Portfolio Management Tools for R&D and New Product Commercialization

Christopher Haller

Agenda

A. Why Do Portfolio Management?B. Portfolio Management Best PracticesC. Portfolio Management ExamplesD. Portfolio Management – First StepsE. Conclusions/Recommendations

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A. Why Do Portfolio Management? – What is R&D?

What does R&D and Product Commercialization produce?

- Designs & drawings- Knowledge- Products

Ultimately R&D and product development produces a revenue stream or returns for a company or organization

R&D and Product Development = Investment

Hence the need for Portfolio Management

A. Why Do Portfolio Management? –R&D Portfolio Example

Imagine if you had $10M of R&D resources to invest and you had the following goals:o Return of 15% (double the money in 5 years)o Protect your initial investment (moderate risk)o Invest to grow long term & maintain or improve marketplace positiono Foster an environment of innovation and continuous improvement

Investment Approaches:A. Don’t invest in R&D – put money in external investment vehiclesB. Invest based on what feels right & immediate customer wantsC. Research, analyze and balanced portfolio approachD. Purchase R&D from external sources via mergers/acquisitions and contracts

CORRECT ANSWER FOR A COMPANY WHO WANTS TO GROW IT R&D CAPABILITY:C – but what constitutes a balanced portfolio (answer in a few slides)

A. Why Do Portfolio Management?

Successful Companies = Innovative high quality products that delight customers

R&D Output = Knowledge transferred into products and returns on investment

Much of today’s product R&D activity is still characterized by 11: High rates of failure Missed deadlines Excessive rework Cost overruns

A key failure mode in the innovation process is not addressing the critical “people-driven” innovation disciplines such as: Strategic planning Product portfolio management Project and resource management

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A. Why Do Portfolio Management?

All too often, engineering and product development suffers from a number of fallacies that rob the organization of the optimum conditions for innovative and high output17:• High utilization of resources will improve performance• Processing work in large batches improves the economics of the

development process• Our development plan is great; we just need to stick to it• The sooner the project is started, the sooner it will be finished

Effective portfolio management addresses these fallacies Effective resource management Improving flow of project (smaller is better – load leveling R&D) Ability and methodology for updating portfolio based on market and

technology Start a project when it makes sense rather than overload the system

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A. Why Do Portfolio Management? – Pitfalls of MultitaskingImpacts of Large Number of Projects & High Utilization of Resources Numerous studies have been done assessing the impact of

multitasking and overloading resources on organizational performance & innovative thinking

People are pretty good at shifting between two contexts for small tasks. To a certain extent, we can parallel process two independent tasks.

For larger tasks/projects, we should expect some switching cost. As the number of tasks is increased, additional tasks incur an

additional 10% penalty, in reality the costs are frequently higher.

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A. Why Do Portfolio Management? - Other Benefits

The other benefits of Portfolio Management:• In addition to improving project loading to maximize people

efficiency and promote innovative thinking, portfolio management provides the following to the business:

A logical mix of product development projects to fit the company strategy

Some rational for determining product lifecycle and EOL decisions

A roadmap for product development and implementation (communication and leadership tool!)

A tool for matching resource loading and projects to meet optimum ROI and quality of work life

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A. Why Do Portfolio Management? – Technology/Customer Profiles Strategic & Resource Planning: Balancing project loading and

strategic vision

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Mature business – high project load, maintaining productsLow risk, short term, low growth

Start-up business – fewer resources, new products/technology Very high risk, long term, high growth potential

Established Business looking for growth through R&D – smaller focused projects, fostering innovation and turning knowledge into products and revenue

Balanced Portfolio:Moderate risk, short/long term, moderate to high growth

A. Why Do Portfolio Management? – Technology/Customer Profiles Optimum Project Mix to Balance Growth & Risk

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A. Why Portfolio Management – moving to development flow

Lean Product Development Principals: Set Based Flexible Design

Integration Focused Leadership

Dynamic Cross Functional Teams

Knowledge Sharing/ Continuous Learning Process

Flow/Cadence Driven Development

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Essentially equivalent toflow -> fewer projects ata time but load leveledR&D (work is notback end loaded) – alsoprojects have reducedcycle time & DIP

Traditional Product Development – back end loaded

Lean Product Development – Load Level Flow

B. Portfolio Management Best Practices – Portfolio Definition Process

Top down and bottom up approach Top down – strategy and portfolio mix set by senior leadership (10000 foot level) Bottom up – individual technology and product experts and teams establish list of technologies and

products

Senior management puts together strategy, risk tolerance and performance goals

Technology/product experts put together data (ROM) around sales, development effort, risks, timing and strategic impact (note: representation from a diverse team ranging form R&D to manufacturing to marketing etc.)

From data and research define ratings of technology projects and product development programs – based on a range of factors:

ROI (may be adjusted around prediction risk – volume/margin) Strategy Impact Technology and customer risk Development/industrialization time (time to money) Resource Usage – Budget and People

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C. Portfolio Management Examples – Background Used an aggressive portfolio management approach on a 300 M$/year

revenue product line from 2005 to 2014

Portfolio consisted of new products, technologies and cost reduction/concurrent engineering activities

Assembled a cross functional group comprising of senior management, product/marketing, R&D, product development, manufacturing, supply chain, purchasing, customer reps and systems to annually brainstorm and define sets of technical options and programs.

Held quarterly sponsor meetings to review the roadmap performance and also review any proposed changes between annual reviews

Through a series of programs and smaller projects introduced over 15 product changes over a nine year period that saved the company 3 M$ on a yearly basis but (cumulative savings of around 100 M$ -> payback of 4X versus development cost)

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C. Portfolio Management Examples - Development History & Portfolio Evolution

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C. Portfolio Management Examples - Development History: Quantitative Analysis

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Budget, Savings (Return) & Number of Projects

R&D ROI % (One Year Payback) per YearNOTE: Volume & commodity adjusted ROI%

NOTE: Green line represents fit without outliers, red dash is all data

NOTE: Severe volume & commodityprice drops impacting returns

C. Portfolio Management Examples – Initial Roadmap Generation Technical Portfolio Analysis

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Option Cost

Savings Timing Risk (Int)Risk (Ext Customer Resources

Proposed Introduction Cum Risk

Value w t - risk,res,time

(Months)Technology 1 174 2 1 1 1 Program 7 1 174Technology 2 45 4 1 2 1 Program 7 1.333333 34Technology 3 50 2 1 1 1 Program 8 1 50Technology 4 207 2 1 1 1 Program 8 1 207Technology 5 100 4 1 1 1 Program 8 1 100Technology 6 150 6 2 1 2 Program 8 1.666667 90Technology 7 853 0 1 1 1 Program 8 1 853Technology 8 138 3 1 1 1 Program 9 1 138Technology 9 891 6 1 1 2 Program 9 1.333333 669Technology 10 0 6 2 1 2 Program 9 1.666667 0Technology 11 3119 9 2 2 3 Program 9 2.333333 1003Technology 12 1680 6 1 1 2 Program 9 1.333333 1260Technology 13 150 6 2 1 2 Program 10 1.666667 90Technology 14 891 6 1 2 1 Program 10 1.333333 669Technology 15 2070 9 2 2 3 Program 10 2.333333 666Technology 16 690 9 2 1 2 Program 10 1.666667 311Technology 17 150 6 2 2 2 Development 2 75Technology 18 -250 6 2 1 2 Development 1.666667 -150Technology 19 600 9 2 1 2 Development 1.666667 270Technology 20 323 6 2 2 2 Planned 2 162Technology 21 400 6 2 2 1 Planned 1.666667 240Technology 22 1191 9 3 2 2 Planned 2.333333 383Technology 23 690 12 2 1 3 Deferred 2 259Technology 24 2070 12 2 3 3 Deferred 2.666667 582Technology 25 1035 12 2 2 3 Deferred 2.333333 333

Risk: Resources:1 - Low2 - Medium 1 - Low Resource requirements3 - High 2 - Medium Resource requirements

3 - High requirements - greater than 50% resources for a significant amount of time

Risk (Int) - includes technical and manufacturing risks along with uncertainty around cost reduction estimatesRisk (Ext Customer) - includes likelihood that external customers have issues with the change or reject performance of modified product

C. Portfolio Management Examples – Initial Roadmap Generation Film Technical Roadmap Definition – Roadmap 2005/6

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C. Portfolio Management Examples – Roadmap Evolution

Technical Roadmap Definition – Roadmap 2014 Ratings

OpportunityTechnical

RiskMarket

Risk

Portfolio Management Examples – Roadmap Evolution

Technical Roadmap Definition – Roadmap 2014

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C. Portfolio Management Examples – cost savings over time

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D. Portfolio Management – First Steps Current State: A large project list with forced ranking for all product

lines – not load or strategically balanced

Future State: A prioritized product/technology portfolio based on marketplace and development data/analysis that is resourced leveled with the following benefits:

A process for project selection that is both top down and bottom up focused

Realistic schedules due to resource leveling and careful analysis Minimized multitasking but efficient use of resources Product/technology mix poised for short term payback and long term

growth Long term view with alignment to corporate goals (believable and

stretch targets) Scientific method for project selection Resource headroom for innovative thinking and research Responsive to customer needs and proactive R&D approach

D. Portfolio Management – First StepsSample Roll-out for a Portfolio Management Process

D. Portfolio Management – Portfolio Management Workflow

E. Conclusions1. Adopting portfolio management tools helps focus development efforts and

prevent over extension of development resources.

2. Defining product/technology roadmaps gives a tangible and long term direction for R&D and product commercialization. These tools provide a level of discipline to the project management process and also a defined method for adding or killing projects.

3. These tools in combination with lean product development tools can make significant improvements to time to market, ROI, customer satisfaction, innovation and market share growth.

4. The portfolio management workflow provides a method to both prioritize and organize projects for both short term return and long term growth

5. Regular portfolio management at both the senior management and development team level provides a tool for regular communication of projects and priorities to the product development community

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E. Recommendations1. Rollout the roadmap definition process with both education and data collection meetings

2. Update the portfolio with the data and information and begin efforts to prioritize and organize the projects

3. Review with both senior management and individual groups for modifications and approval

4. After approval, adjust projects and resources according to the portfolio

5. Setup a routine process to re-evaluate the portfolio on an annual or semi-annual basis

6. Setup a change review process to add additional projects or revisit existing projects

7. Modify and improve the portfolio management process to meet business needs

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Discussion / Question and Answer

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References: Resources list:

1. A More Rational Approach to New-Product Development, E. Bonabeau, N. Bodick & N. Armstrong (Havard Business Review March 2008)

2. Developing Products in the Half the Time, Preston Smith and Donald Reinertsen (Van Nostrand Reinhold 1991)3. Going Lean, Stephen A. Ruffa (AMACOM 2008)4. Managing the Design Factory, Donald Reinertsen (Free Press 1997)5. Product Development in the Lean Enterprise, Michael N. Kennedy (Oakley Press 2003)6. Product-Development Practices that Work: How Internet Companies Build Software, Alan MacCormack (MIT Sloan

Management Review, Winter 2001)7. Shooting the Rapids: Managing Product Development in Turbulent Environments, Marco Iansiti (California Management

Review, Fall 1995)8. The Lean Machine, Dantar P. Oosterwal (AMACOM 2010)9. The Machine That Changed the World, James Womack, Daniel Jones and Daniel Roos (Free Press 2007)10. Toyota’s Principles of Set-Based Concurrent Engineering, Durward K. Sobek II, Allen C. Ward and Jeffrey K. Liker (MIT

Sloan Management Review, Jan 1999)11. Project and Portfolio Management for the Innovative Enterprise, James Ramsay (CA Technologies 2011)12. Multitasking Gets You There Later, Roger Brown (InfoQ 2010)13. Executive Control of Cognitive Processes in Task Switching, Joshua S. Rubinstein, David E. Meyer and Jeffrey E. Evans,

Journal of Experimental Psychology - Human Perception and Performance, Vol 27. No.414. Quality Software Management: Systems Thinking, Gerald M. Weinberg (Dorset House 1991)15. Workload and Performance of Employees, Shah Hussain, S.S., Jaffari, A.R. et al, INTERDISCIPLINARY JOURNAL OF

CONTEMPORARY RESEARCH IN BUSINESS. 201116. Multitasking Damages Your Brain And Career, New Studies Suggest, Travis Bradberry (Forbes 2014)17. Six Myths of Product Development, Stefan Thomke and Donald Reinersten (Havard Business Review 2012)18. The Principles of Product Development Flow: Second Generation Lean Product Development, Donald Reinersten

(Celeritas Publishing 2009)

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