growth team m e m b e r s h i p™
1
Best Practice Guidebook
Innovation Portfolio Management Process
guidebook summary
Firm: Dow AgroSciences LLC
Industry: Chemicals, food ingredients, and biotechnology
Headquarters: Indianapolis, Indiana, United States
Geographic Footprint: Global
Ownership: Public—A wholly owned subsidiary of Dow Chemical
Revenue (2009): $4.5 billion USD
Problem:
Due to the size and scale of its innovation portfolio, Dow AgroSciences
(DAS) finds it challenging to consistently assess project risks, compare
projects, and measure portfolio value.
Solution:
Dow AgroSciences employs a portfolio management system that uses
standardized project data to evaluate, manage, and compare projects
individually and across the entire portfolio.
Business Results:
Dow AgroSciences surpassed its 2001–2010 Compound Annual Growth
Rate (CAGR) goals by 8% by the end of 2008 and increased the
percentage of realized expected value by 50%.
The contents of these pages are copyright © 2010 Frost & Sullivan. All rights reserved.
Resources Required:
• Full-time process leader and one half- or full-time administrator
• Network infrastructure commensurate with size and scale of the
business
• Portfolio management consultant* and web-based software*
system totalling:
-- $150–$300,000 USD start-up cost
-- $150–$500,000 annual operating costs
Applicability of Best Practice to Executive Functions:
Function
Applicability
R&D/Innovation
Corporate Strategy
* Dow consulted with SmartOrg for its software solution.
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The portfolio management process prioritizes, monitors, and evaluates the entire innovation portfolio
The Portfolio Management Process
Use Strategy and
Investment Criteria
to Screen Projects
Objective
Set strategy and investment
needs for innovation projects.
Key Participants
Portfolio Management Forum
(PMF):
The executive team,
comprised of the R&D
leader and Global Business
Line leaders, meets annually
to evaluate the portfolio’s
strategic fit and funding
allocation.
Establish Baseline
Project Values
Objective
Develop commercial
assumptions for each project
and enter them into the
portfolio management system.
Eliminate Project Risks
and Improve Value
Assess Project
Progress
Objective
Identify the indicators with the
greatest impact on project value
and mitigate those uncertainties.
Objective
Evaluate performance and
strategic fit of individual projects
and across business units.
Key Participants
Local Market Teams:
Cross-functional, local market teams enter information into the
portfolio management system and perform tactical project work.
Project Success Leaders:
These global project owners direct the activities of local market
teams and cross-functional project core teams comprised of biology,
regulatory, supply, and finance representatives. Project Success
Leaders report to their respective Global Business Line Management
Teams (see step 4).
Key Participants
Global Business Line
Management Teams (GBLMT):
The management team for
each business unit (BU)
sets innovation strategy and
manages its product portfolio.
Make Project and
Portfolio Investment
Decisions
Objective
Perform annual project
prioritization and funding
allocation.
Key Participants
Portfolio Management Forum
(PMF)
what is an innovation project?
Dow AgroSciences (DAS) uses a web-based, integrated portfolio management system to track all innovation projects that qualify for funding. DAS’ innovation projects
are either entirely new or extend an existing product line and can run multiple years. For the purposes of this guidebook we have simplified DAS’ multi-tiered innovation
portfolio to the following three levels:
•• Projects—a single innovation based on a specific technology for a specific purpose (e.g., a rice insecticide)
•• Product Line—all projects (new innovations and line extensions) in the same product family (e.g., all rice insecticides)
•• Business Unit—all product lines that fall under one of Dow’s market segments (e.g., pest management)
The contents of these pages are copyright © 2010 Frost & Sullivan. All rights reserved.
Source: Dow AgroSciences LLC; SmartOrg; Growth Team Membership™ research.
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key takeaway: Establish strategy requirements and investment hurdles for innovations entering the portfolio
DAS’ Portfolio Management Forum (PMF) uses three screening criteria to determine
whether a project should enter the portfolio management system and receive funding
Qualifying for the Portfolio Management System
Does the project meet the
minimum investment hurdles for
its life cycle classification?
Is the project in one of DAS’
strategic markets?
What is the project’s
life cycle stage?
The Market Attractiveness Matrix helps determine DAS’
ability to achieve a profitable long-term market position.
The PMF updates the Matrix every two years to analyze
its portfolio, identify attractive markets, and determine
where to increase or decrease investments.
To ensure an optimal blend of new and mature products,
the PMF gauges the life cycle stage of any new product
under consideration.
Entirely new innovations are automatically classified
as “invest” projects, while all other innovations are
classified based on the their life cycle stage and market’s
attractiveness (per the Matrix).
Product Line Life Cycle Stages
Market Attractiveness Matrix (Illustrative)
Strong
H
INVEST
GROW
DEFEND
Manage
for Cash
Rice
L
Weak
L
H
DAS Competitive Strength
Market Attractiveness
Factors
• Growth rate
• Size
• Political/social factors
• Technology factors
Competitive Strength
Factors
• Market share
• Brand equity
• Distribution reach
• Profitability
Idea: Project X is a rice insecticide line extension
replacing an existing product in three years. Rice
is a large but weak market for DAS, given its many
competitors, low prices, and low margins.
Profit
Late
Early
Classification and Hurdles
Renew
Sales
Market
Attractiveness
PMF follows predetermined investment hurdles to
determine innovation eligibility in the current budget
cycle. The classification system removes the least strategic
projects and gives insight to the expected value DAS
should realize from its investments.
INVEST
GROW
DEFEND
Manage
for Cash
>5
>10
>15
>20
IRR% (Internal
Rate of Return)
>25%
>40%
>60%
>75%
Payback Years
<10 years
<8 years
<6 years
<4 years
Productivity
Rate (NPV/
Cost)
Due to these projects’
high growth and
profit potential, their
investment hurdles are
relatively low.
Project “X” Illustrative Example
A rice line extension project falls into the “defend”
product life cycle stage. However, given DAS’ weak
competitive position in the rice market, the PMF
downgrades it to “Manage for Cash.”
The contents of these pages are copyright © 2010 Frost & Sullivan. All rights reserved.
Because these projects
have a low potential for
future growth and their
profits are more at risk,
their investment hurdles
are relatively high.
As a “Manage for Cash” investment, Project X meets the
required investment hurdles—Productivity (22:1 per $
spent), IRR (76%), and Years to Payback (2 years)—and
therefore enters the portfolio management process.
Source: Dow AgroSciences LLC; SmartOrg; Growth Team Membership™ research.
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best practice guidebook
key takeaway: Create commercial market assumptions
based off predetermined indicators of projects’ value
DAS identifies ten key
indicators of a project’s value
Project teams then establish assumptions around each indicator and
input the information into the portfolio management system
Generate Commercial Assumptions
Input Commercial Assumptions
Portfolio Management System
predicting innovation success
DAS evaluated 15 years of financial data to reduce
100+ data points used in innovation assessments
to the 10 indicators listed above. These indicators
ensure project teams focus on factors most likely
to determine project success. Additionally, these
ten indicators enable apples-to-apples comparisons
across all projects.
Define
Review Guidelines
Background
Information
Assess Inputs
Manage Data sets
”
Price at maturity
Volume at maturity
Cost at maturity
Impact of cannibalization (by market and by
new product)
5. Development costs for project
6. Capital investment required
7. Impact on maturity sales of technical failure
8. Shape of product life cycle
9. Incremental selling manpower
10. Promotion costs
“X
1.
2.
3.
4.
Assumptions are estimates
for each indicator based
on market research and
industry/market experience.
Pr
oje
ct
ten indicators of
project value
Project
Success
Leader
Local Market
Team
Project X Homework Meeting
• 1–2 hour discussion led by the
Project Success Leader
• Cross-functional representatives
from key areas of accountability:
Commercial, Biology, Regulatory,
Finance
• Discussion of factors influencing
each indicator’s low- and high-value
assumptions
-- Document rationale for the range
and revisit annually
The contents of these pages are copyright © 2010 Frost & Sullivan. All rights reserved.
Technical Success
Title
Project “X”
Background Information
Project “X” is a line extension of Project “XYZ” for managed rice crops
Objective
Project “X” will replace existing product in the Southern U.S. managed
rice crop insect protection product line when it sundowns in 3 years
Probability of Technical
Success
0.6
Probability that all technical requirements
will be achieved
Commercial Assumptions
Review Evaluation
Units
Low
Base
High
Last
Change
Price at
maturity
Local
currency per
unit
7.5
9
10.5
6/3/2008
Volume at
maturity
1,000s of
units
100
150
200
6/3/2008
Cost at
maturity
Local
currency per
unit
2
3
4
7/15/2008
Impact of
cannibalization
Compendium
of measures
-7.5
-13.5
Development
costs
$1,000s USD
0
1
Capital
investment
$1,000s USD
2
3
Impact of
technical failure
Compendium
none
average
high
Product life
cycle shape
Compendium short medium
long
Incremental
Selling
Manpower
$1,000s
of local
currency
3
10
15
Promotion
Costs
$1,000s
of local
currency
12
20
30
Uncertainty
Diagram
10 Indicators
Comparison and
Tracking
-21.0
Ranges save time spent
on “perfecting”
the
2
numbers.
3
7/15/2008
Source: Dow AgroSciences LLC; SmartOrg; Growth Team Membership™ research.
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best practice guidebook
key takeaway: Evaluate assumptions to identify the indicators
with the greatest impact on a project’s commercial value
The tornado diagram depicts the impact of uncertainty on the assumptions governing each of the ten key indicators;
it calculates the NPV for each of its high, base, and low values; the longer the bar, the greater the uncertainty and its impact on project NPV
Tornado Diagram Analysis
Local Market Teams reduce
“Volume at Maturity”
uncertainty by strengthening
their assumptions. They
conduct a customer satisfaction
and willingness-to-pay survey
for the new product. Based
on this information, the team
can narrow its assumptions,
thereby reducing uncertainty
and improving project net
present value (NPV).
Before Action (Illustrative)
10 Indicators
Volume at Maturity
Price at Maturity
After Action (Illustrative)
NPV ($ Millions)
0
1
2
3
100,000
4
5
6
200,000
$7.5
$10.5
10 Indicators
NPV ($ Millions)
0
1
2
3
$7.5
Price at Maturity
Impact of Cannibalization
5
6
$10.5
$10.5
$7.5
Unit Cost at Maturity
4
Unit Cost at Maturity
Development Costs
Capital Investment
Impact of Cannibalization
Impact of Technical Failure on Sales
Product Life Cycle Shape
Volume at Maturity
150,000
100,000
Incremental Selling Manpower
175,000
200,000
Promotion Costs
Combined Uncertainty
Combined Uncertainty
Combined Uncertainty depicts the range of NPV
values based on a statistical analysis of all the
uncertainties. The longer the bar, the greater the
team’s uncertainty about its assumptions, and the
lower the expected value of the project.
Base Case
Uncertainty for Volume at Maturity
NPV ($3.3M)
narrows from $4.1 M to $2.0 M NPV…
The contents of these pages are copyright © 2010 Frost & Sullivan. All rights reserved.
…The Combined
Uncertainty decreases…
Base Case
NPV Before
Action
($3.3M)
Base Case
NPV After
Action
($4.0M)
…and the expected project value
improves from $3.3 M to $4.0 M.
Source: Dow AgroSciences LLC; SmartOrg; Growth Team Membership™ research.
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key takeaway: Continuously assess individual project values to validate progress
The Global Business Line Management Team uses project financial
statements to monitor year-on-year performance…
…and value-tracking charts to provide visibility into
projects’ expected performance over time
Project Financial Statement
Project Value-Tracking Chart
Illustrative
Baseline values are the input
values from when a project
is approved. The baseline
values also incorporate any
approved changes.
Illustrative
18
To see the full version
CLICK HERE
Baseline
Submission
Current
Submission
2010 PMF
Submission
Expected Value (NPV—$ Millions)
4.34
6.11
7.01
Expected Cost (total costs
$ millions)
0.34
0.43
Project
12.65
IRR (Internal Rate of Return—Yield
of the investment)
0.73
1.01
4.68
Years to PayBack (# of years)
3.7
3.1
1.3
0.21
0.17
Cost Budget 2011 projects move to completion.
0.01
0.15
0.15
Cost Budget 2012
0.00
0.14
0.15
2
2
3
Cost Budget 2010 (Annual
$ spent
Financials
should improve0.06
as
—millions)
uncertainties are reduced and
14.30
25.43
Average Products
Expected Products
Values line management
2.17
3.05
global
business
team
12
Current
Project Value
0.27(NPV $ million)
Productivity (NPV/expected cost)—
The greater the value, the greater
the profit margin for the product
Number of Products
Project X
• Above annual target line
• Performing better than
its project plan
• Change is positive;
changes less than 10%
are; not out of scope
Project X
2.34
Value Given
Global Expected
Business Commercial
Line Management
Teams evaluate
3.91 project performance
3.44
2.55
Technical
Success
on three levels: project, product line, and portfolio. The GBLMT
evaluates
Global of
Project
Success
leaders’ progress
Probability
Technical
Success
0.60in managing
0.95the value 0.95
and uncertainties
of
their
individual
projects.
Expected Products Cost
0.17
0.21
0.09
Cost Budget 2010
0.03
0.11
0.06
Cost Budget 2011
0.00
0.08
0.05
Cost Budget 2012
0.00
0.07
0.05
The contents of these pages are copyright © 2010 Frost & Sullivan. All rights reserved.
Project X
6.11
6
0
0
4.34
Annual
Target Line
Project Y
Project Y falls far below its annual target
line and is performing beneath the
minimum standard
• Greater than 10% decrease in value
• Requires in-depth project review
6
12
18
Baseline Project Value
(NPV $ million)
In-Depth Project Y Review
• The GBLMT focuses on projects with a 10% +/- change
in NPV.
• Local Market Teams root cause the change in project
value (e.g., invalid assumptions, technical issues, cost
overruns, competitor action) and determine whether
performance can improve by the next annual review.
• The GBLMT prescribes next steps ranging from risk
mitigation to project termination.
Source: Dow AgroSciences LLC; SmartOrg; Growth Team Membership™ research.
growth team m e m b e r s h i p™
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best practice guidebook
key takeaway: Assess each business unit’s portfolio by value and risk to allocate further funding
Global Business Line Management Teams use the CFO charts, Commercial Uncertainty charts, and other considerations
to conduct annual portfolio assessments and submit a prioritized project list to the Portfolio Management Forum
Productivity Prioritization
Projects are prioritized based on investment productivity, from most to least productive, and plotted in
the CFO chart.
Risk Prioritization
Project prioritizations are adjusted based on
considerations such as risk versus return.
CFO Chart
Commercial Uncertainty Chart
Illustrative
-20
40
60
80
High
Value
Project A
60
Project C
Project A
40
Project Y
Project X
Project F
20
0
20
Project X
Project Y
Project C
0
Cumulative Project Value
Project D
80
Cumulative Project
Value (NPV $Million)
Project Z
Project F
100
Illustrative
Range of Uncertainty—NPV ($ Million)
100
0
1
2
3
4
Cumulative Project
Cost (NPV $Million)
5
6
Interpreting the CFO Chart
High Productivity Projects (X, A, C) create the most value per unit cost.
• Project X has an NPV of ~$28 M, with costs of $200K, resulting in a
productivity ratio of 140:1.
Marginal Projects (Y and F) are still productive projects, but may not stack
up when compared across all business units.
Low Productivity Projects (D and Z) produce the least value per unit
cost and are at risk of losing funding.
The contents of these pages are copyright © 2010 Frost & Sullivan. All rights reserved.
Low
Value
Project D
The Commercial Uncertainty chart complements
the CFO chart by illustrating the risks associated
80 with each project. Based off this analysis, teams can
adjust projects’ prioritization in the funding queue.
additional assessment tools
60
The portfolio management system allows DAS
to easily assemble projects into portfolios and
40compare across all BU’s. The value and risk tools
are the primary considerations along with:
•• Market timing
•• Probability of Technical Success chart
20•• Expected Project Value chart
•• Cash Flow
Source: Dow AgroSciences
LLC; SmartOrg; Growth Team Membership™ research.
0
0
1
2
growth team m e m b e r s h i p™
best practice guidebook
8
key takeaway: Focus budget allocation on high-value, strategically aligned projects
A two-pass funding process first funds high productivity, strategically aligned projects and then “the best of the rest”
Two-Pass Annual Portfolio Funding Process
Hold Annual
Funding Meeting
The Portfolio Management Forum
(PMF) meets annually to evaluate the
complete innovation portfolio and make
cross‑business unit funding decisions. The
PMF compares the available budget to the
requested funding and determines which
projects to fund on the first pass.
The Portfolio
Management Forum
The PMF approves a predetermined
percentage of the projects each business
unit prioritizes as most valuable
(represented by the green bars below).
Requested
project funding:
$200 M
Still-unfunded projects from all BU’s are
pooled and compete for the remaining
budget.
Best of the Rest
Illustrative
High
Value
BU BU BU BU
Line 1 Line 2 Line 3 Line 4
+
+
+
= $160M
($15M still to
be allocated)
Low
Value
Innovation
Budget:
$175 M
Fund the “Best of the
Rest” Projects
Fund the Best Projects
The PMF determines it will fund
80% ($160M) of the project
requests. This “first pass” quickly
turns the funding conversation
to the projects on the margin. In
doing so, the PMF can examine
these projects more closely and
make decisions to maximize value.
The contents of these pages are copyright © 2010 Frost & Sullivan. All rights reserved.
Project
BU
Cost

ZZ
Rice
$2 M

Z
Small
Grains
$2 M

Q
Insect
Control
$3.5 M

AA
Corn
Herbicides
$2.5 M

B
Pest Mgmt.
$2.5M

K
Small
Grains
$2.5 M

L
Corn
Herbicides

AD
Turf
$15 M
Finalize Project List
Decisions are finalized and communicated
to the business units within 48 hours
of the meeting. The PMF also puts 10
projects on a waiting list for possible
off‑cycle funding. Should spending or
viability of a funded project change
resulting in a budget gain, the PMF selects
the next feasible project.
From: The PMF
To: Business Unit
Subject: Alternates
From: The PMF
To: Business Unit
Subject: Approved Projects
Approved Projects:
• Project X
• Project A
• Project C
• Project Y
Rejected Projects:
• Project F
• Project D
• Project Z
Source: Dow AgroSciences LLC; SmartOrg; Growth Team Membership™ research.
growth team m e m b e r s h i p™
best practice guidebook
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Business Results
Dow AgroSciences has increased project management efficiency and value capture…
Improved Project Success
100%
The portfolio management system
enables Project Success Leaders to
make accurate forecasts and increase
captured value from each project.
Margin
Sales
Sales
Margin
Average %
Captured of
50%
Forecasted Sales
and Margin
0%
Pre-Portfolio
Post-Portfolio
Management System Management System
…leading to greater sustained value in its portfolio over time, as well as the attainment of its growth goals
Sales CAGR
EBIT* CAGR
25%
Sales CAGR
25%
20%
20%
15%
15%
10%
10%
5%
5%
0%
CAGR Goal
2001–2010
CAGR Actual
2001–2007
0%
Sales CAGR
CAGR Goal
2001–2010
CAGR Actual
2001–2007
* Non-GAAP financial measure;
excludes certain items.
The contents of these pages are copyright © 2010 Frost & Sullivan. All rights reserved.
Source: Dow AgroSciences LLC; SmartOrg; Growth Team Membership™ research.
growth team m e m b e r s h i p™
best practice guidebook
10
Key Lessons Learned
Profiled Company Perspective
• Successfully combining portfolio and project management requires the right balance of people, process, and
systems. The appropriate balance depends on your situation, but over or under resourcing any one of these
areas tends to undermine the success of the others.
• Data modeling is an effective way to reduce effort and save time without a corresponding loss in information.
Less can be more when you avoid focus on a single, “perfect” number.
-- Allowing users to reflect uncertainty in their inputs generates more realistic values and data ownership.
The inputs also show project teams where they should try to reduce project uncertainty and improve
project value.
• A system that is transparent to all stakeholders provides tremendous benefits.
-- Clear project metrics provide team members immediate feedback on their projects. Paired with investment
guidelines, teams gain a frame of reference for the difference between marginal and acceptable projects.
-- A straightforward project approval process and clear prioritization criteria build trust for the process among
stakeholders. Consensus on which projects should be funded, rejected, or discontinued is much easier to
achieve when everyone is referencing the same information.
• Strategy should be set at a corporate (i.e., global) level, and local market teams should own execution. That
said, the global team should not handle decision-making for local market projects. Local teams’ appreciation for
region-specific nuances is critical to accurately predicting how a project might sell within a given market.
• Not all portfolio management technology solutions are created equal. Finding the right software designed for
the task is important. Dow AgroSciences was looking for tools to aid in portfolio and project management;
tracking project value, identifying uncertainties, and presenting alternatives through quantitative modeling. Dow
chose Portfolio Navigator by SmartOrg because of this.
The contents of these pages are copyright © 2010 Frost & Sullivan. All rights reserved.
Source: Dow AgroSciences LLC; SmartOrg; Growth Team Membership™ research.
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Supporting Tools & Resources
Example: Project Financial Statement
Illustrative
Project X
Baseline Project
Value
Current Project
Value Submission
Expected Value (NPV—$ Millions)
4.34
6.11
Expected Cost (total costs $ millions)
0.34
0.43
12.65
14.30
IRR (Internal Rate of Return—Yield of the investment)
0.73
1.01
Years to PayBack (# of years)
3.7
3.1
Cost Budget 2010 (Annual $ spent —millions)
0.06
0.21
Cost Budget 2011
0.01
0.15
Cost Budget 2012
0.00
0.14
Number of Products
2
2
Expected Products Values
2.17
3.05
Expected Commercial Value Given Technical Success
3.91
3.44
Probability of Technical Success
0.60
0.95
Expected Products Cost
0.17
0.21
Cost Budget 2010
0.03
0.11
Cost Budget 2011
0.00
0.08
Cost Budget 2012
0.00
0.07
Project
Productivity (NPV/expected cost)—The greater the value,
the greater the profit margin for the product
Average Products
GO BACK
The contents of these pages are copyright © 2010 Frost & Sullivan. All rights reserved.
Source: Dow AgroSciences LLC; SmartOrg; Growth Team Membership™ research.
growth team m e m b e r s h i p™
best practice guidebook
12
Supporting Tools & Resources
SmartOrg
SmartOrg Inc.
SmartOrg, Inc. is a leading provider of decision support software
that optimizes project/portfolio economic value—from concept
to commercialization. Customers include Boeing Commercial
Airplanes, Chevron Technology Company, Dow AgroSciences,
Bayer CropScience, Hewlett-Packard and like companies in the
U.S. and Europe. The flagship application, Portfolio Navigator™,
is installed on company servers or hosted by SmartOrg. The
system stands alone or is integrated with resource management
applications such as SAP PPM.
For additional information, please visit www.smartorg.com or send
email to info@smartorg.com
The contents of these pages are copyright © 2010 Frost & Sullivan. All rights reserved.
Source: Dow AgroSciences LLC; SmartOrg; Growth Team Membership™ research.