Stanford-SDG Webinar Six critical principles of strategic portfolio management

1. © 2014 by Stanford Strategic Decision and Risk Management. All rights reserved. 1 Six Critical Principles of Strategic Portfolio Management Stanford Strategic Decision and Risk Management Certificate Program

2. © 2014 by Stanford Strategic Decision and Risk Management. All rights reserved. 2 Upcoming Courses http://strategicdecisions.stanford.edu SEPTEMBER 2014 (Stanford) Sunday Monday Tuesday Wednesday Thursday Friday Saturday 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Decision Analysis Strategic Portfolio Decisions Advanced Decision Analysis Biases in Decision-Making Converting Strategy into Action Decision Quality Scenarios and Effective Forecasting

3. © 2014 by Stanford Strategic Decision and Risk Management. All rights reserved. 3 Hannah Winter Partner, SDG Associate Program Director, Stanford SDRM Meet Today’s Speaker Ryan Chin Senior Associate Director, Stanford Center for Professional Development David Matheson President, CEO, and Co-founder SmartOrg, Inc. www.smartorg.com Also Featuring

6. A great technology and a compelling customer need are necessary, but not sufficient to change the world. What is missing? (c) 2000 - 2015 SmartOrg, Inc.6 A compelling and robust economic and strategic reason to do it (versus something else).

7. The three basic dimensions of great portfolio results. (c) 2000 - 2015 SmartOrg, Inc.7 What How Process: Milestones Authority Reviews Resources: Assignment Budgeting Timelines Economic: Prioritization Evaluation Strategy Great portfolio results Who Decisions

8. The portfolio process drives two interacting sub- processes. (c) 2000 - 2015 SmartOrg, Inc.8 Making a project the best it can be • Iterative, Ongoing • Focus on project teams Selecting the best projects • Periodic, Comparative • Focus on executives Planning •How to do it? Goal •What is our target? Evaluation •What is worth doing? Return Strategy Risk Cost Together these drive a virtuous cycle of increasing returns.

9. Poll: Which area most needs improvement in your organization? • What: Economic – Prioritization, Evaluation, Strategy • Who: Resources – Alignment, Budgeting, Timing • How: Process – Milestones, Authority, Reviews (c) 2000 - 2015 SmartOrg, Inc.9 Poll 2 Vote by selecting your answer in the polling window on the right side of your screen. Remember to click Submit. Note: only aggregate responses will be displayed.

11. The design challenge is applying these principles in a way that best fits your company. (c) 2000 - 2015 SmartOrg, Inc.11 Aligned Decision Forum Drive real decision-making and conflict resolution at all levels. Value Creation Focus Maximize value created across the organization. Credible, Comparable Evaluations Allow participants to make and accept decisions. Embrace Uncertainty and Dynamics Treat uncertainty explicitly. Clear Communication and Learning Share information, update it and improve results. Inclusive, Collaborative Process All stakeholders participate openly and benefit. Principles of Strategic Portfolio Management

12. Aren’t we all on the same team? (c) 2000 - 2015 SmartOrg, Inc.12 Aligned Decision Forum Value Creation Focus Clear Communication & Learning Inclusive, Collaborative Process Principles of SPM Credible, Comparable Evaluations Embraces Uncertainty and Dynamics

13. Too many projects, not enough resources – what would you do in this situation? • A high-tech packaging company built on tremendous innovation over decades in materials and design. • Increasing global competition and erosion of its advantage. — Its products were increasingly undifferentiated. — Margins eroding dramatically. — R&D and NPD had in recent years failed to produce. • The portfolio was choked with R&D and NPD proposals. — CEO has asked for more innovation — Largely cost reductions and incremental projects. — New innovation was crowded out. — Lots of churn and debate as projects struggled to get resources. — They had 70+ projects and could only support about 15. (c) 2000 - 2015 SmartOrg, Inc.13

14. Which approach produces the best result? • Business cases – CFO created a business case process that gathered relevant data and put it in financial terms. Modeled after successful capital investment process. • Project management – Assign clear project leadership responsibility, form teams, create plans with clear milestones and deliverables. Pursue the best plans, hold people accountable. • Resource allocation – Core issue is that certain resources are oversubscribed. Create resource managers to assign key resources based on guidelines and situation specifics. • Scoring rules – Define essential criteria, such as strategic fit, size of opportunity, technical difficulty and investment. Assess score for each project on scale of 1-5 on each dimension. Take weighted average to get figure of merit. (c) 2000 - 2015 SmartOrg, Inc.14

15. Typical approaches often fail to resolve the real portfolio issues “Business cases strongly favored incremental projects.” “Project management methods created more work on projects we would cancel.” “Resource allocation efforts abdicated the companies most important investment decisions to relatively low- level managers.” “Weighted scoring rules simply elevated politics to a new level of sophistication.” (c) 2000 - 2015 SmartOrg, Inc.15 APPROACHES THAT DID NOT WORK Too many projects — how to sort them out?

16. Good evaluation worked. “When we got clear about value, many project leaders voluntarily cancelled their own projects; they realized they could better direct their efforts to higher-value projects.” “We reduced our portfolio from 70 to 20 projects, improving the return by more than 100%.” (c) 2000 - 2015 SmartOrg, Inc.16 Too many projects — how to sort them out?

17. Line 1 Line 2 Line 3 Line 4 Line 1 Line 2 Line 3 Line 4 Value Creation Focus. Maximize value creation across the organization. (c) 2000 - 2015 SmartOrg, Inc.17 People Structure Information Objectives are driven by personal agendas, functional perspectives, and individual biases. Individuals and groups think clearly about economic and strategic issues and creatively about how to improve value. Metrics and analysis are not clearly connected to value creation, or they are manipulated to advance personal agendas. Line 1 Line 2 Line 3 Line 4 Information selected to support personal agendas or positions. Irrelevant information brought to bear on decisions. All the information needed to inform value creation, both positive and negative, are incorporated into a neutral evaluations Metrics and analysis inform understanding of economic outcomes and drive choices. Low High Takethesurveyat:www.smartorg.com/survey

18. Poll: Which Value Creation element most needs improvement for you? (c) 2000 - 2015 SmartOrg, Inc.18 Poll 6 • People • Structure • Information Vote by selecting your answer in the polling window on the right side of your screen. Remember to click Submit. Note: only aggregate responses will be displayed.

20. Useless process and political battles. (c) 2000 - 2015 SmartOrg, Inc.20 Aligned Decision Forum Value Creation Focus Credible, Comparable Evaluations Embraces Uncertainty and Dynamics Clear Communication & Learning Inclusive, Collaborative Process Principles of SPM

21. How do you resolve conflict? Politics: deal-making in the smoke-filled room Boss decides: benevolent dictator Sharing: everyone gets some Persuasion: argue until everyone agrees Deny: make nice, maybe it will go away (c) 2000 - 2015 SmartOrg, Inc.21

22. Poll: How do you resolve conflict? • Politics: deal-making in the smoke-filled room • Boss decides: benevolent dictator • Sharing: everyone gets some • Persuasion: argue until everyone agrees • Deny: make nice, maybe it will go away • Other (c) 2000 - 2015 SmartOrg, Inc.22 Poll 3 Vote by selecting your answer in the polling window on the right side of your screen. Remember to click Submit. Note: only aggregate responses will be displayed.

23. Portfolio Management = The discussion of what to do about the gap between top-down aspiration and bottom-up reality (c) 2000 - 2015 SmartOrg, Inc.23 Top-Down • Where do we want to go? • What do we need to get there? Bottom-Up • What do we have in our portfolio? • What should we keep, modify, shut down? Portfolio Manager Role • Set funding priorities • Allocate resources among segments • Balance innovation and incremental projects • Meet corporate financial goals • Assure a steady stream of successful new products

25. Line 1 Line 2 Line 3 Line 4 Line 1 Line 2 Line 3 Line 4 Aligned Decision Forum. Drive real decision making and conflict resolution at all levels. (c) 2000 - 2015 SmartOrg, Inc.25 People Structure Information Players compete to make decisions or advance their own agendas without an effective forum for joint portfolio decisions. Players deliberate, resolve conflict, and take actions based on cooperative discussion. The process is unclear or most projects are exceptions to the process. Line 1 Line 2 Line 3 Line 4 Decisions are made using “gut feel” based on anecdotal information. Meaningful and relevant information is summarized at appropriate level of detail for decision at hand. The process brings the right people together, clarifies top- down aspirations and bottom-up reality, and frames decisions about prioritization and strategy Low High Takethesurveyat:www.smartorg.com/survey

26. What do you do when you don’t believe the numbers? (c) 2000 - 2015 SmartOrg, Inc.26 Aligned Decision Forum Value Creation Focus Clear Communication & Learning Inclusive, Collaborative Process Principles of SPM Credible, Comparable Evaluations Embraces Uncertainty and Dynamics

29. The silver standard of persuasion: (c) 2000 - 2015 SmartOrg, Inc.29 The political loser accepts that the process was fair and accurate. This sucks for me and I think it’s the wrong choice, but at least they heard the full story and made a tough call.

30. Credible, Comparable Evaluations. Allow participants to make and accept decisions. (c) 2000 - 2015 SmartOrg, Inc.30 People Structure Information Line 1 Line 2 Line 3 Line 4 Project evaluations are internally inconsistent without underlying mental models or logic. Information is selected to support individual projects without regard for consistency across projects. Information comes from knowledgeable sources, and is shared, vetted, and understood across the projects. Common evaluation framework follows clear and comprehensible logic; common issues are treated in common ways. Significant advocacy: the objective is to “win” by having requests granted and gaming the system is tolerated. Those whose preferred alternatives are rejected find the basis for the decision convincing. Low High Takethesurveyat:www.smartorg.com/survey

31. Summary of last three principles Embrace Uncertainty and Dynamics • Assumptions are always wrong • Treat uncertainty explicitly Inclusive Collaborative Process • Avoid the great portfolio / budgeting brown-out • All stakeholders benefit from the process Clear Communication and Learning • Do people know what needs to be done next? • Share, update and improve portfolio information. (c) 2000 - 2015 SmartOrg, Inc.31

32. The design challenge is applying these principles in a way that best fits your company. (c) 2000 - 2015 SmartOrg, Inc.32 Aligned Decision Forum Drive real decision-making and conflict resolution at all levels. Value Creation Focus Maximize value created across the organization. Credible, Comparable Evaluations Allow participants to make and accept decisions. Embrace Uncertainty and Dynamics Treat uncertainty explicitly. Clear Communication and Learning Share information, update it and improve results. Inclusive, Collaborative Process All stakeholders benefit. Principles of Strategic Portfolio Management

33. Poll: How important is it for your organization to improve (or create) its strategic portfolio process along these lines? • 1 = not important • 2 • 3 • 4 = important • 5 • 6 • 7 = very important (c) 2000 - 2015 SmartOrg, Inc.33 Vote by selecting your answer in the polling window on the right side of your screen. Remember to click Submit. Poll 7 Note: only aggregate responses will be displayed.

35. Most can implement this typical process. Confidential and Proprietary Strategic Portfolio Management (SPM) process Preparation • Diagnose and frame • Design the process • Set standards Evaluation • Model the value • Incorporate uncertainty and alternatives • Develop plans, targets and information Calibration • Compare projects • Provide peer and expert review • Vet assessments Decision • Balance the portfolio • Prioritize investments • Refine portfolio strategy Tracking • Track performance • Monitor environment • Refine plans, targets and information • Update assessments

37. © 2014 by Stanford Strategic Decision and Risk Management. All rights reserved. 37 If you are interested in the concepts discussed in today’s webinar, please join us on campus in September. • Attend “Strategic Portfolio Decisions” to learn how to: – Use the language, principles, and tools of Strategic Portfolio Management (SPM) to conduct asset valuations and portfolio analysis – Diagnose a portfolio's characteristics and tailor the SPM process to the types of strategic decisions required to manage the portfolio – Identify alternative investment levels and choose the optimal alternative for each portfolio element – Analyze and allocate resources using portfolio analysis software – Track and monitor changes in the business environment to re- evaluate the allocation of resources in the portfolio • For more information, visit http://strategicdecisions.stanford.edu 8–10 September

38. © 2014 by Stanford Strategic Decision and Risk Management. All rights reserved. 38 The course: develop your ability to be a strategic leader. 38 Aligned Decision Forum Value Creation Focus Credible, Comparable Evaluations Embraces Uncertainty and Dynamics Clear Communication & Learning Inclusive, Collaborative Process Principles of SPM Critical Principles and Concepts Practical Step-by-step Process Try It: Interactive Simulations and ExercisesConcrete Cases and Examples

39. © 2014 by Stanford Strategic Decision and Risk Management. All rights reserved. 39 Poll: What is your level of interest in the SDRM certificate program? Poll 8 Vote by selecting your answer in the polling window on the right side of your screen. Remember to click Submit. • I am interested in attending courses in September at Stanford. • I am interested in these courses but can’t make the September dates. • I would like to learn more about your online courses. • I am already a participant in the SDRM program; please contact me to recommend additional courses toward my certificate. Note: only aggregate responses will be displayed.

40. © 2014 by Stanford Strategic Decision and Risk Management. All rights reserved. 40 Stanford Center for Professional Development Meeting the career-long education needs of engineers, technology professionals, managers, and executives…online | at Stanford | at work Graduate and professional courses and certificates, master of science degrees, custom and executive education programs, free online webinars, seminars, and live lectures.

41. © 2014 by Stanford Strategic Decision and Risk Management. All rights reserved. 41 Strategic Decision and Risk Management • Professional certificate program available online | at Stanford | at work • Directed by Professor Ron Howard, Management Science & Engineering, Stanford • Educational partnership between the Stanford Center for Professional Development and Strategic Decisions Group • http://strategicdecisions.stanford.edu

42. © 2014 by Stanford Strategic Decision and Risk Management. All rights reserved. 42 The SDRM courses relate to and expand upon the topics we discussed today. Advanced Project Management (APM) Program Strategic Decision and Risk Management (SDRM) Program Required Elective Decision Quality Decision Analysis Strategic Innovation and Design Thinking Scenarios and Effective Fore- casting Modeling for Strategic Insight Decision Quality Practicum Advanced Decision Analysis Value- Driven Enterprise Risk Mgmt Managing Risk in Healthcare Orgs Collaborative Decision- Making and Negotiation Ethical Decision- Making Leading Strategic Decision- Making Biases in Decision- Making Converting Strategy into Action Strategic Portfolio Decisions

43. © 2014 by Stanford Strategic Decision and Risk Management. All rights reserved. 43 Upcoming Courses Pricing: $2,750 per course For more information: Patty Harris and Kristen Simonds +1.650.307.6973 scpd- sdrm@stanford.edu SEPTEMBER 2014 (Stanford) Sunday Monday Tuesday Wednesday Thursday Friday Saturday 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Decision Analysis Strategic Portfolio Decisions Advanced Decision Analysis Biases in Decision-Making Converting Strategy into Action Decision Quality Scenarios and Effective Forecasting

44. © 2014 by Stanford Strategic Decision and Risk Management. All rights reserved. 44 Ryan Chin Senior Associate Director, Stanford Center for Professional Development ryanchin@stanford.edu To contact one of today’s speakers: scpd-sdrm@stanford.edu +1 650.307.6973 http://strategicdecisions.stanford.edu Hannah Winter Partner, SDG Associate Program Director, Stanford SDRM hwinter@sdg.com David Matheson President, CEO, and Co-founder, SmartOrg, Inc. dmatheson@smartorg.com

45. © 2014 by Stanford Strategic Decision and Risk Management. All rights reserved. 45 Upcoming Courses http://strategicdecisions.stanford.edu SEPTEMBER 2014 (Stanford) Sunday Monday Tuesday Wednesday Thursday Friday Saturday 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Decision Analysis Strategic Portfolio Decisions Advanced Decision Analysis Biases in Decision-Making Converting Strategy into Action Decision Quality Scenarios and Effective Forecasting Pricing: $2,750 per course For more information: Patty Harris and Kristen Simonds +1.650.307.6973 scpd- sdrm@stanford.edu