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Sep 10, 2002
A Portfolio-of-Initiatives Approach to Corporate Strategy
Doing good corporate strategy has long lost its character as a straightforward game of analytics, planning, and coordinated execution. Projects will fail, circumstances will change, small opportunities might become large in the blink of an eye, and large opportunities might shrink to zero within months.
Why not just acknowledge the uncertainties and increasing levels of risk in your corporate strategy behavior? McKinsey proposes a so-called portfolio-of-initiatives approach, which organizes the search-build-destroy-expand process associated with that. Much of this sounds like basic business advice, but having a framework always helps. That's why I will summarize the article.
- The portfolio of initiatives a company should pursue should be organized around certain themes, which represent certain aspirations of the company. Such a portfolio will increase the overall likelihood of success, even if many inidividual initiatives should fail (portfolio effect).
- In an increasingly risky and uncertain world, familiarity breeds extraordinary rewards. And such familiarity with new terrain can especially be gained by engaging into new territory early enough and with as much breadth as possible. This is especially possible with a portfolio of initiatives. Risks can also be reduced using this approach, as large bets are avoided before familiarity has been achieved to some extent.
- The master process for each theme is to define the opportunity, create several small initiatives, explore those initiatives, constantly re-evaluate the success and potential of these initiatives, kill the unpromising ones, and drive up investment on the promising initiatives. Step-by-step the theme will be explored and one or two or at best a few successful initiatives will create a large new business opportunity for the company.
- The biggest difference in terms of traditional management is the willingness to change course and react flexibly. See this quote from the article: "The hallmark of this approach is a willingness to change direction continually as more and more distinctive knowledge is acquired. The approach implies an expectation that major midcourse corrections will be required, not that everything will go according to plan. It calls for a willingness to shut down initiatives if it becomes clear that they are headed nowhere."
- Successful sectors that have been using this approach for long are the pharmaceutical industry or the venture capital industry. Their business had always been characterized by constant change and high uncertainty, something that now is true for more and more other industries. Thus, using best practice processes that have been proven over time should be a good idea.
- Summarizing, the three elements of a portfolio-of-initiatives approach are:
- Disciplined Search: Opportunities are abound in an uncertain world. Following the most promising ones is a prerequisite to gaining familiarity with them. Converting them into real investment opportunities is the overarching goal, and thus scarce resources need to be invested incl. the best people that the company has. Also, not making large bets before familiarity has been achieved, is a cornerstone to success.
- Managing a Portfolio of Initiatives: The portfolio of initiatives needs to be re-analyzed constantly, it needs to be monitored, and the reviews should be conducted with direct participation by top management, possibly even the CEO. The process needs to be visible and transparent. When initiatives go well, investments should gradually be driven up. When they go bad, they should be terminated. Ruthlessness in termination is important. Also, an interesting approach would be to re-combine initiatives in a certain theme when it makes sense. Just like any VC would do.
- Flexible and Evolutionary Approach: "... that lets 'natural selection' rather than vision determine where, how, and when to compete."
- Disciplined Search: Opportunities are abound in an uncertain world. Following the most promising ones is a prerequisite to gaining familiarity with them. Converting them into real investment opportunities is the overarching goal, and thus scarce resources need to be invested incl. the best people that the company has. Also, not making large bets before familiarity has been achieved, is a cornerstone to success.
Source: "Just-in-time strategy for a turbulent world" by Lowell L. Bryan, in: McKinsey Quarterly, issue 2 / 2002
Posted by Stefan Smalla on Sep 10, 2002 at 9:04 | Permalink