Stanford Strategic Decision and Risk Management

Sample Course Syllabus
Strategic Portfolio Decisions

Course Description

Courses at Stanford provide participants the opportunity to interact with Stanford faculty and SDG instructors.

Recognizing and Distinguishing Portfolio Decisions

A portfolio is a related set of elements or assets that compete for resources and deliver value for an organization. The allocation and management of resources for these elements is a fundamentally different problem from analyzing a single major investment decision, developing a new business strategy, or deciding how to manage cost or schedule risk on a large construction project. The reason is that one needs to quantify the value contribution from each element of the portfolio, the interactions among elements, and how changing the resource allocation will change the overall value of the elements and the portfolio. In the course we examine how these decisions are made for diverse types of portfolios, including new product or R&D portfolios, personal financial portfolios, and the portfolio of businesses that compose a conglomerate business.

Principles of Strategic Portfolio Management (SPM) and the SPM Process

We introduce six principles of high quality portfolio management, which guide the organization of people, processes, information, and analysis for effective portfolio decision-making. We then lay out a generalized SPM process that embodies the principles, facilitates good decisions, and enhances the chances for good results. The SPM process comprises several iterative steps, including portfolio diagnosis, process design, asset evaluation, information calibration, portfolio decision-making, and tracking results. These general steps can be tailored to fit most portfolio decision-making situations.

Case Study and Exercise-New Product R&D Portfolios

To give participants the experience of allocating resources in portfolio, the course includes multiple classroom exercises and case studies drawn from actual SPM projects. Course participants work through analyzing and allocating resources in an R&D portfolio of new products, using portfolio analysis software. Participants analyze the probabilities of R&D success and commercial profitability of multiple products in a portfolio, and then evaluate the overall portfolio value of different allocations of resources among projects.

Diagnosing and Framing the Portfolio

Key to establishing the right process for portfolio decision-making is diagnosing the portfolio's characteristics, the portfolio elements, and the types of strategic decisions required to manage the portfolio. This provides the foundation for the design of an efficient and effective portfolio management process. This course module includes an exercise in which participants diagnose various types of portfolios, and suggest how the general SPM process should be tailored to each type.

Resource Allocation Alternatives

At the heart of strategic portfolio decision-making is allocating resources to the portfolio's elements. In most cases, the best way to do this is to identify alternative investment levels for each portfolio element, i.e., multiple alternatives for each element. The next step is evaluating, for each element, the level of value created for each alternative, taking into account interactions among elements. Finally, one "rolls up" the values of each element under each alternative, and then chooses the optimal alternative for each element. Because of the large number of combinations of alternatives and elements, this can be a difficult mathematical optimization. This topic is presented in class discussion and with actual case studies of large-scale portfolios.

Case Studies-Business Portfolios

In contrast to R&D project portfolios, business portfolios tend to have many fewer portfolio elements (i.e., the individual businesses that compose the portfolio). Also, each business may have much more value at stake than the elements of an R&D portfolio, and there may be fewer apparent interdependencies, although synergies and divergence are often deeper than most people think. Each business typically has a unique structure, more-so than with R&D projects.

Business portfolios emerge and shrink from many different market forces. Proactively managing the portfolio is critically important but challenging, because of high stakes, with concentrations of risk that may be difficult to fully comprehend. Also, organizational incentives frequently clash with the corporate imperative to increase overall portfolio value. We present first a framework for managing business portfolios at the corporate level, and then discuss individual case studies that illustrate the complexities of the management task.

Tracking Uncertainties

Critical to any type of portfolio is tracking progress and monitoring changes in the business environment and then re-evaluating the allocation of resources to the businesses. Financial portfolios may need to be rebalanced much more frequently than R&D or business portfolios-hourly up to quarterly depending on the composition of the portfolio and the changing values of the financial portfolio assets. Companies managing R&D or new product portfolios often have an annual "portfolio cycle," in which the models of individual elements are updated with new information and the overall allocation is adjusted. Business portfolios typically should be re-evaluated as major new opportunities or threats arise. The case studies presented in the course include information on how this tracking occurs in the individual business being studied.

Portfolio Management Dashboards

Regardless of the type of portfolio, there will be often be overwhelming types and quantities of information potentially available to the portfolio manager. We conclude the course with an exercise in which participants design a portfolio "dashboard" that shows the synthesized, critical information displays the manager needs to make the strategic decisions that will squeeze maximum value from the portfolio.

Course Description