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Term
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Explanation
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portfolio mapping
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Various graphing and charting techniques generally used to portray the "balance" of a portfolio of projects by displaying how the various projects perform on two or more dimensions or criteria. The most popular
portfolio mapping diagram displays project risk and reward—the y-axis is labeled probability of success and the x-axis is labeled payoff or reward. Projects are plotted on the
diagram according to their estimated success probabilities and payoffs (if successful).
A bubble diagram is a popular variant of portfolio mapping that uses a circle or ellipse to identify each project instead
of a single point. The size, shape, color or shading of the circle is varied to provide additional information about the corresponding project. For example, the size of the circle may
represent the initial cost of the project.
A portfolio mapping
In one popular version of the risk-reward portfolio mapping (shown above), projects are categorized according the quadrant that they fall into. The 4 quadrants of the
diagram are labeled "pearls," "oysters," "bread & butter," and "white elephants." Pearls have a high probability of success and yield high payoffs. Oysters are long shots, but with
high payoffs. Bread & butter are low-risk projects with low reward. White elephants are low probability and low payoff projects.
Numerous, versions of portfolio mappings and bubble diagrams are in use and project portfolio management software often provides such
displays. The chosen axes represent characteristics relevant to the specific application area. For example, for new-product-development projects, popular variations of the risk-reward
plot include ease-attractiveness (plots showing the trade-offs between technical feasibility versus some measure of market attractiveness, such as growth potential), cost- timing (cost
to complete versus time to benefits), and focus-benefit (consistency with organizational strengths versus some measure of project benefit, such as expected net present value (ENPV)).
Portfolio mapping tools are useful devices for displaying project characteristics, but they do not provide a basis for deciding either how to tradeoff those
characteristics nor what balance or distribution among the various characteristics is best for the project portfolio.
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portfolio planning matrix
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A graphical tool sometimes used by large companies to help analyze and manage their portfolios of strategic business units (SBU's).
The tool involves locating the company's SBU's within the cells of a matrix. The results, it is claimed, assist the company in deciding which businesses should receive more or less
investment and help to identify businesses that should be abandoned and new businesses that should be added to the portfolio.
The original version of the portfolio planning matrix (sometimes called the BCG Growth-Share Matrix, was developed in the 1970's by the Boston Consulting Group
(BCG). In this version, the matrix has four quadrants representing low versus high levels of market share and low versus high opportunities for growth. The company's SBU's are
identified and placed in the matrix as follows: Mature SBU's that generate excess cash because of their dominant market shares in slow-growth markets are placed in the lower left
quadrant and labeled cash cows. SBUs that consume cash but that have potential because of their high shares of high-growth markets are placed in the upper right quadrant and labeled
stars. SBU's that must consume cash to remain viable and that have low shares of high-growth markets are placed in the upper right cell and labeled question marks. Finally, SBU's that
simply generate enough cash to break even, but that hold little further promise because of their low shares of low-growth markets are placed in the lower right quadrant and labeled
dogs.
BCG portfolio planning matrix
The location of SBU's within the BCG matrix can help suggest portfolio strategies. If the company can increase the market share for a question mark, it may turn it
into a star. If investment needs to be decreased, the company could phase out or sell dogs or question marks. Cash might be increased by reducing the investments in star that have
established good market share, thereby turning them into cash cows.
A somewhat more sophisticated version of the portfolio planning matrix, referred to as the McKinsey/General Electric Matrix, uses market attractiveness rather
than market growth as the y axis and competitive strength rather than market share as the x axis. Multiple indicators are used to assess market attractiveness, including market
profitability, pricing trends, and entry barriers. Likewise, multiple factors are used to assess competitive strength, such as relative brand strength, market share, customer loyalty,
and record of technological or other innovation. In this version, business units are portrayed on the matrix as pie charts, where the size of the pie represents the total market size
and the slice size indicates the market share captured by the SBU. Arrows are added to indicate the projected direction of movement of the SBU's over time. The process for locating the
SBU's within the matrix involves identifying drivers for each dimension, scoring the SBU's against the drivers, weighting the drivers, and multiplying weights times the scores. As with
the BCG version of the planning matrix, the pattern of results may help to suggest strategies for improving the business portfolio.
McKinsey/GE portfolio planning matrix
The main advantage of a portfolio planning matrix is its simplicity. The main limitations include the inability to compute or account for the contribution of the
various SBU's to total portfolio value, failure to account for risk, and lack of consideration of the interdependencies that, in practice, often exist among SBUs. Although the portfolio
planning matrix was once widely popular, its use has largely been replaced by more sophisticated project portfolio management methods, including those described throughout this
website.
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precedence diagram
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See project network diagram (PND).
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preferential independence
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A condition that, unless satisfied, ensures that value (e.g., the value of a proposed project)
cannot be computed via a weight-and-add equation. Preferential independence means that the value derived from achieving any level of performance against an objective does not depend on the performance achieved against any other objective (i.e., the importance weight assigned to any criterion must be
logically independent of the rating scores assigned other criteria or metrics). For example, in the context of choosing a restaurant meal, one's preferences for wines (e.g., the weight
one would assign to the enjoyment of drinking one's favorite bottle of wine) are likely to depend on the diner's choice of the main dish (so the value derived from the meal cannot be
computed by assigning values to different dishes and values to different wines and adding the results).
Preferential independence is also called mutual independence of preferences, to emphasize the fact that dependence needs to be checked in both directions. For
example, even though one's relative preferences for wines may be affected by the choice of the main dish, one's preferences for main dishes may not be affected much by the choice of
wine.
Note that preferential independence does not require statistical independence. Mutual preferential independence can hold even when performance against different
criteria is highly correlated, provided that the criteria express separate aspects of value (e.g., tests show that people often view public health and environment to be preferentially
independent even though the quality of human health often depends on the quality of the local environment).
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present value (PV)
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The value of a future stream of costs or benefits, or their monetary values, on a specified date or at the beginning of a specified time period. Present value is
computed from via a discount rate and the net present value formula.
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PRINCE2
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Similar to PMBOK, PRINCE2 is a process-based, standard method for project management. PRINCE2, an
acronym for PRojects IN Controlled Environments, 2nd major revision.), is widely used within the UK Government.
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prioritization
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The process of assigning priorities to things or tasks. To prioritize is to arrange or list things in order of desirability or preference. The purpose of the list to
indicate the order in which the items would be chosen, assuming that constraints or limits make it impossible to freely choose all items.
In the case of projects, time, money, and resource constraints make prioritization necessary. Project prioritization involves
displaying in a list the order in which projects would be added or removed as constraints governing what can be accomplished are relaxed or tightened.
For example, as described in the paper on mathematical methods, the ratio of project benefit to
project cost can in some cases be used as a priority measure for ranking projects. When independent projects are ranked using such a measure, selecting projects in rank order until the
budget is consumed will approximately identify the projects that generate the greatest total benefit (value) for the available budget.
The concept of project prioritization is less helpful in situations where there are interdependencies among projects and when there are multiple constraints that limit
the set of projects that can be conducted (e.g., projects that require funding in successive years, with constraints on what can be spent in each year). In such circumstances, it is
generally still possible to show as a list the order in which projects would be added or deleted from the project portfolio, but the list would change depending on the particular
constraint that is adjusted. Also, the list will not be a strict ranking. For example, as the budget is increased, a project that is initially added might be dropped to accommodate a
larger project with a higher benefit-to-cost ration (see the discussion on the efficient frontiers vs. ranking curves). Thus, although the concept of
prioritization is useful, portfolio optimization is more general concept and goal.
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prioritization matrix
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A simple tabular format for displaying a prioritization of projects based on a
multi-criteria analysis. For example:
A sample prioritization matrix
Many project portfolio management tools use some form of a prioritization matrix to summarize project evaluations and rankings. While
the matrix provides a compact way of conveying results, the quality of the tool depends on the quality of the multi-criteria method used to produce the results, including the logic for
defining the criteria and the processes used to evaluate projects and assign weights.
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probability distribution
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A formula or listing that specifies either the possible outcomes associated with an uncertain variable and their probabilities (if the number of possible outcomes is
finite, in which case the probability distribution may be referred to as a discrete probability distribution or as a probability mass function) or the probability of the
outcome falling within a specified interval (if there is a continuum of possibilities, in which case the probability distribution may be referred to as a continuous probability
distribution or as a probability density function).
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probability encoding
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A formal, interview-based process for extracting and quantifying judgments about an uncertainty in the form of a probability distribution. Probability encoding is routinely used within the field of decision
analysis to convert the specialized or general knowledge held by experts into probability distributions that represent the judgments of those experts. Although there are variations,
most approaches to probability encoding are multi-step and use recognized techniques for reducing errors and bias in judgments. A common approach includes stages or elements designed to
motivate, structure, condition, encode, and verify.
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probability wheel
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A device for facilitating probability encoding. The original probability wheel developed by the Decision Analysis
Group at SRI International (see below) was a spinner for visually generating random events of specified probability. It served as a reference probability for comparing the perceived
likelihood of uncertain events. Decision analysis tools and some project portfolio management tools
provide virtual probability wheels or similar devices for probability encoding.
Probability wheel used to facilitate encoding judgmental profiles
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