24.09.2020Blog

How to build a portfolio for resilience and adaptive strategy

Covid-19 has raised the awareness of resilience. Portfolios are at the centre of making choices and steering what organisations do and invest in. In this post, I’ll dig deeper into the resilient portfolio: 1) What are the properties of resilient portfolio, 2) How are they connected to adaptive strategy and 3) How is a portfolio managed to ensure organisational resilience?

What is a resilient portfolio and why does it matter?

A portfolio – in the context of this post – is a collection of business opportunities that the organisation pursues by investing into them, and the visualisation of the state of each of these opportunities.

Resilience in the context of the portfolio requires that the organisation takes into account three different horizons of opportunities:

  1. Incremental, like new versions of existing services
  2. Evolutionary.
  3. Radical / Pioneering.

McKinsey has described these horizons as:

  • Horizon 1 – Incremental: ideas provide continuous innovation to a company’s existing business model and core capabilities in the short-term.
  • Horizon 2 – Evolutionary: ideas extend a company’s existing business model and core capabilities to new customers, markets, or targets.
  • Horizon 3 – Radical is the creation of new capabilities and new business to take advantage of or respond to disruptive opportunities, or to counter disruption.

The reasoning behind taking all these opportunities into account is that every business has a lifecycle. This lifecycle is not predictable due to VUCA (Volatility, Uncertainty, Complexity, Ambiguity) properties of the business environment. You need to have a balanced portfolio across the horizons in order to achieve business resilience and to survive in the long term.

Connecting portfolio to adaptive strategy

Choosing the opportunities to the portfolio naturally has a connection to strategy but does not need to be constrained by it. The typical options how the portfolio is connected to strategy are:

  1. Strategic bets as opportunity areas to be explored.
  2. Strategy informed by exploration and co-creation with existing and non-customers.
  3. Exploration outside current strategy.

Strategic bets as opportunity areas: one practical way to connect the portfolio to the strategy is to formulate opportunity areas from each / a combination of strategic themes, and to assign an exploration team for that area.

The second option is to inform the strategy by exploration and co-creation. In practice, this means that evolutionary and radical horizon opportunities are followed through the portfolio. The insights and evidence from these opportunities is shared with people crafting the strategy, and the exploration teams can be requested to study the strategic dimension further.

The third option is to explore outside the current strategy in order to have a broader view of the business and possibly inform the upcoming iterations of the strategy.

These options are not mutually exclusive, but in order to manage the portfolio and maximise the value (knowledge & learning, ROI, and reduced risk) it needs to be clear what the connection is between the chosen opportunities and the strategy. This is sometimes called “strategic-fit” and is defined for each opportunity. The strategic-fit is not enough to reach an adaptive strategy. For that we need ways to manage the portfolio.

How to manage portfolio in a way that ensures resilience and enables adaptive strategy

Traditionally, the processes of creating and managing strategy and portfolios are done in three steps: “Analyse-Plan-Implement”. The problem with this approach is that it does not fit the reality of the VUCA world. Hence, you need to inspect and adapt both the portfolio and strategy accordingly. The way to do this is to apply the Complex Adaptive Systems theory to the strategy and portfolio management. In essence, this means replacing the “Analyse-Plan-Implement” with the “Probe-Sense-Respond” approach.

In practice, “Probe-Sense-Respond” means experimentation on strategy and portfolio. The speed of learning experiments varies a lot between the horizons, and the focus of experiments is connected to the uncertainties of each opportunity. The experiments try to validate and explore the desirability, feasibility, and viability of each opportunity.

  • Desirability – Do they want this? – Design
  • Feasibility – Can we do this? – Data/Technology
  • Viability – Should we do this? – Business

In the case of Evolutionary and Radical horizon opportunities, there is actually a fourth dimension to be experimented: Adaptability – are we able to adapt our organisation to create, deliver and capture the value of the opportunity? In practice, this means testing new business models, go-to-market channels, and ecosystem setups.

What practices of portfolio management change?

To transform the portfolio management from the traditional approach to the adaptive requires changing the following structures and conditions:

Annual budgeting of each opportunity – due to the speed of change and VUCA properties of each opportunity, annual budgeting makes no sense. Why would you decide your investments with the least knowledge possible like many organisations still do when budgeting in the autumn in advance of the following year? Instead you should have rolling wave budgeting based on the actual evidence from the experiments and forecast for types of opportunities.

Power hierarchy and silos – disconnecting people who decide, who manage and who actually do create a lot of waste, consume time and disconnect the evidence from decision making. Another problem is that transformative business opportunities have no breathing room (political, budgetary, priority) within existing business units. Clayton Christensen describes this issue in Theory of disruptive innovation, Capitalist’s dilemma by saying:

“It’s not bad management that drives companies becoming irrelevant. It’s due to today’s talented management doing their job well.”

The same process for all opportunities – managing radical and evolutionary horizons is very different from incremental opportunities. It is common to have these in different portfolios too, but no matter whether you put the opportunities in the same portfolio or not, you need to understand and manage them very differently. One practical example of this is innovation accounting as early phase radical opportunities are basically weak signals that do not show up in your incremental opportunity metrics. Innovation Accounting is a way of evaluating progress when all the metrics typically used in an established business (revenue, customers, ROI, market share) are effectively zero.

Empowering people and using some teams as probes – you have incremental opportunities in development, and you are managing them with some agile framework. This works for opportunities that are validated and you are scaling up the execution to capture the value. However, in the case of radical and evolutionary opportunities, you want to avoid premature scaling and use cross-functional teams as probes that de-risk the opportunity with the help of design thinking and lean start up; basically generating insights and validating business ideas within the opportunity. These teams are seed-funded and later funded by the evidence of the opportunity. Only a few of these opportunities will actually grow at such a rate that requires scaling.

Limiting the WIP in portfolio level – whenever I help organisations to implement ways of leading and working with the portfolio, they often say: “This is all nice and dandy, but we do not have time for anything else but incremental development of the things we have right now. We have a discovery team looking at signals but all they do is just generate more ideas that we never actually act on”. I sometimes use the analogy of “stuffing more paper in the printer than it can actually print, thus leading to jamming and finally a breakdown”. The key practice to overcome this challenge is to manage the portfolio Work-in-progress limit by a type of business opportunity: incremental, evolutionary, and radical. Naturally, the core business increments are crucial to be managed in order to have the capability to invest in evolutionary and radical opportunities. Still, without an explicit investment scheme, leadership support, and ways of working with evolutionary and radical horizons, there is no resilience and business agility to reach VUCA change.

The key take-aways that I want to leave you with are:

  1. A resilient portfolio must be connected to strategy, and in order to have an adaptive strategy, your portfolio needs to reflect the bets and inform the strategy.
  2. Resilient portfolio management is key to reaching business agility and to responding to any change in the market
  3. Due to the VUCA properties of the world, no plan survives reality. We need to embrace the change by approaching opportunities with experimentation and by gathering evidence to make better investments.

Watch Solita Meeting Point 2020 recording hear the latest insights from our customers KONE, OP Financial Group, Finnish Church Aid, Telia and Kalmar and how they have embraced change.

Watch the event recording