The Enterprise Portfolio Planning Process
Managing a full portfolio of enterprise projects is more than just another activity of the annual budgeting process. Hidden in that routine exercise is an opportunity for forward-thinking companies to inject future business opportunities into the enterprise portfolio!
In fact, the most innovative organizations believe that there is a lot of value in bringing emergent strategy into the corporate portfolio planning approach. Now the initial reaction to adding another layer of forecasting into your enterprise portfolio management may be one of hesitation. However, there’s a way to comprehensively evaluate your enterprise portfolio without making the analysis a very complex, spreadsheet driven exercise. Instead, you can complete these Four Checks periodically at the highest level of the corporate portfolio to insure innovation remains core to your business!
We do believe that there’s a lot of value in being able to bring emergent strategy into the corporate portfolio planning approach.”
Before diving into the four checks and what they mean to the bottom line, we must first understand the framework in which they live. For this, we will use McKinsey’s 3 Horizons Model. This framework was created for companies to assess potential opportunities for growth without neglecting performance in the present.
Horizon One represents those core businesses most readily identified with the company name and those that provide the greatest profits and cash flow. Here the focus is on improving performance to maximize the remaining value.
Horizon Two encompasses emerging opportunities, including rising entrepreneurial ventures likely to generate substantial profits in the future but that could require considerable investment.
Horizon Three contains ideas for profitable growth down the road—for instance, small ventures such as research projects, pilot programs, or minority stakes in new businesses.
With a firm understanding of the Three Horizons, we can now dive into each of the Four Checks!
The Four Checks
1st check: “Keep the Oxygen”
We first want to make sure we’re keeping the profit of the self-funding engine that is the H1’s. If the H1’s (the core of your business) aren’t healthy, successfully executing on H2’s and H3’s becomes extremely hard.
2nd check: “Mind the Gap”
All the H1’s and H2’s are on a timeline. Every product or service is on a business cycle – H1’s disappear over time and H2’s grow. As you think about the timeline you have to be very thoughtful – when are the H1’s going to decline and when are the H2’s going to start to scale? If you find that there is a gap it could lead to a growth stall or even worse a growth decline! Therefore organizations need to be very mindful of that timeline as both H1’s and H2’s evolve.
3rd check: “Add the J’s”
All H2’s go through a J-curve. These are generally expensive activities: trying to build a market (or trying to change the world!), need to complete sales activities, etc, so the amount of appetite that you have needs to be controlled. When you add up all the J-curves the sum is more than just the sum of the NPV’s. In this way, it’s more than looking at the financial numbers on a spreadsheet. It becomes about understanding what the curve looks like, what that timeline looks like and do you have the resources and appetite to conduct multiple J’s – not just one or two.
4th check: “Manage the Funnel”
This refers to the options funnel and making sure you have enough options. Most innovation theories focus on the number of ideas you have. Because if you want to have ideas you should have a lot of ideas as the attrition rate will be high. The lesson here is you need to be thoughtful about not only the launchpad but the landing pad of these ideas. A lot of your ideas will graduate into existing businesses or go into another business unit. So you need to ensure that there’s something after the H3’s graduate. If you’re not thoughtful about the system flow ideas get stuck – even with a successful incubation!
Keeping the Portfolio Innovative
Let’s recap what we’ve learned thus far. One, every business needs to include not just current business activities but emergent ones as well in the enterprise portfolio planning process. Two, every company has three distinct business opportunity groups; The Three Horizons. Three, in order to ensure innovation remains core to your business offerings there are Four Checks you can make periodically to your enterprise portfolio. And four, without proper planning each of these three business opportunities will begin to dry up, starting with the Third Horizon group. As a result, you need to be disciplined in implementing all four portfolio checks to guarantee the successful maturation of H3’s into H1’s and sustained profitability.