If your core business is changing, it can profoundly change how your managers allocate their resources. Changing strategies should be reflected in the projects your company pursues and the things it stops doing. Unfortunately, many companies are remarkably ineffective in aligning their strategies with the activities they're actually investing in. Companies should consider creating an “opportunity portfolio” to help visualize what they're doing. It involves evaluating the full range of projects against both market and capabilities uncertainty.
To construct an opportunity portfolio, you need to map all of your organization's major initiatives against two types of uncertainty. Across the horizontal axis is uncertainty about markets -- internal and external constituencies for your company's offerings. On the vertical axis is uncertainty about capabilities -- typically, technical or execution uncertainties. Projects in less uncertain spaces have lower levels of uncertainty; those in more uncertain spaces have higher levels of uncertainty. The mapping differentiates between projects designed to enhance the core businesses from new platforms. The latter are options for the future -- investments made today in uncertain ventures that may or may not succeed. Like financial options, options for the future buy you the right but not the obligation to make additional investments going forward.
Opportunity portfolios will look different depending on the makeup of the organization's projects. When the portfolio is tilted toward the core, as it is in diagram 1, most of the projects will be located in the low-uncertainty part of the map. The size of each bubble represents the estimated net present value of that initiative today. The map suggests a company not making enough investments in future opportunities.
The second diagram suggests a more future-oriented company, where the core business is suddenly less certain than it was. Not only has the core business, represented by the big bubble on the right, become smaller, it has also moved into a part of the map where there is more uncertainty, which means that the likelihood of achieving these payoffs is probably much lower. At this point, management may need to reallocate resources, shifting the mix of projects away from declining or increasingly uncertain businesses toward those with brighter prospects.
This article is adapted from “How to Rethink Your Business During Uncertainty,” by Rita Gunther McGrath and Ian C. MacMillan, which appeared in the Spring 2009 issue of MIT Sloan Management Review. The complete article is available at http://sloanreview.mit.edu/smr/.