A Pragmatic Approach to Portfolio Analysis

Robert D. Solimeno PhD
Immersitech LLC, 1776 Mentor Avenue, Suite 330, Cincinnati, Ohio 45212

Abstract Managers needing to allocate resources (both human and financial) must decide in some fashion how the allocation takes place to maximize the value of their project portfolio. A different way—by application of a spreadsheet scoring model followed by Principal Components Analysis (PCA) produces a “map” of all projects and scoring parameters together in a single plot. This map is a useful aid to guide the critical decision making in allocating scarce resources.

Key words: portfolio analysis, project management, business strategy, maximizing portfolio value

1

Introduction

Many businesses in the manufacturing sector have an abundance of project work: to improve operations, to address quality issues, to develop new and innovative products, etc. These same businesses have a talented staff that these days is typically lean in number. This leads one to the conclusion that there is an even more acute need for an objective decision making process by which business managers decide on where to put their limited resources. This article presents another look at how to guide those decisions in a pragmatic way as a proxy for a more rigorous analytic method. The approach presented uses a multi-faceted scoring model followed by principal components analysis of the scoring results. The result is a map of all projects to guide the business stakeholders in deciding which projects should get the limited resources.

business leverage. and strategic leverage.” and then to add the five factor scores together in a weighted fashion to generate an overall project score. The scoring model as described fails to do this. not all firms using the scoring model share this view and the various categories are thought to capture different facets of project value. (2) High scores across the board – “The Halo Effect” – a project scoring high on one criterion often score high on many criteria. et al.[1] is to simply add the scores within each category to yield “factor scores. over time. The project scores are easily compiled into a data matrix (spreadsheet) of 19 columns (the scores) by “n” rows (the projects). While simple and straight-forward. The scoring model is comprised of 19 questions in five categories: (1) (2) (3) (4) (5) likelihood of commercial success. financial reward. this approach homogenizes the information from this array of categories.2 Background The governing strategic approach with this model is that the value of the portfolio is maximized. one has to draw a line among a cluster of projects. The first step in doing such a portfolio analysis is to list all projects in a portfolio and then to score each of them using a scoring model as has been described in Cooper.[1] that use this technique are that: (1) Precision is imaginary – project scores are necessarily compared and a threshold established for funding. 2 . likelihood of technical success. As a result some firms have. Edgett. Most often there will be many more projects than project scores. To measure one with a micrometer can be misleading. When the overall averaged project scores are very close. (3) No assurance of efficiency – with purely financial-based models (NPV or ECV methods) the parameter to be maximized is divided by the constraining resource to maximize the value of the portfolio. Nevertheless. and Kleinschmidt[1]. reduced the number of criteria significantly to avoid the effect. The “measured” scores are not precise and are like fluffy cotton balls. The traditional approach as explained in detail by Cooper. Major concerns expressed by managers as described by Cooper. Small differences can be meaningless. et al.

1. and then as a whole is a most daunting exercise. Interpretation is so cumbersome at this level of granularity that the big picture is lost. Scatter plots like this can be constructed for any pairwise combination of the 19 parameters in the scoring model. Visualizing data by constructing simple scatter plots is an easily accomplished step toward identifying potential patterns. . Scatter plot of Market Attractiveness versus Growth Opportunity for nine fictitious projects. and even much larger ones. . Plotting all combinations of 19 x 19 parameters generates a matrix of 361 plots! Attempting to evaluate what all of the plots mean individually. Any pair of scoring parameters may be arranged on an x-y scatter plot. Fortunately.q q q Growth Opportunity 5 q 6 7 q q q q 2 3 4 q 1 1 2 3 4 5 6 7 Market Attractiveness Fig. there is a better way to analyze large data sets such as this . As an example nine fictitious projects were scored for all 19 parameters and Figure 1 displays a plot of two of those parameters—comparing Market Attractiveness versus Growth Opportunity. 3 Simple Graphical Analysis A graphical approach to data analysis of the raw scores has the potential to overcome the imaginary precision issue. 3 .

−5 1.5 9 Track.Attractiveness Platform. The R environment for statistical computing [4] was used in preparation of this work.Position Profitability Durability 6 −0. ultimately produces a two-dimensional plot of the data and the corresponding dimensions.0 PC1 0.Required Business. 4 −5 1 0 5 . The analysis.Impact 5 Proprietary. and parameter names appear at the maximum end of the loading vector) 4 A Pragmatic Approach The improved analysis presented here retains the original 19 “dimensions” of the raw data in the scoring model without the homogenization induced by summing or averaging the individual scores.Fit 7 Market.time Uniqueness Regulatory.0 0 5 0.Impact 8 Synergy Capital.5 0.for.Record Mfg.0 Commercialization.5 −1.Intensity Technical.Capability 4 Growth.Gap Equipment. The project map of nine fictitious projects is shown in Figures 2 and 3. A more modern textbook by Jolliffe [3] is a comprehensive text on the subject.0 −0. 2. Principal Component bi-plot of PC1 versus PC2 with overlaid loading vectors (numerals in the plot correspond to the project name listing.Opportunity 3 Competitive.0 Fig. The ultimate desired outcome is that the map guides the key stakeholders in making as informed a decision as possible with the available information. first described by Pearson[2].Resources Technology. which may be accomplished with many modern statistical software packages.Social..Growth Business.. The scoring data are analyzed by a method known as Principal Components Analysis (PCA).Base 2 PC2 0.or.0 −1.Political. The plot is a map that managers can use to debate the relative merits of like and dissimilar projects.5 1.Skill.

2 Fig. Magnification of Figure 2 5 Interpretation of Results The PCA bi-plot packs a terrific amount of information into a concise and seemingly simple plot.Position Profitability Durability −0.1 Technical.Resources Technology.0 0.Skill.Opportunity Competitive.or. Figure 2 quite literally represents a “map” of the project portfolio. 3..Intensity 3 PC2 0.time Uniqueness 0.Capability 4 0. is the major driver of the plot since it represents the greatest proportion of variance of any of the principal components. PC1. but once the analyst recognizes a few features of the plot the real value of the method emerges.for.” The first principal component.Record Mfg.0 Regulatory.1 PC1 0.3 Track.Impact 5 Proprietary.Gap Equipment.Social.Base 2 Commercialization. Interpretation may seem daunting at first.Political.2 −0. A clearer view of this is evident in 5 −2 −1 0 1 2 . So directionally it makes sense to pay most attention to the x-axis corresponding to PC1 where we see a number of loading vectors pointing to the left.Impact 7 8 Synergy Business.3 −0. Upon this map are superimposed each of the 19 parameters (the arrows) with which all nine projects were evaluated.−3 −2 −1 0 1 2 3 0.2 Growth.Fit Capital. At first glance one can see in Figure 2 a cluster of arrows and text superimposed upon a scatter plot of numbers from 1 to 9 (referring to the nine projects in the current portfolio under study) and their juxtaposition on the plot depicts how each of them relate to the others with respect to all 19 scoring parameters.1 Market. The names of each parameter are shown adjacent to the respective “loading vector.Required −0..Growth Business.1 0.Attractiveness Platform.2 −0.

Business Fit. Management debate is still necessary to decide where to place resources. 7. or cluster of projects. 2. 2001. etc pointing in generally similar directions). That debate is both stimulated and facilitated by employing this analysis and is perhaps one of the most valuable outcomes of this method of analysis. Perseus Publishing. and efficient data reduction to provide business managers a clear view of project opportunities for decision making. Proximity of any project point. 7. Now that projects in the portfolio can be readily grouped in clusters. Portfolio management for new products. Business managers can now debate which projects should be funded and logical decisions can be made about where resources will be put. The general rule to follow is that projects clustered in proximity to each other have similar characteristics. near a vector arrow indicate high values and opposite the arrow head are low values. This method also addresses at least one major concern expressed by managers using the scoring model: imaginary precision.Figure 3 where projects 5. 6 . objective. Projects 6 and 1 appear to be clear outliers from the others. Market Attractiveness. Business strategy is not implemented until money is committed to specific projects. Synergy. and 8 appear in the upper end (high scores) of the distribution for most of the scoring parameters (e.g. Business Impact. 3. Thus in contrast to projects 5. Those projects have a lot in common — similar high scores for those parameters! Projects positioned opposite of any given arrow score low for that parameter. and 8 — projects 4. This analytical approach provides a most pragmatic. but project similarities and differences are clearly related by position on the map. and Elko J. Edgett. 6 Conclusion The pragmatic approach of applying Principal Components Analysis to a portfolio of projects that have been scored among many criteria provides a useful visual map of how these projects are interrelated. Kleinschmidt. The PCA analysis avoids the imaginary precision issue by graphically presenting the juxtaposition of all projects relative to each other and their raw scores. References [1] Robert Gravlin Cooper. and 9 in the upper right quadrant of Figures 2 and 3 have similarities with each other but differ significantly from the first cluster. the picture of the portfolio as a whole becomes much clearer with respect to all metrics applied. Scott J.

Philisophical Magazine. [3] I. Springer.org/. 2:557–72. [4] The R Foundation. 7 .[2] Karl Pearson. 1901. 2002. Jolliffe.T.r-project. Principal component analysis. On lines and planes of closest fit to a system of points in space. http://www. Springer series in statistics.