Empowering Innovation Portfolio
Decision-Making through Simulation
August 29th 2013
Live tweet with #InnoDM
Mike Tulaney
Business Consultant, Sopheon
michael.tulaney@Sopheon.com
Introduction
• NPD is a complex, High-Risk endeavor for any organization
• Leaders must be willing to engage the unknowns:...
• A Market Model is Fundamental to any Simulation
– Define Primary Value Chain
– Identify Who Your Company is in the Chain...
• Innovation Management is the Strategic Investment in Technology and Market Development
• Investment Units can be Large S...
• Our Investment Model is based on
– NPV (Cash Flow)
– Probability of Success (Risk Factors)
– Required Investment Value (...
Copyright 2013 7
The Market System
Enable a Portfolio-Wide Update based on Changes to
Market Factors
Price Oil $50/bbl Com...
The Market System
Understand Portfolio Sensitivity to Market Factors
Copyright 2013 8
• Based on the output dimensions (EV...
The Market System
Enabling Decision-Making
Copyright 2013 9
The Market System
Modeling your Market as a System provides De...
Copyright 2013 10
POLL QUESTION
Does your organization understand and monitor Key Market Factors in the markets
that your ...
• Scenario: a Potential Future State of Key Market Factors
• Discrete Scenario Analysis
– Look to most influential Factors...
PriceofOil
$100/bbl$50/bbl
Competitive Market Power Score
1 5
4 Potential Future States (Scenarios)
Copyright 2013 12
The ...
Copyright 2013 13
The Strategy / Scenario Matrix
Assign a Probability of Occurrence
• Create an Expected Scenario by
apply...
Copyright 2013
The Strategy / Scenario Matrix
Vary Strategy with Scenario
• We’ve varied the potential futures that our po...
• Each of the 4 Corner Scenarios
now has 3 Strategic Investment
Decision Options
• Including the Expected Scenario,
this y...
Analysis Considerations
• Should high ROI be our Innovation Objective?
• What about market penetration or technology roadm...
The Strategy / Scenario Matrix
Enabling Decision-Making
The Market System
The Strategy /
Scenario Matrix
Copyright 2013 17...
POLL QUESTION
Does your organization formally compare and contrast multiple strategies to guide
your innovation investment...
• “Real Options”: Specific Investment Decisions to be made at a point in time
• Innovation Strategies are more typically m...
• Strategic Gaming fosters creativity, competition, cross-functional learning, change of
perspective
• We will use our Mar...
We must model the Game Theory which governs our Market System
• What effect will technology development have on competitio...
Copyright 2013 22
Virtual Strategy Gaming
Game Play
• Simulation to be repeated many times by several different players
• ...
Virtual Strategy Gaming
Enabling Decision-Making
The Market System
The Strategy /
Scenario Matrix
Copyright 2013 23
Virtua...
Three Simulation Techniques:
• The Market System
• The Strategy / Scenario Matrix
• Virtual Strategy Gaming
Enable Innovat...
Mike Tulaney, Business Consultant, Sopheon
www.sopheon.com
Michael.tulaney@Sopheon.com
Thank You for Attending
Stay up to ...
Upcoming SlideShare
Loading in...5
×

Empowering Innovation Portfolio Decision-Making through Simulation

308

Published on

New product development is a complex, high-risk endeavor for any organization. In order to execute a game-changing innovation program, leaders must be willing to engage the unknowns around future markets and the technologies that will serve them.

This webinar discusses how simulation and specialized business processes can provide a risk-free proving ground to challenge and compare innovation strategies, thereby empowering analysts and executives to confidently make difficult investment decisions.

To view this webinar, go to http://budurl.com/zgs5

Published in: Business, Economy & Finance
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total Views
308
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
0
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

Transcript of "Empowering Innovation Portfolio Decision-Making through Simulation"

  1. 1. Empowering Innovation Portfolio Decision-Making through Simulation August 29th 2013 Live tweet with #InnoDM
  2. 2. Mike Tulaney Business Consultant, Sopheon michael.tulaney@Sopheon.com
  3. 3. Introduction • NPD is a complex, High-Risk endeavor for any organization • Leaders must be willing to engage the unknowns: – Future Markets – Future Technologies • Simulation provides Risk-free Proving Ground to challenge and compare innovation strategies, empowering analysts and executives to confidently make investment decisions • Discussing Three Simulation Techniques which Build Upon Each Other: – The Market System: Understanding Portfolio Sensitivity to Market Factors – The Strategy/Scenario Matrix: Comparing Strategies within a Prescribed Set of Scenarios – Virtual Strategy Gaming: A “Real Options” Approach to Portfolio Management Copyright 2013 3
  4. 4. • A Market Model is Fundamental to any Simulation – Define Primary Value Chain – Identify Who Your Company is in the Chain (e.g. a Manufacturer) – Identify Your Competitive Landscape and how it influences your Business – Identify External Market Factors which influence your Business – Innovation Management must consider your Market to be a Dynamic System with Inputs, Outputs, Feedback Raw Materials Bulk Transport Supply Base Manufacturer Distribution Channels Retail Channels Disposition Price of Oil Primary Value Chain External Market Factors Competitive Landscape PricingTechnology Development IP Position Market Development Innovation Management Market Power Copyright 2013 4 The Market System Understanding Portfolio Sensitivity to Market Factors Disposable Income Manufacturer
  5. 5. • Innovation Management is the Strategic Investment in Technology and Market Development • Investment Units can be Large Strategic Programs or Small Projects. The collection is your Investment Opportunity Portfolio. • Each Unit depicted in this Map has an estimated economic and strategic value, charted by NPV and Probability of Success, as well as a Required Investment Value (the Size of the Bubble) • The Decision to Invest in specific units (Bubbles) is an expression of a single “Innovation Strategy” Copyright 2013 5 The Market System Expression of an Innovation StrategyNPV Probability of Success LowHigh Low High Expected Commercial Value = $10M Total Required Investment = $5M Return on Investment = 2.0 NPV Probability of Success LowHigh Low High Expected Commercial Value = $7M Total Required Investment = $3M Return on Investment = 2.3 Apply Investment Decisions to Increase ROI
  6. 6. • Our Investment Model is based on – NPV (Cash Flow) – Probability of Success (Risk Factors) – Required Investment Value (Cost of Innovation) • Goal is to link Market Factors to these Model Parameters – Base on Historical Data, Test Market Data, Trend Analysis – Typically Difficult and Requires Iteration • Embed Market Factors directly into Calculations Copyright 2013 6 The Market System Build Market Factors into the Investment Model 2013 2014 2015 Revenue 1.0 5 10 Costs 2.0 3 5 CapEx 2.0 1 0 NCF -3.0 1 5 Price Oil $50/bbl WACC 10% NPV $3.0M Project Financial Analysis Key Factor 1 2 3 4 5 IP Position X Annual R&D Inv X Market Share X Price Parity X Overall 2.75 Score Competitive Market Power Scorecard
  7. 7. Copyright 2013 7 The Market System Enable a Portfolio-Wide Update based on Changes to Market Factors Price Oil $50/bbl Competitive Score 2.75 Project NPV PoS ECV Inv ROI 1 $1.0M 50% $0.3M $0.1M 3.0 2 $3.0M 75% $2.0M $1.0M 2.0 3 $4.0M 60% $2.0M $0.5M 4.0 4 $2.0M 30% $0.8M $0.4M 2.0 5 $5.0M 40% $2.0M $1.0M 2.0 Portfolio $15.0M $7.0M $3.0M 2.3 Price Oil $75/bbl Competitive Score 4.00 Project NPV PoS ECV Inv ROI 1 $3.5M 70% $1.2M $0.2M 6.0 2 $2.5M 60% $2.0M $1.2M 1.7 3 $6.0M 70% $4.0M $0.8M 5.0 4 $1.0M 40% $0.8M $0.3M 2.7 5 $4.0M 70% $3.0M $1.0M 3.0 Portfolio $17.0M $11M $3.5M 3.1 NPV Probability of Success LowHigh Low High Expected Commercial Value = $7M Total Required Investment = $3M Return on Investment = 2.3 NPV Probability of Success LowHigh Low High Expected Commercial Value = $11M Total Required Investment = $3.5M Return on Investment = 3.1 Scenario 1 Scenario 2 Same Investment Strategy – Different ROI Bubbles move around Plot
  8. 8. The Market System Understand Portfolio Sensitivity to Market Factors Copyright 2013 8 • Based on the output dimensions (EVC, ROI, etc) which are most important to your business, your Portfolio will have Sensitivity to changes in various Market Factors. • The Market Factors to which your Portfolio is most sensitive should be considered Key: • System Influence should be understood • Factors should be built into Investment Calculations • Development Teams and Decision Makers should be Monitoring current values and future projections • Key Market Factors should be considered when developing Scenarios to challenge your Innovation Strategies
  9. 9. The Market System Enabling Decision-Making Copyright 2013 9 The Market System Modeling your Market as a System provides Decision Makers: • Insight into complex relationships inside and outside the Primary Value Chain • A short list of Key Market Factors to model with and monitor • Mass-update capability of entire portfolios by varying Key Market Factors
  10. 10. Copyright 2013 10 POLL QUESTION Does your organization understand and monitor Key Market Factors in the markets that your products serve? 5 – Yes, this is standard practice 4 – Yes, but on an ad hoc basis 3 – I don’t know 2 – No, but we’ve considered this practice 1 – No, we’ve never considered this practice
  11. 11. • Scenario: a Potential Future State of Key Market Factors • Discrete Scenario Analysis – Look to most influential Factors from the system model – Isolate Factors which are not co-variant – Define extreme scenarios, i.e. “the corners”, not just the most plausible – Don’t randomly vary Factors • This is more like Monte Carlo analysis, than pure scenario analysis Copyright 2013 11 The Strategy / Scenario Matrix Comparing Strategies within a Prescribed Set of Scenarios
  12. 12. PriceofOil $100/bbl$50/bbl Competitive Market Power Score 1 5 4 Potential Future States (Scenarios) Copyright 2013 12 The Strategy / Scenario Matrix Scenarios Defined at “Corners” of Key Market Factors Composite of Several Factors Discrete Value, not a Range • Assign Extreme Values to Key Market Factors to create “Corner” Scenarios • Give each Scenario a Name to provide Context for Decision Makers • Simulate the same Investment Strategy within each Scenario • Note the difference in ROI due to changing values of Key Market Factors Scn1: Out of Gas Scn2: High Price of Success Scn3: Ours to LoseScn4: Cheap Miles to Go
  13. 13. Copyright 2013 13 The Strategy / Scenario Matrix Assign a Probability of Occurrence • Create an Expected Scenario by applying a Probability of Occurrence to each of the Corner Scenarios • Calculate the Expected ROI 2.3*30% 3.1*40% 6.0*20% 1.5*10% 3.3 = Expected ROI PriceofOil $100/bbl$50/bbl Competitive Market Power Score 1 5 4 Potential Future States (Scenarios) Scn1: Out of Gas Scn2: High Price of Success Scn3: Ours to LoseScn4: Cheap Miles to Go ROI = 2.3 P(1) = 30% ROI = 3.1 P(2) = 40% ROI = 6.0 P(3) = 20% ROI = 1.5 P(4) = 10% Expected ROI = 3.3
  14. 14. Copyright 2013 The Strategy / Scenario Matrix Vary Strategy with Scenario • We’ve varied the potential futures that our portfolio decisions may live in • Some futures look brighter than others • Now vary the Strategy and Simulate it within each Scenario by changing: • Election of specific Projects • Level of Investment in each • Give a Unique Name to each Strategy to add Context and suggest Intent for your Decision Makers Srt1: Tech Bet Srt2: Follow the Leader Srt3: Maintenance Only 14
  15. 15. • Each of the 4 Corner Scenarios now has 3 Strategic Investment Decision Options • Including the Expected Scenario, this yields 15 Combinations • Switch to a Matrix for Analysis Copyright 2013 15 The Strategy / Scenario Matrix Combinations Analysis PriceofOil $100/bbl$50/bbl Competitive Market Power Score 1 5 4 Potential Future States (Scenarios) Scn1: Out of Gas Scn2: High Price of Success Scn3: Ours to LoseScn4: Cheap Miles to Go Expected
  16. 16. Analysis Considerations • Should high ROI be our Innovation Objective? • What about market penetration or technology roadmap objectives? • Some strategies are more robust to variability in Key Market Factors • Does robustness necessarily imply optimization for your organization? • Do we have the “corners” correctly identified? What about “Black Swan Events”? • Must we set an investment strategy that is robust to any and all potential futures? Copyright 2013 16 The Strategy / Scenario Matrix Combinations Analysis Corner Scenarios Scn1: Out of Gas Scn2: High Price of Success Scn3: Ours to Lose Scn4: Cheap Miles to Go Expected Prob of Occurrence 30% Prob of Occurrence 20% Prob of Occurrence 10% Prob of Occurrence 40% Strategy ECV Inv ROI ECV Inv ROI ECV Inv ROI ECV Inv ROI ECV Inv ROI Srt1: Tech Bet 15 5 3.0 21 7 3.0 18 3 6.0 10 3 3.3 14.5 4.4 3.3 Srt2: Follow the Leader 10 4 2.5 15 7 2.1 15 3 5.0 7 3 2.3 10.3 4.1 2.5 Srt3: Maintenance Only 7 3 2.3 10 6 2.0 6 3 2.0 5 2 2.5 6.7 3.2 2.1
  17. 17. The Strategy / Scenario Matrix Enabling Decision-Making The Market System The Strategy / Scenario Matrix Copyright 2013 17 Virtual Strategy Gaming Comparing multiple Strategies within multiple Scenarios: • Provides Comparative, Numerical definition of Strategies which are typically Contextual • Distills inherent Strengths and Weaknesses of Innovation Strategies • Defines relative Robustness of Strategies to various Potential Future States
  18. 18. POLL QUESTION Does your organization formally compare and contrast multiple strategies to guide your innovation investments? 5 – Yes, this is standard practice 4 – Yes, but on an ad hoc basis 3 – I don’t know 2 – No, but we’ve considered this practice 1 – No, we’ve never considered this practice Copyright 2013 18
  19. 19. • “Real Options”: Specific Investment Decisions to be made at a point in time • Innovation Strategies are more typically modeled like a STATIC Annual Operating Plan than a DYNAMIC Series of Decisions • Let’s recall the Market System map: Copyright 2013 19 Virtual Strategy Gaming A “Real Options” Approach to Portfolio Management • Note that our organization (Manufacturer) is PART of the system. • To some degree, our decisions influence the value chain and the external market • How will OUR Investment Decisions change THEIR next actions?
  20. 20. • Strategic Gaming fosters creativity, competition, cross-functional learning, change of perspective • We will use our Market System map and Discrete Scenarios to create a Virtual Future World within which to challenge several Innovation Strategies. • While this can be enacted with a team of players, like a board game, serious software modeling can enrich context and complexity (think SimCity®) New Definition • Innovation Strategy: a series of sequential investments, made with the additional knowledge of the market’s reaction to our preceding investment • NOT a static selection of investments, frozen in time, at the mercy of Key Market Factors Copyright 2013 20 Virtual Strategy Gaming The Strategy Game
  21. 21. We must model the Game Theory which governs our Market System • What effect will technology development have on competition? • New market creation and higher margins? • Price War and lower margins? • What effect will foregoing an investment have on our market position? • Ignored by competition because we are no threat? • Ignored by customers because we become irrelevant? • What effect will a hurricane destroying an oil refinery have on our overall portfolio? • Is our ROI too sensitive to the Price of Oil? • Is this an opportunity to reinvest savings because we’re not? Note: modeling competitive response assumes rational behavior on the part of all parties • How rational do you believe your actual market system players are? • How rational is your organization? Copyright 2013 21 Virtual Strategy Gaming Leveraging Game Theory
  22. 22. Copyright 2013 22 Virtual Strategy Gaming Game Play • Simulation to be repeated many times by several different players • Performance can be compared and contrasted to determine optimum Strategy
  23. 23. Virtual Strategy Gaming Enabling Decision-Making The Market System The Strategy / Scenario Matrix Copyright 2013 23 Virtual Strategy Gaming Virtual Gaming: • Accounts for the dynamic, interactive nature of Market Systems • Mimic’s Real-World Decision-Making by people, not spreadsheets • Provides a fun, competitive environment to foster High-Risk Decision-Making in a Risk-Free Environment
  24. 24. Three Simulation Techniques: • The Market System • The Strategy / Scenario Matrix • Virtual Strategy Gaming Enable Innovation Portfolio Decision-Making by providing Analysts and Executives with: • Insight into complex Market relationships • Identification of Key Market Factors to model and monitor • Mass-update capability of entire portfolios, not just individual projects • Comparison of Strategies including Strengths, Weaknesses, and Sensitivity to Variation • A Risk-Free Environment to trial High-Risk Decisions Copyright 2013 24 In Conclusion
  25. 25. Mike Tulaney, Business Consultant, Sopheon www.sopheon.com Michael.tulaney@Sopheon.com Thank You for Attending Stay up to date on upcoming webinars by following us @sopheon 25

×