Economic Frameworks for Portfolio and Product Management

This class presents the idea of using economic frameworks for portfolio and project management. We’ll begin with an overview of the three horizons model, and discuss the economic models that are suitable in each horizon. We’ll then discuss and experiment with economic tools that can be applied in each horizon, including the Value of Information, Monte Carlo and Cost of Delay.

Transcript

1. i290 lean/agile product management
   unit 5: economic frameworks
   @jezhumble
   https://leanagile.pm/
   humble@berkeley.edu
   This work © 2015-20 Jez Humble
   Licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.
   

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2. grasp the principles of cost of delay
   understand the principles of decision theory
   calculate the value of information
   make product decisions in an economic framework
   know how to apply optionality
   learning outcomes
   

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4. MoSCoW
   Must have
   Should have
   Could have
   Won’t have
   

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5. kano model
   

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6. “you may ignore economics, but economics
   won’t ignore you”
   — Don Reinertsen
   “The measure of execution in product
   development is our ability to constantly align
   our plans to whatever is, at the moment, the
   best economic choice.”
   — Don Reinertsen
   

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7. decision theory
   The analysis of complex decisions with significant uncertainty
   can be confusing because 1) the consequence that will result
   from selecting any specified decision alternative cannot be
   predicted with certainty, 2) there are often a large number of
   different factors that must be taken into account when making
   the decision, 3) it may be useful to consider the possibility of
   reducing the uncertainty in the decision by collecting additional
   information, and 4) a decision maker's attitude toward risk
   taking can impact the relative desirability of different
   alternatives.
   Craig W Kirkwood, Decision Tree Primer, p1
   

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8. risk matrix
   probability (0-1)
   impact ($)
   low probability
   low impact
   high probability
   low impact
   low probability
   high impact
   high probability
   high impact
   

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9. decision tree
   temperature sensor:
   • development cost: $100k, revenue $1m
   • probability of success: 0.5
   pressure sensor:
   • development cost: $10k, revenue $400k
   • probability of success: 0.8
   

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10. decision trees
    Craig W Kirkwood, Decision Tree Primer, p4
    EV=$400,000
    EV=$400,000
    EV=$310,000
    EV=$0
    

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11. decision tree
    

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12. value of information
    • information reduces uncertainty about
    decisions that have economic consequences
    • information affects the behavior of others,
    which has economic consequences
    • information sometimes has its own market
    value
    Douglas Hubbard, How to Measure Anything (3rd edn), p145
    

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13. measurement
    A quantitively expressed reduction of uncertainty
    based on one or more observations
    Douglas Hubbard, How to Measure Anything (3rd ed.), p31
    

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14. perfect information
    Value of perfect information = EV after - EV before = $100k
    

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15. not normally binary decisions — a continuum
    humans are risk averse when the stakes are high
    use utility functions; reduce stakes
    don’t capture time dependence
    use calculus monte carlo analysis
    problems with decision trees
    

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16. opportunity cost
    In microeconomic theory, the opportunity cost of a
    choice is the value of the best alternative foregone,
    where a choice needs to be made between several
    mutually exclusive alternatives given limited
    resources. Assuming the best choice is made, it is
    the "cost" incurred by not enjoying the benefit that
    would be had by taking the second best choice
    available.
    Wikipedia
    

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17. cost of delay
    Task A: upgrade package to support credit card encryption
    CoD: fine of $50,000 per day we’re not in compliance.
    Duration: 2 weeks
    Task B: Complete a feature for a key customer
    CoD: we’ll close $100,000 per week with this feature
    Duration: 1 week
    

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18. cost of delay
    Task A: 2 weeks, CoD $250k / week
    Task B: 1 week, CoD $100k / week
    

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19. urgency profiles
    

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20. exercise
    Should I wait for the feature?
    We have completed sufficient features for 85% of our
    target customers.
    We can:
    a) Launch what we have, add last 15% in next release, 6
    months from now
    b) Take 2 more months to finish last 15%
    Cost of delay for project: $200,000 / month
    

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21. batching up work
    “Black Swan Farming using Cost of Delay” | Joshua J. Arnold and Özlem Yüce | bit.ly/black-swan-farming
    

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22. technology adoption lifecycle
    Geoffrey Moore, Crossing the Chasm
    

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23. three horizons
    Baghai, M., Coley, S. and White, D., The Alchemy of Growth
    

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24. Intuit horizons and metrics
    

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25. optionality
    Nassim Taleb, Antifragile
    

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