Constraints have increased and so has demand for sustainable value. In good times there was a wide margin of error. Sometimes even seat-of-the-pants decision-making works, but so does winning at the casino. Both are unreliable and usually unrepeatable. Gambling with your organisation’s prosperity is reckless and likely to lead to long term value destruction. Today, the new mantra is capital-efficient, profitable growth.
Your goal is to create sustainable value. At the end of the day, strategic management can be defined as the allocation of resources to generate cash flows over the long term. Value is created when those cash flows offer returns on investment that are greater than the cost of capital required to fund the projects. Companies become winners when they generate CEPG at rates greater than their competitors.
There are three major drivers that impact CEPG: 1) eliminating wasteful and poorly performing projects; 2) selecting projects that have high returns on capital employed (ROCE) ; and 3) focusing in the big idea.
Many companies who have implemented the new discipline project and portfolio capability have discovered their “Acres of Diamonds.” When implemented well, the return on a proven PPM capability can deliver dramatic payback.
The “Payback” or return on the investment from PPM comes from three key areas:
1. Waste Reduction
2. Capital Efficiency
3. Accelerated Growth
1. WASTE REDUCTION
PPM is often thought of as a capability that helps you decide what to do, but the PPM process also helps identify which projects you should STOP doing. The portfolio selection process uncovers waste and redundancy. It identifies bad projects early and allows you to stop them sooner than you otherwise would.
Apart from eliminating the negative, it also accentuates the positive. The process gives you the capability and incremental resources to invest in higher value projects.
- Just six months following their implementation of a PPM process, a division of Johnson and Johnson saved $7.5 million by eliminating poorly performing projects from their portfolio. Two years is a great payback on any venture. Johnson and Johnson achieved a payback of less than one month on the investment made in implementing their PPM capability.
- Following their first global project portfolio analysis, Natura Cosmetics discovered that the poorest performing 30 percent of their projects were consuming 27 percent of the company’s Research and Development resources. They offered virtually no increase in sales and profitability. They cancelled those plans and are now re-allocating resources to their higher performing projects.
- Another global corporation’s initial PPM analysis revealed that 55 percent of their supply chain projects were creating 98 percent of the portfolio value. Said another way, 45 percent of their portfolio of projects were contributing only a shocking 2 percent of value. They eliminated over 40 percent of this portfolio and went on to accelerate annual sales growth by 24 percent.
2. CAPITAL EFFICIENCY
Wise use of capital is a key component required to create CEPG. When a company generates return on capital at a rate less than the cost of that capital, they are destroying value. Attending to the return on capital of your portfolio can dramatically improve the value equation.
- When Georgia-Pacific took a close look at their portfolio of capital projects, they found the expected return on capital was a disappointing 2.2 percent with the cost of capital 8 percent. It was time for action. After developing their PPM process, the return on capital jumped to 8.5 percent in just two years. Over that same period, they reduced their capital spending by $600M and the stock price steamed ahead 200 percent. Remarkably, this was in an environment of flat industry growth.
3. ACCELERATING GROWTH – BIGGER IS BETTER
A puffin instinctually knows to eat the biggest fish first. But how do we know which are the biggest fish? Are we catching minnows or marlin? Are we fishing from a flimsy rowboat that can easily capsize, or are we on an ocean-going vessel? The PPM process allows us to understand the likely impact of our decisions— in advance— and have a good idea of the return for effort. It allows us to know the risk we are taking on so we’ll have a better idea if we’re fishing in the right place.
There are two types of projects. Type One projects deliver growth and profitability. Type Two projects are everything else. Type Two projects are called maintenance or keep- the-doors-open projects. One of the first things we need to do in the early stages building a PPM capability is to understand the current balance between project types and measure them. The beginning of wisdom is to call things by their proper names— as an ancient Chinese proverb says.
- A recent analysis of a Fortune 50 corporation revealed that only 13 percent of that organization’s resources were focused on growth. This finding is not unusual.
- Danny Strickland knows the value and payback of investing in a PPM capability. Throughout his career as the leader of R&D at Proctor and Gamble, General Mills, and Johnson and Johnson– and as Chief Innovation Officer for The Coca-Cola Company, Danny made sure these organizations understood the criticality of project selection. Danny has a legacy of creating project portfolios that deliver true transformational value. As part of his strategic thrust for accelerated growth while at Johnson and Johnson, Danny implemented a comprehensive PPM capability – he knew he needed a crow’s nest. Within his first two years Danny transformed the new product development portfolio:
- Reduced the number of “big bet” projects from 37 to 28 – down a 24 percent reduction
- Increased the average business impact from .7 to 2.6 on a 5-point scale – up 271 percent
- Increased average overall technical risk from .8 to 1.5 on that same 5-point scale – up 88 percent
- Increased average year two sales from $6.9 to $62 million per project – up almost 800 percent
- Increased total portfolio year two sales from $256 million to $1.7 billion – up a staggering 571 percent.
THE STRATEGIC BENEFITS OF PPM
Measurable profits flow from well-designed and implemented PPM capability, but less recognized are strategic benefits that contribute to Capital Efficient Profitable Growth.
- Improved organizational alignment and focus
- Improved speed and agility of the project selection process
- Improved quality of execution
- Achievement of the desired balance by SBU, Region, Strategy, Project Type, Risk, etc.
- Translation of an operational strategy through portfolio selection
- Dynamic “what if” scenario planning
- Improved organizational accountability
- Improved ability to analyze, decide, and communicate
For more information on how Product Portfolio Management can help your business, follow us online or contact us to arrange your free product demonstration.
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Related Articles by Michael Menard:
Complexity Busting – The best-in-class project-selection process reduces complexity and accelerates good decision making.
Lost Keys – In the absence of a holistic view of your entire portfolio of projects and lack of defined process, you rely on guesswork. Under pressure or through habit you revert to doing what you know how to do. Rationality goes out of the window.
A Thousand Cuts – Each decision inflicts pain. Often this pain goes unnoticed – for a while. But sooner or later, the consequences make themselves felt. Weak growth, dwindling profit, and a slow erosion of value make up make up the predictable declining trajectory. Failure to create profit rarely comes from one single cataclysmic disaster.
A Mouthful of Fish – For the puffin, choosing the biggest fish is an instinctive demonstration of efficiency, value, and execution. So how do we know which are the biggest fish for us?
My Moment of Truth – The event that changed my career happened on December 14, 1996, at precisely 6.30 a.m. I was commuting. The radio was on. I wasn’t paying attention until these words hit me like a sock to the jaw: do not go to your grave with your music still inside you. Then the idea burst into being.