PORTFOLIO FUNDING BY HORIZON

UNHEALTHY PORTFOLIO FUNDING

How does the lack of finding disrupt the lean flow through horizons and phases of sPDLC at a portfolio level?  Let's take a look at seven patterns (1).    

funding_xxx.jpg

Under seige

XXX

None of the horizons is healthy.  The company may be undergoing a turnaround or disruption by a game-changer, such as (de)regulation.

funding_32x.jpg

Lost the right to grow

32X

Management has lost focus on the core business, probably due to external factors.

funding_xx1.jpg

Running out of steam

XX1

Where is the new business in the pipeline?  Often happens after a successful turn around effort.

funding_3xx.jpg

Inventing a new future 

3XX

Common in startups, which are not profitable yet.  

funding_x2x.jpg

Inventing a new future (another pattern)

X2X

Common in startups, which are not profitable yet.  

funding_3x1.jpg

Gap in the pipeline

3X1

This pattern is typical in companies that invest heavily in R&D but fail to commercialize ideas.  Investors may react negatively to unfulfilled expectations.  

funding_x21.jpg

Failure to seed for the future

X21

Common in mature enterprises that grow by the acquisition of startups but cannot create and grow innovative businesses organically.

 

HEALTHY PORTFOLIO FUNDING

"10/20/70" is a default recommendation (1), meaning a company needs to allocate 70% of funding to H3 profit (core business), 20% to H2 growth, and 10% to H1 new ideas (innovation).  However, a healthy balance for a company depends on multiple factors:

  • The pace of change and uncertainty in the industry.  Technology companies and industries undergoing disruption need to invest more in innovation and growth, H3 and H2, to keep their strategic options open and to keep up with the high pace of change. 

  • Company capabilities, such as managerial talent and financial freedom.  To afford long term growth, a company needs to excel in the operational execution of H1 core.  Then it needs to invest in innovation management capabilities of H2 and H3.  

  • Shareholder expectations.  Investors in high growth companies have high expectations.  Meeting them most of the time requires excellence in research, commercialization, and operational improvements.

 

TAKEAWAY

Smaller companies may have only one portfolio; mature enterprises might have a hundred.  Regardless of size, companies need to appropriately fund product portfolios in all three horizons to achieve sustainable long term growth.  

Mature enterprises often starve H3 for the sake of near term profits in H1 and implement H2 mostly through acquisitions of growing startups. I will come back to these unhealthy funding patterns in an article about systems thinking. 

REFERENCES

  1. "The alchemy of growth" by Mehrdad Baghai, Stephen Coley, and David White