Where Are All the Breakthrough New Products? Using Portfolio Management to Boost Innovation: Ensuring That High-Risk Projects Receive Their Fair Share of the Resources Requires a Different Approach to Portfolio Management and Different Analytical Tools
Cooper, Robert G., Research-Technology Management
Most businesses' development portfolios have far too many projects, and often the wrong ones, according to a major APQC study (Cooper 2012a; Cooper 2005). A comparison of the breakdown of development portfolios in the 1990s versus the 2000s reveals a huge increase in product development projects that are really renovations--incremental improvements--and a decrease in true innovations (Figure 1). The fact is over the last 15 years, portfolios have drifted from moderately balanced to extremely unbalanced, with far too many small projects and few major or breakthrough initiatives. There is a real shortage of the type of breakthrough initiatives that drove many of these same companies to greatness in the last century. A good part of the problem is the climate and culture within these organizations, namely a preoccupation with short-term financial results, reflected in the way senior people are incentivized and a general risk aversion. But a major part of the challenge also lies with portfolio management--how executives make their R&D investment decisions.
The last 20 years have seen the rise of a number of financial approaches intended to lend more rigor to go/kill decisions, including net present value (NPV), the productivity index, payback period, and economic value-added (EVA) methods. These are fine for evaluating traditional, "known" projects. However, an overreliance on these approaches will tend to favor incremental projects whose financial forecasts are reasonably reliable; further, applying such methods to bolder initiatives will tend to kill all but the sure bets. These popular methods thus produce an abundance of small, low-hanging-fruit projects that will have little impact on the business. Bottom line: If the goal is a higher proportion of bigger, bolder initiatives in the development portfolio, then stop relying on traditional financial approaches to help make portfolio choices!
A related cause for the dearth of breakthrough projects is the failure to set aside strategic resources to fuel these major initiatives. As one executive declared in a workshop on strategic portfolio management, "We have a long list of smaller projects that we have to do. By the time we're through these, there's simply nothing left over for the longer term, bigger projects." Resources are scarce in most firms, and there is an unending list of small "renovation" projects requiring attention. After the portfolio allocation exercise, resources are already overcommitted, leaving few or no resources available for the breakthroughs--and so they get put on hold.
Solutions to these portfolio challenges do exist, and a number of firms have begun implementing such solutions. The recognition that there is indeed a problem--that there are too many minor projects in the portfolio consuming virtually all the resources and a real dearth of major, long-term and high-impact initiatives--must come first. A solid portfolio review is a good place to begin; a current-state assessment of the breakdown of projects, where the resources are going, and where the results (sales and profits) are being generated, can provide insight (Figure 2). With this data in hand, the management team can set a goal to shift the portfolio to a higher proportion of bigger, bolder development initiatives. Simply setting the goal is not enough, however; these goals must be supported by resource allocations. Resources are often not available for larger projects simply because they are totally consumed by too many small projects. One solution is an organizational one, namely to fence off people who work 100 percent on major developments or breakthroughs. Indeed, a major APQC study revealed that 51.7 percent of top performers in innovation have a dedicated innovation group (Cooper 2012a).
A second solution is a portfolio approach known as "strategic buckets." Here, management makes a strategic decision to set aside resources for different types of projects, including breakthroughs. …