In working out your responses to the Discussion Question, you should choose examples from your own experience or find appropriate cases on the Web which you can discuss. You will receive credit for references you make to relevant examples from real companies. Please make sure that you cite and reference all your outside sources properly, as per the Harvard Referencing System.
Many organisations have a well-defined and well-scoped strategic process. Frequently this process is augmented by a broader idea capture which provides insights and suggestions for the tactics associated with the implementation of the overall strategy. What is recognised, however, is that regardless of the process which is used to set strategy, the critical challenge is the actual execution of that strategy. Indeed, as is widely recognised, weakness in execution, not weakness in strategy, is a primary reason for CEO failure. Knowing this, it is important to tie the strategic theory governing the business to the experience of project management. Without this linkage, either the project portfolio ignores the needs of the business or the strategic goals are empty, with no support at the executive level. It is clear that this is an area which businesses must get right for long-term success.
Strategy needs to come before portfolio ranking and selection. In order to select the right set of projects, strategic goals must be defined in advance. Furthermore, the strategic goals should ideally be relatively limited. Having a small number of goals helps to keep the goals memorable and at the necessary high level, thus avoiding the blurring of strategic goals with the tactics for their implementation. Of course, the process of linking projects to strategic goals is critical. If the projects an organisation undertakes do not reflect its strategy, then what does? It is much less likely that operational work has a strategic impact relative to projects, which are more likely to create some level of change within the organisation.
Though the strategic goal definition must come before project selection, it must not be rushed. Selecting the right strategy is imperative for defining a portfolio which will have a strong impact on the future of the organisation. A poor strategy which is executed flawlessly is still a failure.
Linking projects to strategic goals, however, is only one step in the ranking and evaluation process for a project portfolio. The most important projects are the ones which provide the most business value. Business value, measured using a variety of means, might be a way to create more customers, retain the ones you have, or create a new market altogether. It is important that value is clearly defined and assessed, and that the organisation uses analytical techniques which are thoroughly defined and accepted throughout the organisation. It might be a way to release products faster, to make more money on support, or to spend less money on support. Business value will be unique for your organisation and your projects.
In the ranking process, however, there are some common approaches (detailed in the supplemental articles for this week) which corporations have found to work. The ranking process should be standard across the corporation, so that ‘apples are compared to apples’. Another approach is to have the ranking process involve collaboration across the organisation, so that not just one individual or organisation makes the decisions. These and other approaches are essential to ensure buy-in from the organisation to the overall results.
For this week, discuss the following questions:
1. Assess and explain the advantages and disadvantages of the different methods for evaluating projects and rank portfolios. Discuss how project evaluations can be used to make decisions on individual projects—especially in the termination of projects.

2. Discuss the advantages and disadvantages of the methodology outlined in the Sharpe and Keelin article. How were these individuals able to gain buy-in to the approach which they used for this portfolio evaluation within the SmithKline-Beecham organisation?

Sustainability, Programme and Portfolio Management
Week 5: Ranking/evaluating the portfolio and making portfolio decisions
Week 5 Introduction
Many organisations have a well-defined and well-scoped strategic process. Frequently, this process is augmented by a broader idea that provides insights and suggests the tactics associated with the implementation of the overall strategy. What is recognised, however, is that regardless of the process used to set strategy, the critical challenge is the actual execution of the strategy. Weakness in execution, not weakness in strategy, is a primary reason for CEO failure. Knowing this, it is important to tie the strategic theory of governing the business to the experience of project management. Without this linkage, either the project portfolio is not aligned to the needs of the business or the strategic goals are empty with no support at the execution level. It is clear that this is an area that businesses must focus on for long-term success.
Strategy needs to come before portfolio ranking and selection. In order to select the right set of projects, the strategic goals must be defined in advance. Furthermore, the strategic goals should ideally be relatively limited. If an organisation has a small number of goals, that helps to keep the goals memorable and at the necessary high level. Thus, it avoids strategic goals blurring with the tactics for their implementation. Of course, the process of linking projects to strategic goals is critical. If the projects an organisation undertakes do not reflect its strategy, then what does? It is much less likely that operational work has a strategic impact relative to projects, which are more likely to create some level of change within the organisation.
Despite its apparent link to strategy, much of the strategic literature has ignored the project portfolio and its tie to the strategy of the firm. Frequently, organisations see execution as an ongoing modification of the process. More recently, however, the strategy literature has begun to address the portfolio ranking and selection process as a means to frame the strategy of the organisation.
Though the strategic goal definition must come before project selection, it must not be rushed. Selecting the right strategy is imperative for defining a portfolio which will have a strong impact on the future of the organisation. A poor strategy executed flawlessly is still a failure.
Linking projects to strategic goals, however, is only one step in the ranking and evaluation process for a project portfolio. The most important projects are the ones that provide the most business value. Business value, measured through a variety of means such as financial calculations or strategic considerations, may be a way to create more customers or retain the ones you have or create a new market altogether. It is important that value is clearly defined and assessed, and that the organisation use analytical techniques which are thoroughly defined and accepted across the organisation. It might
be a way to release products faster or make more money on support or spend less money on support. Business value will be unique for your organisation and your projects.
In the ranking process, however, there are some common approaches which corporations have found to work. The ranking process should be standard across the corporation. Another approach is that the ranking process should involve collaboration across the organisation, not just one individual or organisation making the decisions. These and other approaches are essential to ensure buy-in from the organisation to the overall results.
Methods to rank projects within the portfolio—quantitative and non-quantitative
• Textbook reading: Kerzner: Project Management Best Practices: Achieving Global Excellence, Chapters 14 and 15
• Textbook reading: Rothman: Manage Your Project Portfolio: Increase Your Capacity and Finish More Projects, Chapters 4 and 5
• Textbook reading: Morris and Pinto: Wiley Guide to Project Program and Portfolio Management, Chapters 5 and 8
• Day, G. (2007) ‘Is it real? Can we win? Is it worth doing? Managing risk and reward in an innovation portfolio’, Harvard Business Review, 85 (12), pp. 110–120.
• Sharpe, P. & Keelin, T. (1998) ‘How SmithKline Beecham makes better resource-allocation decisions’, Harvard Business Review, 76 (2), pp. 45–57.
• Luehrman, T. (1998) ‘Investment opportunities as real options: getting started on the numbers’, Harvard Business Review, 76 (4), pp. 0–51.
• Copeland, T. & Tufano, P. (2004) ‘A real-world way to manage real options’, Harvard Business Review, 82 (3), pp. 90–99.

Each project within a portfolio should be evaluated against the criteria that are used in the prioritising of the portfolio. This scoring should be done independently. Usually, the creator of the business case and the sponsor will create the first scores. The business leaders often will review and adjust the scoring based on the consensus of the group, depending on the method of evaluation used.
An important consideration is that, whilst there are many possible methodologies which can be used in ranking projects within a portfolio, there is no consensus on which are the most effective. As a consequence, each organisation tends to choose, for the project classes being considered, the methodologies which suit its culture and which allow it to consider the project attributes it believes are the most important. Also, the methodologies most useful for developing a portfolio for one class of projects may not be the best for another (e.g., good estimates of quantitative values such as costs and time may be readily available for certain construction projects, but qualitative judgement is more likely to be used for development of advanced new products). A major difficulty with portfolio selection is the number of possible combinations of projects which can be selected, with resources and schedules for each project affecting those available for the
remainder of the portfolio. Many companies use more than one approach in the selection process.
Here are some of the key methodologies used in ranking projects within a portfolio:
• Economic Return: These techniques typically require financial estimates of investment and income flows over the time frame of the project, often based on experience with similar projects. They have large usability in construction portfolios but are used in new product portfolios as well. The most common technique here is based on calculating the net present value (NPV) of the cash flow streams for the investments, whilst an extension of this technique includes risk and uncertainty in the calculations.
• Real Options Theory: Real options theory is distinctive because it highlights the combined importance of uncertainty and managerial discretion, and it presents a dynamic view of firms’ investment and organisational governance decisions. Scholars also see promise in real options as a normative theory that can bridge corporate strategy and finance by injecting strategic reality into capital budgeting models, whilst also bringing the discipline of financial markets into strategic thinking. Real options analysis, as a discipline, extends from its application in corporate finance, to decision making under uncertainty in general, adapting the mathematical techniques developed for financial options to ‘real-life’ decisions. For example, R&D managers can use real options analysis to help them determine where to best invest their money in research; a non-business example might be the decision to join the workforce, or rather to forgo several years of income and to attend graduate school. Thus, it forces decision makers to be explicit about the assumptions underlying their projections. Real options analysis is increasingly employed as a tool in business strategy formulation.
• Market Research: Market research can be used to collect data for forecasting the demand for new products or services, based on concepts or prototypes presented to potential customers, to gauge the potential market.
• Portfolio Matrices: Portfolio matrices (‘bubble diagrams’) are popular for displaying parameter values on three or four project dimensions. Although popular for graphical representations and comparisons, bubble diagrams have little theoretical or empirical support, and they may lead decision makers to overlook profit maximisation.
• Comparative Approaches: Included in this classification are Q-sort, pair-wise comparison, the Analytic Hierarchy Process (AHP), and Data Envelopment Analysis. Q-sort is the most adaptable of these in achieving group consensus. In these methods, first the weights of different objectives are determined, then alternatives are compared on the basis of their contributions to these objectives, and finally a set of project benefit measures is computed. Projects are then arranged on a comparative scale for decision making.
• Scoring Models: Optimisation models select from the list of candidate projects a set that provides maximum benefits (e.g., maximum NPV). These models are generally based on some form of mathematical programming, to support the optimisation process and to include project interactions such as resource

dependencies and constraints, technical and market interactions, or programme considerations.
• Portfolio Decision Support Systems: These systems are typically based on a mathematical optimisation approach which begins by selecting a portfolio from a set of candidate projects, providing a maximum overall benefit.

Alignment with corporate strategy
• Textbook reading: Kerzner: Project Management Best Practices: Achieving Global Excellence, Chapters 14 and 15
• Textbook reading: Morris and Pinto: Wiley Guide to Project Program and Portfolio Management, Chapters 5 and 6

Portfolio management is a key step in the implementation of strategy. Strategy articulates a vision for the future of the organisation that usually requires the development or acquisition of new organisational assets or capabilities. Developing and/or acquiring these assets takes investment of financial and human resources, both of which are scarce. Most organisations have far more good investment opportunities than resources to fund them. Portfolio management is about the prioritisation, timing, and resource of these investment ’projects’.
Michael Porter, creator of the Five Forces framework, along with other researchers on strategy, suggests that the goal of strategy is to create a sustainable competitive advantage. More and more, executives are struggling to develop an interactive dynamic system with multiple feedback, which combines strategic conceptualisation and execution in one system instead of the artificial thinkers and doers’ framework that the traditional strategy school has suggested. This actually may cause a problem for the project portfolio approach. Recent work has suggested that organisations may need a more integrated system of temporary endeavours integrated with ongoing processes led by project managers and team members.
Leading practitioners have three overarching objectives: strategic alignment, maximum return, and strategic balance. Most organisations using portfolio management are striving to achieve two and usually all three of these objectives. Strategic alignment means that the approved portfolio supports the strategy of the organisation. Maximum return means that the approved portfolio achieves the best aggregate financial outcomes (or public benefits) relative to the aggregate investment required. Strategic balance means that the portfolio has an appropriate mix of projects considering the multiple objectives and mandates of the organisation. It should be evident that these three objectives are not completely aligned, and so there are decisions or trade-offs that must be made. However, the principal motivation for evaluation projects is to determine how projects fit against these three objectives. In a dynamic environment, these objectives become much harder to achieve than that suggested by the more static approach to strategy.
Strategic alignment has been identified as one of the three overarching objectives of portfolio management, the other two being maximum return and strategic balance. Yet many people are unclear about what strategic alignment means, let alone how to achieve it. The most common elements are that strategic alignment means the projects in the portfolio ‘fit’ or ‘support’ the strategy, which misrepresents what fit and support mean in this context. Furthermore, this requires that the strategy must be articulated with enough clarity that this alignment/fit/support can be tested; however, in many organisations strategy is defined only at a very high level, which does not lend itself to detailed testing of alignment.
For example, for the alignment of new product portfolios, strategic alignment is often considered to be the following:
• All active projects are aligned with the business strategy.
• All active projects contribute to achieving the goals and objectives set out in the business strategy.
• Resource allocations—across business areas, markets, and project types—truly reflect the desired strategic direction of the business.

The mission, vision, and strategy of the business must be operationalised in terms of where the business spends money and which investments it makes. These basis ideas apply not only to new product portfolios but also to project portfolios in general and to the corporate portfolio as a whole.
First, strategic alignment should mean that the projects in the portfolio are both necessary and sufficient for the strategy to succeed. ‘Necessary’ means that the project is required for the strategy to succeed; this is essentially strategic fit. ‘Sufficient’ means that all the projects the strategy requires to be successful have been approved and are in the active portfolio; this is what is called strategic contribution. These are two tests of strategic alignment. There is a third test of strategic alignment for new product portfolios—strategic priorities. This basically asks whether the breakdown of spending is consistent with the stated strategy.
Strategic alignment can be achieved through various approaches: Top-Down, Bottom-Up, and a blend of Top-Down/Bottom-Up. Top-Down begins with the business’s vision, goals, and strategies and then ‘translates’ these into investment initiatives and/or resource allocations. Two approaches commonly used are road-mapping and strategic buckets. Road-mapping translates the business strategy into the strategic initiatives and investment programmes required to execute the strategy; road maps normally have a time dimension. Strategic buckets translate the strategy into spending categories designated for different types of investment projects. Projects are then created and prioritised within these strategic buckets.
Bottom-Up begins with a series of investment opportunities which can arise from anywhere in the organisation but then must be screened so the best ones rise to the top. This requires that strategic criteria be built into the project evaluation and selection
process. The Bottom-Up approach, by starting with individual projects and programmes, may miss some projects necessary for the success of strategy and thus could lead to an insufficient portfolio. The Top-Down and Bottom-Up approaches are fundamentally different in philosophy, implementation, and the portfolio of projects that emerges.
Top-Down/Bottom-Up combines the two approaches and thus hopes to overcome the deficiencies of each individually. It begins at the top with strategy, road maps, and strategic buckets but also proceeds from the bottom with creation, evaluation, and selection of the ‘best’ projects. By starting with the Top-Down approach, it is more likely the resulting portfolio will include the projects essential for strategic success. Then the two sets of decisions are reconciled via multiple iterations. The most straightforward way is to generate the investment portfolio from the requirements of the strategy to be successful, based on the gaps in the capabilities and assets necessary to be successful.
Dealing with complex decisions regarding project portfolios
• Textbook reading: Kerzner: Project Management Best Practices: Achieving Global Excellence, Chapters 15
• Textbook reading: Rothman: Manage Your Project Portfolio: Increase Your Capacity and Finish More Projects, Chapters 4 and 5
• Textbook reading: Morris and Pinto: Wiley Guide to Project Program and Portfolio Management, Chapter 6
• Day, G. (2007) ‘Is it real? Can we win? Is it worth doing? Managing risk and reward in an innovation portfolio’, Harvard Business Review, 85 (12), pp. 110–120.
• Sharpe, P. & Keelin, T. (1998) ‘How SmithKline Beecham makes better resource-allocation decisions’, Harvard Business Review, 76 (2), pp. 45–57.

The project portfolio management process provides the forum, discipline, decision criteria, funding, and decision-making authority to effectively manage the portfolio of projects and programmes. In general, a process that enables difficult decision making would include three phases: generating alternatives, valuing them, and creating a portfolio. Such a standard process leads to a shared understanding among decision makers and development staff about the best investment options for the company. Experience has shown that no single value metric, facilitation technique, peer review meeting, or external validation approach on its own can solve the complex resource-allocation problem faced by many corporations. Often, by tackling the soft issues around resource allocation, such as information quality, credibility, and trust, the hard issues are addressed.
Making portfolio decisions is not easy. The evaluation process must be data driven and not subjected to mere intuition for making decisions or anecdotal evidence for making decisions. When a portfolio evaluation effort is conducted, there is only one goal: to rank each project according to the evaluation method(s) chosen by the leadership team. Once the projects are ranked, there are three possible outcomes: commit to the project,
kill the project, or transform the project in some way (change of market focus, change of technical approach being tried, change of project personnel, etc.). Once decisions are made by the leadership team, the organisation needs to follow those decisions—otherwise, the portfolio management process will likely be ignored and become ineffective.
Processes for making difficult portfolio decisions
• Textbook reading: Kerzner: Project Management Best Practices: Achieving Global Excellence, Chapters 14, 15, and 16
• Textbook reading: Rothman: Manage Your Project Portfolio: Increase Your Capacity and Finish More Projects, Chapter 8
• Textbook reading: Morris and Pinto: Wiley Guide to Project Program and Portfolio Management, Chapter 5
• Day, G. (2007) ‘Is it real? Can we win? Is it worth doing? Managing risk and reward in an innovation portfolio’, Harvard Business Review, 85 (12), pp. 110–120.
• Sharpe, P. & Keelin, T. (1998) ‘How SmithKline Beecham makes better resource-allocation decisions’, Harvard Business Review, 76 (2), pp. 45–57.

The process of portfolio selection/portfolio decisions can be highly complex unless approached logically and carefully. With process simplification in mind, the portfolio selection process should be organised into a series of stages, allowing decision markers to move logically toward an integrated consideration of projects most likely to be selected, based on sound theoretical models. However, each step should have a sound theoretical basis in modelling and should generate suitable data to feed the following step. Users need access to data underlying the models, with ‘drill-down’ capability to develop confidence in the data being used and the decisions being made. At the same time, users should not be overloaded with unneeded data, which should be available only when needed and requested. Users also need training in the use of techniques that specify project parameters to be used in making decisions. An overall balance must be achieved between the need to simplify and the need to generate well-founded and logical solutions. A series of discrete stages for portfolio decision-making process would include the following:
• Pre-process Phase: This would include methodology selection and strategy development. Methodology selection is a strategic process that should be done in advance of any other activities in portfolio decision making. It need be done only once for all time, with minor adjustments from time to time if other methodology choices appear to be better matches for the task at hand before each cycle of portfolio selection. Strategic decisions concerning portfolio focus and overall budget considerations should be made in a broader context which takes into account both external and internal business factors, before the project portfolio is selected.

• Process Phase: o Pre-screening: Pre-screening precedes portfolio calculations. It is based on guidelines developed in the strategy development stage and ensures that any project being considered for the portfolio fits into the strategic focus of the portfolio.
o Individual Project Analysis: Projects are analysed individually after pre-screening. Here, a common set of parameters required for equitable comparisons in following stages is calculated separately for each project, on the basis of estimates available from feasibility studies and/or from a database of previously completed projects.
o Screening: Here, project attributes from the previous stage are examined in advance of the actual selection process, to eliminate any projects or interrelated families of projects that do not meet preset criteria such as estimated rate of return, except for those projects which are mandatory or required to support other projects still being considered. The number of projects in the portfolio being evaluated may be quite large, and the complexity of the decision process and the amount of time required to select the portfolio increases geometrically with the number of projects to be considered.
o Optimal Portfolio: Optimisation is performed in the second-to-last stage, as a beginning point for final portfolio selection. Here, interactions among the various projects are considered, including interdependencies, competition for resources, and timing, with the value of each project determined from a common set of parameters estimated for each project in the previous stage. Analytical Hierarchy Process (AHP), scoring models, and portfolio matrices are popular among decision makers for portfolio selection, because they allow users to consider a broad range of quantitative and qualitative characteristics as well as multiple objectives. However, none of these techniques considers multiple resource constraints and project interdependencies. AHP, pair-wise comparison, and Q-sort also become cumbersome and unwieldy for larger numbers of projects. What is recommended is a two-step process. In the first step, the relative total benefit is determined for each project. In the second step of this stage, all project interactions, resource limitations, and other constraints should be included in an initial optimisation of the overall portfolio, based on the relative worth established for each proposed project.
o Portfolio Adjustment: This is the final stage, using as input the initial optimal portfolio from the preceding stage. The end result is to be a portfolio which meets the objectives of the organisation optimally or near optimally, but the approach must have provisions for final judgemental adjustments, which may be difficult to model. This is a strategic decision, and the relevant information must be presented to allow decision makers to evaluate the portfolio without being overloaded with unnecessary information. The portfolio adjustment stage needs to provide an overall view, where the characteristics of projects of critical importance in an

optimised portfolio (e.g., risk, net present value, time-to-complete, etc.) can be represented using matrix-type displays.

• Post-process Phase: Development and evaluation are post-process activities that can generate data from experience. They are highly useful for learning and project evaluation, and for future portfolio selection exercises. This could involve both the evaluation of existing projects which may be candidates for termination or generation of data for future use in estimating parameters for contemplated projects similar to already completed projects. Current projects which have reached major milestones or gates can be re-evaluated at the same time new projects are being considered for selection. This allows a combined portfolio to be generated within available resource constraints at regular intervals because of (a) project completion or abandonment, (b) new project proposals, (c) changes in strategic focus, (d) revisions to available resources, and (e) changes in the environment.

Impact of strategic portfolio decisions
• Textbook reading: Kerzner: Project Management Best Practices: Achieving Global Excellence, Chapters 14 and 15
• Textbook reading: Rothman: Manage Your Project Portfolio: Increase Your Capacity and Finish More Projects, Chapters 4 and 5
• Textbook reading: Morris and Pinto: Wiley Guide to Project Program and Portfolio Management, Chapter 5
• Day, G. (2007) ‘Is it real? Can we win? Is it worth doing? Managing risk and reward in an innovation portfolio’, Harvard Business Review, 85 (12), pp. 110–120.
• Sharpe, P. & Keelin, T. (1998) ‘How SmithKline Beecham makes better resource-allocation decisions’, Harvard Business Review, 76 (2), pp. 45–57.

The impact of strategic portfolio decisions can take many forms. Of the impacts to discuss, the more important ones to consider are the following:
• Strategic alignment
• Portfolio value
• Efficient use of resources

One of the more important impacts is to help realign the portfolio to the overall business strategy. Strategic alignment should mean the projects in the portfolio are both necessary and sufficient for the strategy to succeed. ‘Necessary’ means the project is required for the strategy to succeed; this is essentially strategic fit. ‘Sufficient’ means that all the projects which the strategy requires to be successful have been approved and are in the active portfolio; this is what is called strategic contribution. These are two tests of strategic alignment. With a robust and thorough portfolio review, the projects an organisation moves forward with should be clearly aligned with the overall vision, objectives, and strategy of the organisation.
Another impact of these decisions is that, for the evaluation parameters chosen, the resulting ‘value’ of those parameters will be increased by the decisions made in the portfolio management process. Typically, financial measures are used to assess value, and in this case the overall financial value of the portfolio will have been increased. Those projects that add only incremental value at best to the portfolio or that actually decrease the portfolio value will be eliminated—unless those projects are mandatory or required for a regulatory or other business purpose, or are incremental projects designed to improve customer satisfaction or retain customers.
Finally, the decisions that made those projects poorly aligned or misaligned with the organisation’s strategy will be terminated or redirected. Those projects that remain will be the ones necessary and sufficient for the organisation to achieve its overall business objectives. The organisation will be utilising its scarce resources in a much more efficient manner—potentially even reducing its overall investment expenses.

Sustainability, Programme and Portfolio Management
Reading – Week 5
Textbooks
Kerzner, H. (2010) Project management best practices: achieving global excellence. 2nd ed. Hoboken, NJ: John Wiley. Chapters 14, 15, and 16.
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