The definition of strategy is a long-term plan of action used to reach a specific goal or a set of objectives. To get the most out of their resources companies should link strategy and new product resource allocation.
In addition, depending on their strategies, companies decide to focus on specific markets, technologies and products. In the same way, once the strategy has been set the majority of projects and spending should be focused on those markets, products and technologies.
Strategy and Portfolio
When companies want to align strategy with project portfolio they need to consider two aspects. The first thing to take into consideration is that all projects should be consistent with their business strategy. The second element is that the breakdown of their spending should reflect their strategic priorities.
There are mainly two methods to reach the goal of strategic alignment:
- Bottom-up: by including numerous strategic criteria into the prioritization tools and Go/Kill decisions;
- Top-down: by creating strategic buckets to set aside funds that will be used for different types of projects.
Scoring models
Scoring models can be used to align project portfolio with business strategy. In fact, the strategic fit can be one of the numerous objectives considered in a scoring model, along with profitability or probability of success. It can be done by simply adding into the scoring model a number of strategic questions.
Adding several strategic factors in the scoring model will allow projects which fit the business strategy to rise to the top of the list. At the same time, by following this method the projects that do not fit the strategy will rank lower in the list.
Strategic Buckets
The top-down approach is probably the only method that can ensure that the portfolio of projects truly reflects the defined business strategy. The strategic buckets approach allows companies to implement their strategies by spending money on specific projects.
Executives first develop the vision and strategy for the business, then, they make choices about how they wish to allocate their limited money resources. By doing so, existing projects are categorized into buckets which are developed by using strategic dimensions.
Listed below are the most common dimensions:
- Project type: the amount of resources that should be assigned to different type of projects (e.g. new product developments, maintenance, process improvements, etc);
- Product lines: the amount of resources that should be split across product lines;
- Strategic goals: the amount of resources that should be split across the specified strategic goals (e.g. defending the core market or expanding the market, etc).
Afterwards, executives determine whether actual spending is consistent with desired spending for each bucket. Companies can use either a scoring model or financial criteria to rank projects within each bucket. This way, the portfolio adjustments are made, either by removing projects, or by adjusting the approval process for future projects.
Finally, projects are prioritized within buckets to obtain the final portfolio of projects. At the end of this process, the final project portfolio represents the business strategy of the company.
For example there are companies that have numerous buckets and below are some of the most common ones:
- new platform development projects
- new product development projects
- maintenance projects
In this case senior managers divide the funds into these buckets, and then rate and rank projects against each other within each bucket. Separate portfolios of projects are created and managed; the spending breakdowns across projects reflects strategic priorities.
Keep in mind
One of the strengths of the strategic buckets approach is that it links spending to the business strategy. By using this method the spending across strategic buckets, over time, will equal the spending targets that executives have set. Another important aspect to consider, when using strategic buckets, is that projects from different buckets are not compared to one other. In fact, it is not necessary to create a full list of ranking criteria that fits all projects.
