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Portfolio Management for New Products: Picking the Winners
 

Portfolio Management for New Products: Picking the Winners

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New product portfolio management is about how you invest your business's product development resources - project prioritization and allocating resources across development projects. There are four ...

New product portfolio management is about how you invest your business's product development resources - project prioritization and allocating resources across development projects. There are four goals in portfolio management - maximizing the value of the portfolio, seeking the right balance of projects, ensuring that your portfolio is strategically aligned, and making sure you don't have too many projects for your limited resources. And there are many tools - some quantitative, others graphical, some strategic - designed to help you chose the right portfolio of projects. Most important, your new product process or Stage-Gate system must be working in order to achieve effective portfolio management: it must deliver data integrity and also weed out the bad projects early.

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    Portfolio Management for New Products: Picking the Winners Portfolio Management for New Products: Picking the Winners Document Transcript

    • Product Innovation Best Practices Series Portfolio Management for New Products: Picking The Winners Reference Paper # 11 By Dr. Robert G. Cooper and Dr. Scott J. EdgettCompliments of:Stage-Gate International andProduct Development Institute Inc.For information call +1-905-304-8797 www.stage-gate.com © Product Development Institute Inc. 2000-2013 Product Development Institute Inc. and Stage-Gate are registered trademarks. Logo for Product Development Institute Inc. used under license by Stage-Gate International. Logo for Stage-Gate used under license where appropriate.
    • Portfolio Management for New Products Picking The Winners By Dr. Robert G. Cooper and Dr. Scott J. EdgettNew product portfolio management is about how you invest your business’s product developmentresources – project prioritization and resource allocation across development projects. This paperaddresses the four goals of portfolio management and the importance of having an established, highquality Stage-Gate® system in place.Keywords:Stage-Gate®, new product process, portfolio management, project prioritization, and resourceallocation.These pages contain copyright information of Product Development Institute and member company Stage-Gate International,including logos, tag lines, trademarks and the content of this article. Reproducing in whole or any part of this document isstrictly forbidden without written permission from Product Development Institute Inc. or Stage-Gate International. 2© 2000-2012 Product Development Institute Inc. 2000-2013 www.stage-gate.comProduct Development Institute Inc. and Stage-Gate International are registered trademarks.
    • Portfolio Management for New Products Picking The Winners By Dr. Robert G. Cooper and Dr. Scott J. EdgettExecutive Summary Portfolio management is a critical senior manage- ment challenge, according to our best practices study2. And top performing businesses tend to New product portfolio management is about rate the importance of portfolio management how you invest your business’s product de- much higher than do poorer performers. Here’s velopment resources – project prioritization why: and allocating resources across development • First, a successful new product effort is fun- projects. damental to business success. This logically translates into portfolio management: the There are four goals in portfolio manage- ability to select today’s projects that will ment – maximizing the value of the portfolio, become tomorrow’s new product winners. seeking the right balance of projects, ensur- • Second, new product development is the ing that your portfolio is strategically aligned, manifestation of your business’s strategy. and making sure you don’t have too many One of the most important ways you projects for your limited resources. And there operationalize strategy is through the new are many tools – some quantitative, others products you develop. If your new product graphical, some strategic – designed to help initiatives are wrong – the wrong projects, you chose the right portfolio of projects. or the wrong balance— then you fail at implementing your business strategy. Most important, your new product process or • Third, portfolio management is about Stage-Gate system must be working in order resource allocation. In a business world pre- to achieve effective portfolio management: it occupied with value to the shareholder and must deliver data integrity and also weed out doing more with less, technology and the bad projects early. marketing resources are simply too scarce to waste on the wrong projects. The conse- quences of poor portfolio management areMaximizing Your Profits From R&D evident: you squander scarce resources, and as a result, starve the truly deservingInvestments projects.How should you most effectively invest your Four Goals in Portfolio Managementproduct development resources? And how should There are four goals in new product portfolioyou prioritize your development projects and al- management:locate resources among them? These are crucialissues in new product portfolio management. Goal #1. Maximize the Value of Your Port-Much like a stock market portfolio manager, folio: Here the goal is to select new product pro-those senior executives who manage to optimize jects so as to maximize sum of the values ortheir R&D investments – to select winning new commercial worths of all active projects in yourproduct projects and achieve the ideal balance pipeline in terms of some business objective.and numbers of projects – will win in the long Tools used to assess “project value” include3 :run1. 3© 2000-2012 Product Development Institute Inc. 2000-2013 www.stage-gate.comProduct Development Institute Inc. and Stage-Gate International are registered trademarks.
    • Portfolio Management for New Products: Picking the Winners• NPV: Determine the project’s net present Pictures portray balance much better than do value and then rank projects by NPV divided numbers and lists, and so the techniques used by the key or constraining resource (for ex- here are largely graphical in nature. These in- ample, the R&D costs still left to be spent on clude: the project; that is, by NPV/R&D). Projects are rank-ordered according to this index until • Bubble diagrams: Display your projects on a out of resources, thus maximizing the value two-dimensional grid as bubbles as in Figure of the portfolio (the sum of the NPVs across 3 (the size of the bubbles denotes the spend- all projects) for a given or limited resource ing on each project). The axes vary but the expenditure. most popular chart is the risk-reward bubble• ECV: The Expected Commercial Value diagram, where NPV is plotted versus prob- method uses decision-tree analysis, breaking ability of technical success. Then seek an the project into decision stages – for exam- appropriate balance in numbers of projects ple, Development and Commercialization (and spending) across the four quadrants. (Figure 1). Define the various possible out- • Pie charts: Here show your spending break- comes of the project along with probabilities downs as slices of pies in a pie chart. Popular of each occurring (for example probabilities pie charts include a breakdown by project of technical and commercial success). The types, by market or segment, and by product resulting ECV is then divided by the con- line or product category. straining resource (as in the NPV method), Both bubble diagrams and pie charts, unlike the and projects are rank-ordered according to maximization tools outlined above, are not deci- this index in order to maximize the bang for sion-models, but rather information display: they buck. The method also approximates real depict the current portfolio and where the re- options theory, and thus is appropriate for sources are going – the “what is”. These charts handling higher risk projects4. provide a useful beginning for the discussion of• Scoring model: Decision-makers rate projects “what should be” – how should your resources on a number of questions that distinguish be allocated. superior projects, typically on 1-5 or 0-10 scales. Add up these ratings to yield a quan- Goal #3. Your Portfolio Must Be tified Project Attractiveness Score, which Strategically Aligned: This means that all your must clear a minimum hurdle. This Score is a projects are “on strategy”; and that your break- proxy for the “value of the project” but incor- down of spending across projects, areas, mar- porates strategic, leverage and other consid- kets, etc., must mirror your strategic priorities erations beyond just financial measures. Pro- (your areas of focus and their respective priori- jects are then rank-ordered according to this ties). Several portfolio methods are designed to score until resources run out. A typical scor- achieve strategic alignment: ing scheme is shown in Figure 2. • Top-down, strategic buckets: Begin at the top with your business’s strategy and fromGoal #2. Seek Balance in Your Portfolio: that, the product innovation strategy for yourHere the goal is to achieve a desired balance of business – its goals, and where and how toprojects in terms of a number of parameters; for focus your new product efforts. Next, makeexample, long term projects versus short ones; splits in resources: “given your strategy,or high risk versus lower risk projects; and across where should you spend your money?”.various markets, technologies, product catego- These splits can be by project types, productries, and project types (e.g., new products, im- lines, markets or industry sectors, and so on.provements, cost reductions, maintenance and Thus, you establish strategic buckets orfixes, and fundamental research). envelopes of resources. 4© 2000-2012 Product Development Institute Inc. 2000-2013 www.stage-gate.comProduct Development Institute Inc. and Stage-Gate International are registered trademarks.
    • Portfolio Management for New Products: Picking the Winners Then, within each bucket or envelope, list all of people and time. Thus an over-riding goal is to the projects – active, on-hold and new – and ensure a balance between resources required for rank these until you run out of resources in the active projects and resources available. Here that bucket. The result is multiple portfolios, are the ways: one portfolio per bucket. Another result is that • Resource limits: The value maximization your spending at year-end will truly reflect the methods (Goal #1) build in a resource limita- strategic priorities of your business. tion – rank your projects until out of re-• Top-down, product roadmap: Once again, sources. The same is true of bubble dia- begin at the top, namely with your business grams (Goal #2): the sum of the areas of the and product innovation strategy But here the bubbles – the resources devoted to each pro- question is: “given that you have selected ject – should be a constant, and adding one several areas of strategic focus – markets, more project to the diagram requires that technologies or product types – what major another be deleted. initiatives must you undertake in order to be • Resource capacity analysis: Determine your successful here?”. It’s analogous to the mili- resource demand: prioritize your projects tary general asking: given that I wish to suc- (best to worst) and add up the resources ceed in this strategic arena, what major initia- required by department for all active projects tives and assaults must I undertake in order (usually expressed in person-days per to win here? The end result is a mapping of month)7. Project management software, such these major initiatives along a timeline – the as MS-Project, enables this roll-up of re- product roadmap (Figure 4). The selected source requirements. Then determine the projects are 100% strategically driven. available resources (the supply) per depart-• Bottom-up: “Make good decisions on individ- ment – how much time people have to work ual projects, and the portfolio will take care of on these projects. A department-by- itself” is a commonly accepted philosophy. department and month-by-month assess- That is, make sure that your project gating ment usually reveals that there are too many system is working well – that gates are ac- projects; it suggests a project limit (the point cepting good projects, and killing the poor beyond which projects in the prioritized list ones – and the resulting portfolio will be a should be put On Hold); and it identifies solid one. Even better, to ensure strategic which departments are the bottlenecks. alignment, use a scoring model at your pro- ject reviews and gates (Figure 2), and include Your New Product Process Must Work a number of strategic questions in this model. Before you charge ahead with portfolio manage- Strategic alignment is all but assured: your ment, put first things first: make sure that your portfolio will indeed consist of all “on strat- new product process or gating system is working egy” projects (although spending splits may well. A majority of product developers have im- not coincide with strategic priorities). plemented Stage-Gate® systems, according to aNote that regardless of the strategic approach PDMA study8, but experience suggests that manyhere, all of these methods presuppose that your are due for an overhaul. An effective new prod-business does indeed have a product innovation uct process is central to portfolio managementstrategy, something that many businesses lack for two reasons:according to our benchmarking study 5. 1. First, regardless of the sophistication of the portfolio models used, your input data must beGoal #4. Pick the Right Number of Projects: sound. And look to your new product process toMost companies have too many projects under- deliver data integrity. Usually this is not the case.way for the limited resources available6. The re- For example, our best practices survey revealedsult is pipeline gridlock: projects end up in a that, in spite of their theoretical rigor, financialqueue; they take too long to reach the market; models (NPV and ECV) yield the worst portfoliosand key activities — for example, doing the up- of projects, not because the models are wrong,front homework— are omitted because of a lack but because the input data were so much in error. 5© 2000-2012 Product Development Institute Inc. 2000-2013 www.stage-gate.comProduct Development Institute Inc. and Stage-Gate International are registered trademarks.
    • Portfolio Management for New Products: Picking the Winners2. Second, your gating process should at mini- Conclusionmum kill or cull out the bad projects, and in sodoing, yield a better portfolio. Again often this Portfolio management is fundamental to newdoes not happen: management confessed to an product success. But it’s not as easy as it firstinability to kill projects, the lack of effective gate seems. Not only must you seek to maximize thecriteria, and many projects simply “getting a life value of your portfolio, but the developmentof their own”. projects in your portfolio must be appropriately balanced, there must be the right numbers ofData integrity means that the up-front homework projects, and finally, the portfolio must be strate-in projects must be done. Many companies have gically aligned. No one portfolio model canimproved the quality of execution and at the deliver on all four goals, and so best-practicesame time provided far better data for project businesses tend to use multiple methods toselection by implementing a systematic Stage- select their projects. Finally, our studies revealGate new product process. Build into your proc- that any portfolio method outlined above is bet-ess two stages of homework prior to the begin- ter than none at all, so our advice is: just do it!ning of Development (Figure 5): • the Scoping Stage, which entails a pre- - End- liminary market, technical and business assessment • Building the Business Case, which in- volves much more detailed market re- search (a user needs-and-wants study, competitive analysis, concept tests) along with technical and manufacturing assessments.Incorporating in these two key stages as part ofyour new product process not only results in bet-ter and sharper product definition, a critical suc-cess driver, but also much better data as inputsto the various portfolio models above.An effective new product process also meanseffective gates. In best-practice businesses, thistranslates into a menu of specified deliverablesfor each gate, visible Go/Kill and prioritizationcriteria at the gates (many companies use score-cards to rate projects at gate meetings), definedgatekeepers per gate, clear gate outputs, andeven “rules of engagement” for the gatekeepingor leadership team of the business. If your gatesare weak – if they fail to weed out mediocre pro-jects – then check yourself against gating best-practices above. Perhaps it’s time to rethink yournew product process! 6© 2000-2012 Product Development Institute Inc. 2000-2013 www.stage-gate.comProduct Development Institute Inc. and Stage-Gate International are registered trademarks.
    • Portfolio Management for New Products: Picking the WinnersFigure 1. Determination of Expected Commercial Value of Project 7© 2000-2012 Product Development Institute Inc. 2000-2013 www.stage-gate.comProduct Development Institute Inc. and Stage-Gate International are registered trademarks.
    • Portfolio Management for New Products: Picking the Winners Figure 2. A typical Scoring Model For Project Prioritization Strategic Alignment: • Degree to which project aligns with our strategy • Strategic importance Product/Competitive Advantage: • Offers customers/users unique benefits • Meets customer needs better • Provides value for money for the customer/user Market Attractiveness: • Market size • Market growth rate • Competitive intensity in the market (high=low score) Synergies (Leverages Our Core Competencies): • Marketing synergies • Technological synergies • Operations/manufacturing synergies Technical Feasibility: • Size of technical gap (large=low score) • Technical complexity (barriers to overcome) (many/high = low score) • Degree of technical uncertainty (high=low score) Risk Vs. Return: • Expected profitability (magnitude: NPV) • Return on investment (IRR) • Payback period (years; many=low score) • Certainty of return/profit estimates • Low cost & fast to do The six Factors are scored (0-10) for each project at gate review meetings by the ‘gatekeepers”. Bulleted items are discussed to arrive at Factor Scores. Each Factor must clear a minimum hurdle. They are then added (weighted or unweighted) to yield the Project Attractiveness Score, which is used to make Go/Kill decisions at gates and to prioritize projects. 8© 2000-2012 Product Development Institute Inc. 2000-2013 www.stage-gate.comProduct Development Institute Inc. and Stage-Gate International are registered trademarks.
    • Portfolio Management for New Products: Picking the WinnersFigure 3. A Typical Risk-Reward Bubble DiagramProjects are shown as bubbles. This high growth business has too many “White Elephants” andtoo much spending in the “Bread & Butter” quadrant, not enough in the “Pearls” quadrant, and isunderfunding the “Oysters”. Example based on a growing Business Unit within a large chemicalcompany. 9© 2000-2012 Product Development Institute Inc. 2000-2013 www.stage-gate.comProduct Development Institute Inc. and Stage-Gate International are registered trademarks.
    • Portfolio Management for New Products: Picking the WinnersFigure 4. The Product RoadmapThe Product Roadmaps shows the major development initiatives (platforms and products) on atimeline for several years into the future. This example is from a manufacturer of process equipment(mixers & agitators) Product Roadmap Extensions into Chemical Mixers Original Agitator Platform - Extension Chemical Mixers: Basic Line Plan Chemical Mixers: Special Impellers extensions & new Chemical Mixers: Hi-Power platforms Extensions into Petroleum Blenders Platform Extension Petroleum Blenders : Low Power Range Petroleum Blenders : High Power New Product Platform: Aerators Aerator Platform P&P Aerators: Line #1 (fixed mount) P&P Aerators: Line #2 (floating) P&P Aerators: Hi-Power Extensions into Aerators for Chemical Waste Platform Extension Chemical Aerators: Line #1 Chemical Aerators: Line #2 10© 2000-2012 Product Development Institute Inc. 2000-2013 www.stage-gate.comProduct Development Institute Inc. and Stage-Gate International are registered trademarks.
    • Portfolio Management for New Products: Picking the WinnersFigure 5. An overview of a Typical Stage-Gate® ProcessThere are five stages plus the idea or “Discovery” stage. Each stage is preceded by a gate, wherea team of “gatekeepers” (senior management) make Go’Kill decisions on projects. The stages arewhere prescribed activities are undertaken by cross-functional project teams. Almost 70% of U.S.product developers have implemented such Stage-Gate processes, according to a PDMA study. Discovery Driving New Products to Market Idea Screen Gate 1 Second Go to Go to Go to Screen Development Testing Launch Stage 1 Gate Stage 2 Gate Stage 3 Gate Stage 4 Gate Stage 5 2 3 4 5 Scoping Build Development Testing & Launch Business Validation Case Stage-GateTM: A five-stage, five-gate model along with Discovery and Post-Launch Review Post-Launch Review Source: Winning at New Products [4] 11© 2000-2012 Product Development Institute Inc. 2000-2013 www.stage-gate.comProduct Development Institute Inc. and Stage-Gate International are registered trademarks.
    • Portfolio Management for New Products: Picking the WinnersAdditional Reading1 This essay is based on a number of books and articles by the authors: R.G. Cooper, S. J. Edgett & E.J. Klein-schmidt, Portfolio Management for New Products. 2nd Edition, Cambridge, Mass: Perseus Books, 2001; Cooper,R.G., Winning at New Products: Accelerating the Process from Idea to Launch, 3rd edition. Cambridge, Mass:Perseus Books, 2001; Cooper, R.G., Edgett, S.J. & Kleinschmidt, E.J., “Portfolio management in new product devel-opment: lessons from the leaders – Part I”, Research-Technology Management, Sept-Oct 1997, 16-28; Part II, Nov-Dec 1997, 43-57. Also see: www.prod-dev.com.2 Portfolio management best practice studies: R.G. Cooper, Edgett, S.J. & Kleinschmidt E.J, “Best practices for man-aging R&D portfolios”, Research-Technology Management, 41, 4, July-Aug. 1998, 20-33; and: Cooper, R.G., Edgett,S.J. & Kleinschmidt, E.J., “New product portfolio management: practices and performance”, Journal of ProductInnovation Management, 16,4, July 1999, pp 333-351.3 For more information on all portfolio methods, see: Portfolio Management for New Products, reference note 1above.4 For a discussion of real options theory, see: T. Faulkner, "Applying Options Thinking to R&D Valuation." Research-Technology Management, May-June 1996, pp. 50-57.5 New product benchmarking studies: Cooper, R.G., "New product leadership: building in the success factors," NewProduct Development & Innovation Management, 1,2, 1999, 125-140; Cooper, R.G., “Product Innovation and Tech-nology Strategy” in the “Succeeding in Technological Innovation” series, Research-Technology Management, 43,1,Jan-Feb. 2000, 28-44; and: Cooper, R.G. & Kleinschmidt, E.J., “Winning businesses in product development: criticalsuccess factors”, Research-Technology Management, 39, 4, July-Aug 1996, 18-29.6 See articles in reference note 2; also: Cooper, R.G., Edgett, S.J. & Kleinschmidt, E.J., “New problems, new solu-tions: making portfolio management more effective”, Research-Technology Management, 2000, 43, 2, 18-33.7 For more on resource capacity analysis, see: Cooper, R.G., “The invisible success factors in product innovation,”Journal of Product Innovation Management, 16, 2, April 1999, 115-133.8 Stage-Gate processes are widely used by the top performing companies. See: A. Griffin, Drivers of NPD Success:The 1997 PDMA Report ( Product Development & Management Association) 1997. For more information on Stage-Gate processes, see Winning at New Products, reference note 1; and www.prod-dev.com 12© 2000-2012 Product Development Institute Inc. 2000-2013 www.stage-gate.comProduct Development Institute Inc. and Stage-Gate International are registered trademarks.
    • Stage-Gate International is the worlds leading full-service provider of solutions which enable organizations to improve their Product Innovation and Portfolio Management capabilities and performance. Our clients include 5000+ organizations of all sizes across all industries. +1-905-304-8797 www.stage-gate.comVisit our website and subscribe to receive the latest research, information andcomplimentary articles to keep you current in product innovation!