A key task of portfolio management is to determine the value of the components
before including them in the portfolio. In terms of economics, a company creates
value when it makes a profit. Thus, it is critical to a company to maximize
value from a given investment.
The concept of value is strongly related to corporate strategy. As
stated in [COL98],
"corporate strategy is the way a company creates value through the configuration
and coordination of its multimarket activities." It is essential to understand
the relationship between product portfolio decisions and the corporate strategy
that drives the value creation.
Two different generic value chain analysis methods have been proposed to conceptualize
how value is created in companies [GRA91].
One was first suggested by the consulting firm McKinsey & Co., and one was
later suggested by Porter [POR85].
The model first proposed by McKinsey (see [GLU80]
and [BAL00],
for example) involves six distinct activities: technology development, product
design, manufacturing, marketing, distribution, and service. The concepts introduced
by McKinsey later inspired the development of Porter's value chain model. [POR85]
proposes the concept of value system, which includes not only the firm's value
chain but also supplier value chains, as well as the channel value chain and
the buyer's value chain. It is very important to understand what role your firm's
product plays in your buyer's value chain when you are trying to understand
your customer's needs and trying, ultimately, to gain and sustain a competitive
advantage.
Market segmentation is a prerequisite for value analysis. Because not
all potential customers have the same need, it is crucial to identify the
needs of these segments. The value analysis then identifies the importance of
these needs and expectations. The value analysis is of great importance to portfolio
management, because it helps steer the firm's limited resources to those products
and investments that will generate the most value to the firm and its customers.
The value analysis is conducted from two perspectives: the customer and the
firm itself.
- The customer value analysis will increase the firm's understanding of which
needs are most important to the different customers. This gives important
input to the release planning to maximize the value of each release to the
different customers.
- The analysis from the firm's perspective means that you evaluate the customer
needs but from the perspective of firm. Important criteria are cost,
risk, and market acceptance, among others. Firm-related criteria are also
important to take into consideration in the release planning, because you
need to optimize the value for each release in relation to cost, risk, and
other factors. The customer value (or perceived customer value) of the components
must be balanced with the firm's priorities (firm value, risk tolerance, strategic
fit, and so forth).
The purpose of the value analysis is to ensure a maximization of the product
performance and, hence the portfolio performance, by ensuring that that the
product meets the criteria that drives value. Herein lies a difficulty when
designing the value-analysis framework: What are the value drivers or the criteria
that affects product performance? Given that the drivers for product performance
may differ from market to market, and the drivers themselves may be correlated
and affect each other, the challenge to the firm is to identify the criteria
that make the most sense to the firm and its chosen markets and segments.
There are various characteristics to consider when evaluating a component.
There characteristics can be grouped into several categories that are influenced
by [COO01]
and [HEN01]:
-
Financial characteristics evaluation
-
Product characteristics evaluation
- Product matches customer needs
-
Product advantage (the products advantage relative to other similar products on the market)
-
Technological sophistication and alignment with strategic technology roadmap
-
Strategic characteristics evaluation
-
Strategic fit
-
Dedicated human resources
- Dedicated Research and Development resources
-
Process characteristics
- Pre-development task proficiency (for example, idea management)
-
Marketing task proficiency
-
Technological proficiency
-
Launch proficiency
- Marketplace characteristics
If you are considering the product lifecycle, more criteria are added to the
evaluation process later in the product lifecycle as more information is known.
In the beginning of the lifecycle, qualitative evaluation methods are usually
used, such as checklists or scoring models [COO01].
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