By Don Creswell, SmartOrg
It is All About Choice
It has been 17 years since Cooper and Edgett published their seminal book “Portfolio Management for New Products” (1998). Companies throughout the world have adopted many of the practices set forth in the book, including various forms of phase gate and portfolio management process. Dozens of software vendors have introduced product/portfolio management (PPM) systems to support the hundreds or thousands of tasks that affect successful development and commercialization of a new product. Yet, according to numerous surveys and studies, the failure rate of new products — as much as 70 to 80 percent — has not improved. There are those who contend that the challenge is even higher in today’s faster-paced volatile, global business environment.
“The success rate of new products is often reported to be 10% or less, which means that at least 90% of new products fail.” — GCI Magazine, April 2012
“According to Harvard professor Clayton Christensen, about 30,000 new consumer products are launched in the U.S. every year. Of these, up to 95% fail.” — Research & Ideas, February 2011
“But the fact remains that the success rates of new product introductions and innovations have improved little over the last 20 years. Booz & Company reports 66% of new product fail within two years, and Doblin Group says a startling 96% of all innovations fail to return their cost of capital.” — Fast Company, April 2012
The high failure rate of new products and, indeed, of many other R&D projects mandates the use of portfolio management to spread one’s bets, balancing risk vs. reward to improve overall return on new product developement (NPD) investment to the company.
Cooper and Edgett cited a quote from “Third Generation R&D, Managing the Link to Corporate Strategy“, “portfolio analysis and planning will grow in the 1990s to become the powerful tool that business portfolio planning became in the 1970s and 1980s.”
Fast forward to 2015. Although many companies have implemented processes and software to support PPM decisions, the success rate of new products has not significantly improved. While portfolio analysis and planning have improved in the operational sense, there is substantial room for creating higher value via strategic portfolio analysis and planning.
Whereas operational or tactical portfolio management is characterized by a high level of control and data is readily available, strategic portfolio management (SPM) focuses on early-stage decision making, where there is little or no data and a great deal of uncertainty around technical, cost and economic factors. Choices made at the SPM level provide a foundation for significant improvement in the return on investment in product development.
Product Choices: you can only develop and launch a limited number of new initiatives, but you are faced with many opportunities. How do you choose the most promising ones, particularly where there is a lot of uncertainty?
Portfolio Choices: you have a large portfolio of NPD projects — to which do you add funds to accelerate value creation? Which are candidates for killing early? Do you have too many projects competing for too few resources?
Balancing Risk vs. Value Choices: you need to sustain the current business but you also need to grow the business. What project mix do you need to balance short-, medium- and long-term goals? What is your company’s tolerance for risk?
Strategic Portfolio Management provides immense value at early stages of development where decisions involve a great deal of uncertainty. At this stage, decision analysis and other decision-science methods can provide guidance to decision makers as they address these important choices. These methods will reveal downside risks and upside potential of each project, identifying the dominant influences on value and where to focus resources. At the portfolio level, projects can then be compared on a level playing field, guiding decisions around allocating resources to optimize NPD return on investment.
It should be recognized that the ratio of “strategic” NPD projects to all other projects is rather small, perhaps less than 20% of development projects. Strategic projects are those that can have a large impact on revenue and profit growth of the company, where considerable investment is involved and the risks are often very high. It is these projects that deserve a significant amount of attention, analysis and inclusion in the strategic NPD portfolio.
As projects proceed through development, the initial economic evaluation needs to be updated during gate reviews to assure that critical value-drivers — those that will materially affect project success — have not changed. Material changes may force decisions around refocusing the project and, in some cases, to terminate the project early. To cite Cooper and Edgett once again, “Portfolio management is a dynamic decision process, whereby a business’s list of active new product development (and R&D) projects is constantly updated and revised. . . . The portfolio decision process is characterized by uncertain and changing information, dynamic opportunities, multiple goals and strategic considerations, interdependence among projects, and multiple decision-makers and locations.”
It all gets back to choice!
Reference: “Portfolio Management for New Products” (Robert G. Cooper, Scott J. Edgett, Elko J. Kleinschmidt) Perseus Books 1998.