product portfolio risk management

Assessing and Managing Risks of Product PortfoliosProduct Portfolios

Ruedi Klein, NPDP, PMP

Product Manager

Alcatel-Lucent

Agenda

1. ‘Efficient Frontier’ of New Product Portfolios

2. Portfolio Risk Assessments

3. Integration of Portfolio and Project Risk Management

All Rights Reserved © Alcatel-Lucent 20072 | Assessing and Managing Risks of Product Portfolios | May 2008

State of the Mobility Market

� Double digit growth is a thing of the past

• Growth areas for voice are China and India• In NAR, declining voice ARPU will be countered with blended

offers driving data usage

� Data adoption remains a major opportunity

• Beginning to see data demand in enterprises• Driven by lifestyle applications for mass market• IMS enables operators to capture these segments

with blended services

Market Growth

Market Trends


� 3G alternatives continue to generate interest

• EV-DO has first to market advantage• Wi-Fi and WiMAX distract the DO market

� Cost control and revenue growth still top priority

• Capex and Opex efficiency still key in maturing markets• Squeezing value from embedded base while moving to Packet

� Market consolidation

• Non-traditional competitors entering to own “telecom wallet”• Legislative impacts

Technologies

Operator Challenges

Landscape Challenges

1‘Efficient Frontier’ of New Product

Portfolios


1 Portfolios

What is Product Portfolio Management?

Portfolio Management

A method to compare the attractiveness of alternative investments.

Unknown


Product Portfolio Management

Portfolio management is a dynamic decision process, whereby a business’s list of

active new product (and R&D) projects is constantly updated and revised. In this

process, new projects are evaluated, selected, and prioritized; existing projects

may be accelerated, killed, or deprioritized; and resources are allocated and

reallocated to the active projects.

Bob Cooper

Objectives of Portfolio Management (*)

1. Maximization of Value

� Allocate Resources to maximize the Value of the Portfolio in terms of some Company Objective

2. Balance

� Achieve a balance of Projects in terms of a Number of Parameters

3. Strategic Direction


� Portfolio is strategically aligned and truly reflects the Business’s Strategy

(*) Cooper, Robert G.; Edgett, Scott J.; Kleinschmidt, Elko J.” Portfolio Management for New Products”, 1998, Addison-Wesley

‘Strategic’ Projects

A project is ‘strategic’, when the money will come outside the planning horizon. In business case lingo the project has a ‘Terminal

Value’.

Two Asset Investment Decision

ρρρρρρρρ = 0= 0 ρρ= 1= 1

ρρρρρρρρ = = --11

R2R2 A2A2


Re

turn

Re

turn

R1R1

X1X1 X2X2RiskRisk

A1A1

Varying Investment Levels, result in varying Rate of Returns

E(rE(rGG)) Asset Asset ReturnReturn

New Product New Product ReturnReturn


WACCWACC

Re

turn

Re

turn

Investment LevelInvestment LevelNew Products are better evaluated as Projects, not as ongoing

Businesses

ρρρρρρρρ = 0= 0 ρρ= 1= 1

ρρρρρρρρ = = --11

R2R2 P2P2

Comparing Product to Asset Investments

Threats to Independence1.Markets2.Product Lines


Re

turn

Re

turn

R1R1

X1X1 X2X2RiskRisk

P1P1

RiskRisk

2.Product Lines3.Technology or Platforms4.Resources5.Project Types

“Put all your eggs in one basket and watch that basket!” & “Diversification is a hedge against stupidity!” – Warren Buffet

Efficient Frontier for New Products (*)

E(rE(rGG))

IndividualIndividualO1O1

O2O2

Two PortfoliosTwo Portfolios


rrff

σσσσG

IndividualIndividualProjectsProjects

Re

turn

Re

turn

RiskRisk

= WACC= WACC ‘Efficient’ ‘Efficient’ FrontierFrontier

(*) Efficient Portfolios were first mentioned in H.M. Markowitz, “Portfolio Selection”, Journal of Finance, 7:77-91 (March 1952)

Limitations of Efficient Frontier Model

1. New Product Project Investment

Levels and Returns are linked

� Return Rate drops as Project Investment

Level differs from Optimum

� Optimum Portfolio is unlikely to result in

Portfolio Investment Level at the

Company’s R&D Budget Level


2. New Product Investments are rarely

independent

3. Any Model purely based on IRR/NPV

ignores the Existence and Value of

Options

Efficient Frontier Conclusion


� Helps to devise a New Product ‘Strategy’

� Enhances traditional Risk / Return Maps

� Visualizes the Return of New Product Projects

� Explains, why we need to subtract the WACC from Returns, when using Return / Risk

Ratios for Prioritization

Theoretical Model, applicable to New Product Portfolios

2Portfolio Risk Assessments


2

Inputs to the Portfolio Decision

� Markets and Customer Lists

� Resource Information and Total R&D Spending Level

� Products and R&D Project Lists

� Business Cases

� Risk Assessments

“The information you have is not the information you want.

The information you want is not the information you need.

The information you need is not the information you can obtain.

The information you can obtain costs more than you want to pay.”

– Anonymous


Risk in Product Portfolio Management

Quantities

Unit Cost

&


“Risk is the central element that influences financial behavior.” –Robert C. Merton (1999)

Unit PriceR&D

Expense

&

Most Success Factors in New Product Development are Not Technical (*)

1. Unique, differentiated, superior Products

2. Strong Market Orientation

3. Sharp, early, fact-based Product Definition

4. Solid up-front Homework (competitive, market, technical, and financial Studies)

5. True cross-functional Teams

6. Leverage (building on Core Strengths)

7. Market Attractiveness


7. Market Attractiveness

8. Quality Launch Processes (well-executed Marketing Actions)

9. Technical Competence/Technology Actions well-executed

(*) Source: Robert Cooper

“Anything that won’t sell, I don’t want to invent. Its sale is proof of utility, and utility is success.” – Thomas Edison

Uncertainty Reduction for Risk Areas (*)

HighHigh

MediumMedium

Level o

f U

ncert

ain

tyL

evel o

f U

ncert

ain

ty

Product LaunchProduct Launch

ProductProductPerformancePerformance

ProductProductUnit CostUnit Cost

MarketMarketAcceptanceAcceptance


00 11 22 33 44 YearsYears

LowLow

Level o

f U

ncert

ain

tyL

evel o

f U

ncert

ain

ty

(*) Source: F.M. Scherer , "New Perspectives on Economic Growth and Technological Innovation" prepared for publication by the British-North American Committee, and derived from Merton J. Peck and Frederic M. Scherer, "Uncertainty and Time in Program Decisions" in The Weapons Acquisition Process: An Economic Analysis (Boston: Harvard Business School Press, 1962) pp. 299-323.

TechnicalTechnicalFeasibilityFeasibility

PerformancePerformance

Risk Assessments

Delay• What competitive Scenario does your

Project face? (Consequence of Delay)• Does your Project have any 3rd Party

Dependencies?• When will the market/customer require

this Project?• How long can we sell the product? The

shorter the riskier.• Does your Project have any cross-

company Dependencies?• What is the probability that this project

will be delayed by one or more releases?

Volume / Quantities• What specific markets does this Project

support?• Who are the Key Customers for your

Project and how many• Have customer commitments already been

made?• What percentage of the project volume

comes from current products?• There is a 10% chance that the volume of

this project will be reduced by ___.

Price• What alternatives are buyers aware of

when making a purchase?• Does the product have any unique

attributes that differentiate it from competing products?

• What amount of change, technological or business will the customer be required to make?

• How significant are buyers expenditures for the product in absolute dollar terms?

• Product Expenditures (Cost) relative to End-Benefits?


Profitability/ NPV

• Risk Scores capture Variability

• Correlation Coefficients capture Weights

• Delay has Impact on either Price or Volume

• Validate Questions

End-Benefits?• There is a 10% chance that the discounted

price of this project will be reduced by ___.

Unit Cost• Have Target Costs been established?• Has Lucent built something similar before?• Are the hardware requirements clear and

stable?• Is the Product Definition clear and stable?• What phase is the project currently in?• What is the Cost Estimate based on?• How volume-sensitive is the Unit Cost?• There is a 10% chance that the unit cost of

this project will be increased by ___.

R&D Expense• What is the estimated size and complexity

of this project?• How much capital/other expense is

required?• How stable are the requirements?• Availability and readiness of development

staff?• Availability and readiness of test staff?• What are the schedule risks for this

project?• Availability and readiness of lab space /

time?

Sample Assessment Question

Example: Pricing Risk / Sensitivity

Q19 How significant are buyers expenditures for the product in absolute dollar terms? Product Expenditures relative to CAPEX?

Very Small / <1% of Total CAPEX .............................................................................................................

Small / <5% of Total CAPEX ....................................................................................................................

Medium / <10% of Total CAPEX................................................................................................................

High / <25% of Total CAPEX ....................................................................................................................

Very High / >25% of Total CAPEX .............................................................................................................


� Five Categories – Multiple-Choice

� Anchored Scales – As unambiguous as possible

� Easily answerable, if a Customer Value Proposition exists

� Run a Dry-Run with someone, who sees the Survey for the first Time

� Derive Risk Scores / Variability

(*) CAPEX – Capital Expenditures

Four Delay Scenarios

Competition

Product

Growth

Restricted Competition

(Interoperability Issues

/Network Effects)

Perfect Competition

(Standard Interfaces /

standalone Products)

No-Growth

Products

Customers don’t switch to CompetitionVolume overall stays same – Price somewhat reduced

Customers switch to Competing ProductsVolume is reduced throughout Lifecycle


High-Growth

Products

Customers don’t switch to CompetitionVolume overall stays same – Price somewhat reducedMargins depressed more severely in later Stages

Customers switch to Competing ProductsVolume is reduced throughout Lifecycle, but more severely in later Stages, due to lower Growth Sales

Just Two Parameters: 1) Delay Time and 2) Percent Revenue Reduction (Price or Volume)

Four Delay Scenarios – Revenue Outcomes (*)

Case 2 – No-Growth / Perfect CompetitionCase 1 – No-Growth / Restricted Competition

0%

20%

40%

60%

80%

100%

120%

Y1-Q

1

Y1-Q

3

Y2-Q

1

Y2-Q

3

Y3-Q

1

Y3-Q

3

Y4-Q

1

Y4-Q

3

Y5-Q

1

Y5-Q

3

Y6-Q

1

Y6-Q

3

0%

20%

40%

60%

80%

100%

120%

Y1

-Q1

Y1

-Q3

Y2

-Q1

Y2

-Q3

Y3

-Q1

Y3

-Q3

Y4

-Q1

Y4

-Q3

Y5

-Q1

Y5

-Q3

Y6

-Q1

Y6

-Q3


Case 4 – Hi-Growth / Perfect Competition

(*) Partial Source: Preston Smith, Don Reinertsen, ‘Developing Products in Half the Time’

Case 3 – Hi-Growth / Restricted Competition

0%

50%

100%

150%

200%

250%

Y1-Q

1

Y1-Q

3

Y2-Q

1

Y2-Q

3

Y3-Q

1

Y3-Q

3

Y4-Q

1

Y4-Q

3

Y5-Q

1

Y5-Q

3

Y6-Q

1

Y6-Q

3

Initial Sales - Baseline Total Sales - Baseline

Initial Sales - Case 3 Total Sales - Case 3

0%

50%

100%

150%

200%

250%

Y1-Q

1

Y1-Q

3

Y2-Q

1

Y2-Q

3

Y3-Q

1

Y3-Q

3

Y4-Q

1

Y4-Q

3

Y5-Q

1

Y5-Q

3

Y6-Q

1

Y6-Q

3

Initial Sales - Baseline Total Sales - Baseline

Initial Sales - Case 4 Total Sales - Case 4

Y1-Q

1

Y1-Q

3

Y2-Q

1

Y2-Q

3

Y3-Q

1

Y3-Q

3

Y4-Q

1

Y4-Q

3

Y5-Q

1

Y5-Q

3

Y6-Q

1

Y6-Q

3

Initial Sales - Baseline Total Sales - Case 1

Y1

-Q1

Y1

-Q3

Y2

-Q1

Y2

-Q3

Y3

-Q1

Y3

-Q3

Y4

-Q1

Y4

-Q3

Y5

-Q1

Y5

-Q3

Y6

-Q1

Y6

-Q3

Initial Sales - Baseline Total Sales - Case 2

NPV Probability Distribution and Risk Weights / Impacts

Net Present Value Probability

Distribution

M ean = 387217.5

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

Tornado Diagram

0.826

0.485

-0.34

-0.028

Unit Price

Volume

Unit Cost

R&D Expense


� Positive Business with a low Probability to fall below NPV=$0

� Wide Range of possible Outcomes

� Typical Profile of Influence Factor Impact on NPV

0

-$0.4 $0.0 $0.4 $0.8 $1.2

Values in Millions

-1 -0.8 -0.6 -0.4 -0.2 0 0.2 0.4 0.6 0.8 1

R&D Expense

Std b Coefficients

R&D Expense, while an important Constraint, is almost never the Factor with the most Impact on Profitability

Portfolio Risk Map (*)

Pro

bab

ilit

yP

rob

ab

ilit

yN

PV

< 0

NP

V <

0100%100%

Expected Expected LossesLosses

50%50%


(*) Adapted from Preston G. Smith and Guy M. Merritt, “Proactive Risk Management – Controlling Uncertainty in Product Development”, 2002, Productivity Press

Pro

bab

ilit

yP

rob

ab

ilit

yN

PV

< 0

NP

V <

0

Maximum LossMaximum Loss[000s][000s]

$1,000 $10,000$10,000

10%10%

$100,000$100,000 $1,000,000$1,000,000

LossesLosses

3Integration of Portfolio and Project Risk

Management


3 Management

CMMi Risk Management Process Area (*)

DetermineRisk Sources

AndCategories

Define RiskParameters

EstablishA Risk

ManagementStrategy

IdentifyRisks

Prepare for Risk ManagementIdentify and

Analyze Risks


ImplementRisk

MitigationPlans

DevelopRisk

MitigationPlans

Evaluate,Categorize,

And PrioritizeRisks

(*) © 2002 by Carnegie Mellon University

Risk Repository

MitigateRisks

Project Level Risk Analysis (*)

Probability of Risk Event

Probability of Impact

Total

LossImpactRisk Event

Ex. Gate 1 Postponed Ex. Delay Release by 2 Weeks Ex. Missed

Ex. 30% Ex. 80%


Risk Event Driver(s)

Impact Driver(s)

(*) Source: Preston G. Smith and Guy M. Merritt, “Proactive Risk Management – Controlling Uncertainty in Product Development”, 2002, Productivity Press

Ex. Dev. Not ready to commit

Ex. Takes 2 Weeks to re-schedule Gates

Ex. Missed major Customer Budget Cycle$50M NPV

“Volatility per se, be it related to weather, portfolio returns, or the timing of one’s morning newspaper delivery, is simply a benign

statistical probability factor that tells us nothing about risk until coupled with a consequence” – Robert H. Jeffrey, 1984

15

20

25

30

35

40

45

Typical Distribution of Technical Risks


0

5

10

15

Sched

ule

Res

ourc

e Sof

twar

e

Featu

re C

hurn

H

ardw

are

Techn

olog

ical

Pro

cess

C

ost

Produ

ct R

oadm

ap

Exter

nal

Req

uire

men

ts

Vendo

r Per

form

ance

Con

tract

ual

Org

aniz

atio

nal/M

anag

eria

l

Risk Resolution Process (*)

Review Risks

Defer Action for more Info

Develop Action Plans

Take no Action(Accept Risk)


Avoid Risk Transfer Risk to a 3rd Party

Provide Redundancy

Mitigate Risk

Reserves of Budget/Schedule

Contingency if Risk Event Occurs

Prevention of the Risk Event

(*) Source: Preston G. Smith and Guy M. Merritt, “Proactive Risk Management – Controlling Uncertainty in Product Development”, 2002, Productivity Press

Risk Management Benefits and Uses

� Crucial Part of Investment

Evaluation

� Integration with Project

Management is 2-Way

� Risk Assessment –Continuity is Key

� Lower Costs and less Chaos


� Lower Costs and less Chaos

Next Steps – Implementation

1. Start with a Review / Identify Areas of Weakness

2. Put in Place a simple regular Risk Assessment within your Portfolio Review Process

3. Using Prompt Lists

4. Covering the whole Portfolio

5. Involving all Stakeholders


5. Involving all Stakeholders

6. Follow-Through

7. Making sure identified Risks are addressed

8. Risks are known throughout Company

9. Don’t let Risk get a bad Name

“In preparing for Battle I have always found that Plans are useless, but Planning is indispensable.” – Dwight Eisenhower

www.alcatel-lucent.com


Ruedi Klein, NPDP, PMPProduct ManagerAlcatel-LucentTel. (973) [email protected]://www.alcatel-lucent.com