Three Goals in Portfolio Management

Three Goals in Portfolio Management
While the portfolio methods employed in these firms varied greatly, the common denominator across firms was the goals management was trying to achieve. One or more of three high level or macro goals dominated the thinking of each firm we studied, either implicitly or explicitly. Which goal was most emphasized by the firm in turn seemed to influence the choice of portfolio method. These three broad or macro goals were:
Value Maximization: In some firms, the preoccupation was to allocate resources so as to maximize the value of the portfolio in terms of some company objective (such as long term profitability; or return-on-investment; likelihood of success; or some other strategic objectives).
Balance: Here the principal concern was to develop a balanced portfolio - to achieve a desired balance of projects in terms of a number of parameters; for example, the right balance in terms of long term projects versus short ones; or high risk versus lower risk, sure bets; and across various markets, technologies, product categories, and project types (e.g., new products, improvements, cost reductions, maintenance and fixes, and fundamental research).
Strategic Direction: The main focus here was to ensure that, regardless of all other considerations, the final portfolio of projects truly reflected the business's strategy - that the breakdown of spending across projects, areas, markets, etc., was directly tied to the business strategy (e.g., to areas of strategic focus that management had previously delineated); and that all projects were "on strategy".
What becomes clear is the potential for conflict between these three high level goals. For example, the portfolio which yields the greatest NPV or IRR may not be a very balanced one (it may contain a majority of short-term, low risk projects; or is overly focused on one market); similarly a portfolio which is primarily strategic in nature may sacrifice other goals (such as expected short term profitability). Our interviews also revealed that although managers did not explicitly state that one goal above took precedence over the other two, the nature of the portfolio management tool elected by that firm certainly indicated a hierarchy of goals. This was because certain of the portfolio approaches uncovered were much more applicable to some goals than others: for example, the visual models (such as portfolio bubble diagrams) were most amenable to achieving a balance of projects (visual charts being an excellent way of demonstrating balance); whereas scoring models tended to be very poor for achieving or even showing balance, but most effective if the goal was maximization against an objective. Thus the choice of the "right" portfolio approach depended on which goal management had explicitly or implicitly focused on.
What methods did firms find most effective to achieve the three portfolio goals? The next sections outline the methods, complete with strengths and weaknesses, beginning with the goal of maximizing the value of the portfolio.