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When to use marginal benefits to maximize project portfolio value

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Strategic RandD portfolio selection aims at an appropriate balance between various activity areas (e.g. technologies or markets). Following a strategic macro-allocation of resources, portfolio management aims to select projects that create the most value from a pool of resources. The authors propose a practical method for the latter purpose. Decision support models, such as integer programming, are powerful and sound, but have been rarely adopted due to their complexity. Their method has two steps. First, each project is represented by a decision tree that accounts for future flexibility to respond to contigencies. The candidate projects are ranked according to their marginal benefit, expressed as “option value per budget dollar”. The ranking is optimal if the investment decisions are continuous variables, if the budget limit can be adjusted to "squeeze in" the last project, or if all projects have approximately the same resource requirements. If these conditions are not fulfilled, a second step employs integer programming to trade off efficient resource use (high option value per dollar) with the benefit of higher total budget utilization. The ranking-“correction” steps make integer programming easier to communicate to managers. They develop a pilot analysis of this method with the applied research group of a diamond producer.

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en

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application/pdf

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http://flora.insead.edu/fichiersti_wp/inseadwp2001/2001-59.pdf

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Copyright INSEAD. All rights reserved