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R&D portfolio steering and strategy


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Research and development can be the most productive and successful part of a company. With a business value driven R&D process and good portfolio optimization tools one can even tenfold the R&D value, making it by far the most successful part of the company.

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R&D portfolio steering and strategy

  1. 1. R&D portfolio management as a tool for strategy development and execution 10.10.2014 GloCell Oy 1 Theory, case examples and services
  2. 2. Executive summary • Portfolio approach can improve R&D and innovation efficiency dramatically. We have references for more that 10X improvements. • Challenge is the political willingness to admit the current situation and to plan strategy from there. • Portfolio management is a function that measures how well the current strategy is delivering, and highlights gaps. It will provide strategic options how to fill the gaps and achieve strategic targets. • Filling the gaps almost always requires a change/modification in strategy. In order to execute the new strategy a new structure is needed, as structure follows strategy. Portfolio will highlight which way to go. 2
  3. 3. Executive summary • Key success factor for implementing a portfolio steering is the reliability of the data, this requires: 1. Innovation process that is focused on business value creation 2. Capability to do correct product project valuations 3. Ownership of the data needs to be with the business owner (P&L accountable) 4. All stakeholders are executing and held accountable for delivering the numbers 5. Data needs to drive decisions with consequences – budgets will be given or taken away based on the data 3
  4. 4. Example: Utilizing portfolio management as strategic tool “company’s” innovation output has increased by 12X 4 20% 30% 100% 120% 150% 300% Year 1 R&D investment 110 200 150 130 ROI% of R&D investment Year 2 Year 3 Year 4 Year 5 Year 6
  5. 5. Portfolio measures how your strategy is working 5 IRR,orNPVofprojectpipeline Cumulative investment into pipeline Corporate threshold TAIL-END 1. Your tail- end is consequence of your current strategy 2. Need to change/expand strategy to bring in new TOP projects 3. Cutting the tail of current strategy releases funds to re-invest into the new strategy Pipeline within current strategy New pipeline under new / expanded strategy This was achieved by realizing early - if the pipeline isn‘t delivering enough, our strategy is wrong
  6. 6. Additional benefits of portfolio steering • Initially will show that the organization is wasting a lot of resources on interesting ideas, but without an idea how to get it to the market -> right sizing to get cost savings (-20%) • Enables that projects actually gets stopped as the resources are pulled out (harder to run submarine projects) -> saves money (-5%) • Will highlight the bottlenecks in executing growth strategy (almost always will be either few individuals with a lot of experience or external budget) -> organizational development and internal/external resource ratio optimization -> improve speed to market • Aligns organizations cross-functionally behind common priorities -> project delivery times will improve significantly • Market success rates improve as people are focusing on market delivery and not project delivery • Good front-end business analysis speeds up the development as the funnel becomes a tunnel 6
  7. 7. Key questions for every organization 7 Strategic planning horizon (5-10 years) Today Base Base Future M&A Innovation Growth GAP 1. What is your growth target? 2. How much should come through innovation? 3. Do you know the growth you are getting from you innovation pipeline? 4. Is there a gap? 5. If yes, what are you going to do about it?
  8. 8. Innovation process needs to be business value driven 8 Stage 2 Stage 4 LaunchStage 3Stage 1 R 18 – 24 months 2nd business case +- 30% Committed BC(+-10%) Business case development and project planning Development G GGG Idea generation Scoping Feasibility Dev. and scale up and regist. Launch plan (+-5%) Cum. Project cost 1st business case +- 50% Post Launch Review 3-10% of project cost 90-97% of project cost
  9. 9. In a well working pipeline 30% of projects are stopped and 30% finish every year - Need a flexible system to re-allocate these resources to new projects 9 • When ideas are mature enough (Gate 3) they request funding from the flexibudget • Consumer value proposition • Credible development plan • Developed business case • When a project gets stopped the resources return to flexibudget3 Committed projectsNon-committed projects Early stage projects Late stage projects Not budgeted, only seed money to move projects forward (+internal resources) Budgeted projects, projects fully funded to ensure project delivery Non-allocated FLEXIBUDGET pool GATE Feasibility Development Launch Cumlative project cost Flexibudget principles Stopped poject resources return to flexibudget Allocated seed budget for early stage projects Flexibudget owned by CEO
  10. 10. After all this – you have a system where numbers are owned by the business, are as reliable as they can be, and people are executing against them 10 P P P NPV 1 NPV 2 NPV 3 NPV 4 NPV 5 1st simulation 2nd simulation 3rd simulation … Run Xn simulations to produce a distribution of all possible NPVs NPV Probability Continuous distribution of all possible outcomes and their probabilities Since input variables can also be varied or defined as a range with probability distribution, Monte Carlo simulation also includes a sensitivity analysis The value of input variables as well as the route taken through the decision tree is determined by a random number generator, subject to the allocated probabilities Variable 1 Variable 2 ProbabilityProbability … Good project valuation (ideal) 95% certainty TODAY FUTURE Leads to great pipeline decision making 95% certainty TODAY FUTURE Business unit A Business unit B Tail-end for re-investment Project pipeline
  11. 11. How can you implement R&D portfolio management? Services and Deliverables Juhani Lehtonen GloCell Oy 11
  12. 12. Facts about Successful Innovation Development • Innovation is the key to long term success • The best companies can create 10-fold value with innovation compared to M&A • We’re talking about business and especially about growth • This cannot be outsourced to special Innovation department or R&D • The process of increasing the innovation maturity is long, politically difficult and strategic • Company top level commitment is a must for success Juhani Lehtonen GloCell Oy 12
  13. 13. It is a growth process - maturity levels • Level 1 – First development process, no shared ownership, no buy- in from senior management (R&D driven) • Level 2 – Commonly cross-functional alignment on process, first simple criteria on project selection (political decision making), front-end of innovation being built • Level 3- Cross-functional process established with front-end process, portfolio process in place, first transparency and portfolio based decision making, no strategic steering of the portfolio • Level 4 – Processes part of daily life, automated data handling, project selection/decision making being tied with corporate strategy • Level 5- Portfolio data guiding strategy development, sophisticated portfolio analysis methodologies to assess optimums in terms of risk and return Juhani Lehtonen GloCell Oy 13
  14. 14. It is a growth process with it‘s normal pains and gains Juhani Lehtonen GloCell Oy 14 NegativePositive Neutral Maturity Level 1 Maturity Level 2 Maturity Level 3 Maturity Level 4 Maturity Level 5 Breakeven PerceivedBenefitAccrued 18-36 months 10 months 16 months 24 months 36 months
  15. 15. Implementation of 6 Principles 15 Key principles Main benefit In terms of transparency Front-end, business value driven innovation process Value driven product development and early stage idea of project value Get project specific valuations, rNPVs Capability to understand and scope value in the front end Manage projects to try to create business value not interesting results Risk perspective, different options, scenarios/options Clear roles, responsibilities and accountabilities in the whole value chain from idea to sales Alignment with business priorities Ownership of the numbers, trusting the numbers Process of giving money and resources to value adding activities Funding only value (as opposed to pet projects, politics) We are not making up numbers for nothing – there is money and resources available for projects if we find a good quality business case System to constantly re-allocate free resources to new business opportunities High efficiency of resource use, competition for very limited resource Bad business cases are identified, and stopped All tied in with personal objectives and compensation Holding each other accountable for results Numbers mean something as people need to deliver the projections #1 #2 #3 #4 #5 #6
  16. 16. Overview of steps and schedule: iterative • Step 1 – Planning of the process • Finding the most critical development areas • Setting the targets for portfolio development • 1-3 months • Step 2-N – Implementation of “6 principles” • Process alignment and creation • Tool creation and implementation • Maturity level development • 12-36 months • Step N+1 – Handover to customer • Case by case support • Special assistance Juhani Lehtonen GloCell Oy
  17. 17. Outcome 1. Innovation process that is focused on business value creation 2. Capability to do correct product project valuations 3. Way of working where ownership of the data is with the business owner (P&L accountable) 4. Way of working where all stakeholders are executing and held accountable for delivering the numbers 5. Process where portfolio data drives decisions with consequences – budgets will be given or taken away based on the data Juhani Lehtonen GloCell Oy 17
  18. 18. Thank you  Let’s create growth! 1 8