The more complicated situation arrives of trade-offs are necessary in the low-high and high-low area. What is more attractive? Is it a high chance of success with small rewards or the low chance of success with high rewards?

Besides the two axes the size of the bubble represent the resources needed in order to complete the project, or in other words, the total cost. It is important to notice that since the area of a circle grows with the quadrant of the radius, the cost should not be linear to the radius, but to the total size of the circle. Furthermore the colour of the bubbles might differ and it is therefore possible to distinct certain projects from each other no matter where they are located in the matrix. This can be very important if there is some kind of dependency as the projects and they should not all be compared but at the same time still wanted in the same chart. This combined gives the user the opportunity to observe four-dimensional information in a very easy and simple two-dimensional chart. This feature is what makes the BC different from many other tools as it provides the user much data in a fast and visual manner.

The use and implementation of a Bubble Chart

The BC can be made on very different foundations from axes with precise numbers to just marking them with low or high. If the BC is just low-high much preparation might not be needed. A little portfolio board could discuss the different project in regard to the needed information and a BC could be made rather fast. However if the chart uses precise numbers, a lot of information needs to be processes before the bubbles can be plotted. Using the dominant design of a BC, the NPV, the resource requirement and the risk needs to be calculated. This is already a hard task in itself. Some projects might be tangible, but project that focuses on improving communication flow, can be hard to measure quantitatively. As the NPV then does not seem that impressive, this kind of project can have a tendency to not be prioritized. Secondly, the calculations of required resources are often being underestimated. This often connects to unexpected expenses but could also be a conscience choice from the project proposer as the project may seem more attractive. As crazy as this sounds this happens all the time []. Lastly the chance of success needs to be calculated. This is in practice done by calculating the unknown risk and this is always a tricky process. Some might use their gut feeling where other uses a 25 multi-criterion qualitative analysis as feed for a stochastic Monte Carlo simulation.

The Bubble Chart is a nice tool to create overview, but is only as good as the information put into it.

1. ↑ https://www.bcgperspectives.com/content/classics/strategy_the_product_portfolio