THINK TANK ONE: R&D AND INNOVATION
GIL 2012: SILICON VALLEY
Innovation Portfolio Management:
Balancing Value and Risk
KEITH O’BRIEN
Vice President, Global Research, Growth Team Membership™
Frost & Sullivan
Keith.OBrien@frost.com
www.gtm.frost.com
Agenda
TIME
9:45
CONTENT
Open Innovation: Gateway to Breakthrough Ideas
A case-based best practice presentation on how Amway Corp established an Open Innovation (OI) team to
capture emerging technologies and support a stage-gate product development process.
FACILITATOR: Keith O’Brien, Vice President, Global Research, Growth Team Membership,™ Frost & Sullivan
CO-FACILITATOR: David Groh, Manager of Health & Beauty New Technology R&D, Amway Corp.
10:45
Innovation Portfolio Management: Balancing Value and Risk
A case-based best practice presentation on how a B2B company implemented a system to evaluate and
compare the value and risk of all projects in the innovation portfolio.
FACILITATOR: Keith O’Brien, Vice President, Global Research, Growth Team Membership,™ Frost & Sullivan
CO-FACILITATOR: David Matheson, President & CEO, SmartOrg, Inc.
The contents of these pages are copyright © 2012 Frost & Sullivan. All rights reserved.
2
Growth Team Membership™ research.
The Growth Team Membership™ (GTM)
GTM is a subscription program that
supports executives within the functions that
report to the CEO
CEO’s Growth Team™
Marketing
Sales
Leadership
CEO
Corporate
Development
Market
Research
Investors/
Finance
GTM: Creating Client Value
GTM’s case-based best practices help executives:
R&D/
R&D/
Innovation
Innovation
Corporate
Strategy
GTM provides best practices, events, and
services that enable executives to address
challenges within their companies
Speed the design and implementation of initiatives
by not reinventing the wheel
Save money and reduce risk by avoiding mistakes
made by other companies
Accelerate problem-solving with a cross‑industry
perspective
Competitive
Intelligence
Improve their functions’ and companies’
performance and productivity
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Growth Team Membership™ research.
Profiled Best Practice Company
Beta
Inc.
Firm: Beta Inc.*
Industry: Information and Communication Technology
Headquarters: United States
Geographic Footprint: Global
Ownership: Public
Revenue (2011): $3–5 billion USD
* Beta Inc. is a pseudonym. All statistics in this guidebook are illustrative.
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4
Growth Team Membership™ research.
Growth Challenge
Problem:
Beta seeks to generate better returns from its product portfolio
(both existing products and those still in development). However, the
company struggles to evaluate and compare the value and risk* of
all projects in its development pipeline, which hampers funding and
decision‑making.
* Risk is defined as the range of uncertainty around the commercial value of the project.
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5
Growth Team Membership™ research.
Beta’s portfolio management process evaluates projects both individually and as
part of the innovation portfolio
Innovation Portfolio Management Process and System
Executive Team
ROLE
Sets the company’s innovation
strategy and manages the
innovation portfolio
Screen Project
Evaluate Project
Project Teams
ROLE
Performs the day-to-day
activities to develop the
project and track its metrics
in the Portfolio Management
System
Track
Progress
Portfolio
Management
System
Calibrate
Information
Calibration Committee
ROLE
Conducts a peer review of all
the projects in the Portfolio
Management System prior to
portfolio prioritization and
funding
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6
Adjust the
Portfolio Strategy
Balance the
Portfolio
Growth Team Membership™ research.
Limit entry into the portfolio management process using specific strategic and
economic criteria
Screen Project
Portfolio Screening Criteria
Is there a market opportunity?
The Executive Team evaluates the
project’s potential based on the size and
growth of the market.
Market Attractiveness Indicators
Can we win?
The Executive Team examines Beta’s
competitive position in the project’s
designated market.
Competitive Advantage Indicators
Market need
Does it fit with our strategic
direction?
Market size
Does it take advantage of our core
competencies?
Market growth rate
What is our market share?
Can we make money?
The Executive Team benchmarks the
project’s projected values against the
investment hurdle for its Life Cycle
Stage—Emerge, Grow, or Mature.
Life Cycle Stage
Investment
Hurdle
EMERGE GROW MATURE
Productivity
Rate (NPV/
>5
>10
>15
Cost)
Payback
<10
<8
<6
Years
What is our brand presence?
Market saturation
Do we have appropriate
distribution?
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7
Growth Team Membership™ research.
Establish proof points to assess the chance of success at each product development
phase
Proof Point Development
Evaluate Project
Case in Point: Mark
PROOF POINTS
Proof Points allow the Project Team to consistently and objectively determine whether a project is viable. The Project Team uses
the following question as a prompt to identify proof points:
What would you want to know before mortgaging your house to fund the product?
Product
Development
Phase
If the integration goes smoothly, we should have a
60% chance of completing the pilot phase. Due to
the loyalty of our customers, it will be easy to find five
current customers to participate in a pilot of Mark.
Project Team
In my judgment, we have a 50%
chance of successfully completing
the demo. We just acquired
a technology that allows us to
analyze social media chatter.
Securing three major marketing agencies to distribute
Mark will be easy. I think we have an 80% chance of
completing the distribution phase.
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Proof Point
Increase the
predictive
performance
Demo
of three major
marketing
campaigns by
50%
Prove product
marketability
Pilot
through a
pilot with five
customers
Sign up three
major marketing
Distribution
agencies to
distribute the
product
Overall Chance of Success
Duration
Cost
(USD)
Chance
of
Success
One Year
$1
million
50%
Three
months
$2
million
60%
One Year
$5
million
80%
24%
Growth Team Membership™ research.
Estimate the project’s commercial value using a concise, fixed set of indicators
Evaluate Project
Forecasting Commercial Value
Seven Indicators
of Commercial Value
1.Total available market
2.Market penetration
3.Potential market share
Discuss
The Project Team discusses
the available evidence on
the project.
Estimate
Document
The Project Team estimates
high, base, and low values for
each of the seven indicators.
The Project Team documents
the rationale for the range of
uncertainty.
4.Market duration
5.Price at maturity
6.Fixed annual cost
7.Sales and marketing costs
Indicator
Potential
market
share
Range of Uncertainty
High Base Low
40%
25%
10%
Project Team
We can expect a minimum 10%
of the market share, if competitors
introduce their solution before us.
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9
However, since there is little competition in this space,
we could get as high as 40% of the market share. But
we are more likely to garner around 25%.
Growth Team Membership™ research.
Pinpoint the indicators with the greatest impact on a project’s
net present value (NPV)
Evaluate Project
Project Risk and Value Model (Tornado Diagram)
Case in Point: Mark
Commercial Contribution—NPV ($million)
(50)
0
Total Available Market (thousands of units)
Potential Market Share (percentage)
50
100
150
200
5
20
40
10
Unit Price ($ thousands)
20
Market Penetration (percentage)
0.1
Fixed Annual Cost ($ millions)
7
3
Sales and Marketing Cost ($ millions)
30
10
10
Base Case = 84
10
The longer bars signify factors
who have high levels of uncertainty
and impact on the project’s NPV.
0.3
4
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300
60
Market Duration (years)
Combined Uncertainty
250
The smaller bars signify factors
with less impact on the NPV.
The width of the bar indicates the
overall uncertainty of the project’s
commercial value.
Growth Team Membership™ research.
Improve project value and reduce risk by addressing the areas of
greatest uncertainty
Project Refinement
Evaluate Project
Case in Point: Mark
Initial Evaluation
Clarification
The Project Team identifies the
indicators with the largest range of
uncertainty.
To refine its assumptions, the
Project Team:
Commercial Contribution—
NPV ($million)
(100)
0
Total Available Market
5
Potential Market Share
10
100 200 300 400 500 600
20
40
Unit Price
20
60
Market Penetration
0.1
0.3
Market Duration
4
Fixed Annual Cost
7
3
Sales & Marketing Cost
30
10
10
Base Case = 84
Combined Uncertainty
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11
Organizes a
conference on social
media data analysis
Surveys 1,000 social
media professionals
on their data analysis
needs and product
use
Conducts in-depth
interviews with
20% of the survey
respondents
Adjusted Evaluation
By adjusting the indicators with the
largest range of uncertainty, the overall
risk of the project is reduced and its
NPV is increased.
Commercial Contribution—
NPV ($million)
(100)
Potential Market Share
0
100 200 300 400 500 600
15
45
Unit Price
30
Market Penetration
0.1
Total Available Market
80
0.3
10
25
Market Duration
4
Fixed Annual Cost
7
3
Sales & Marketing Cost
30
10
10
Base Case = 250
Combined Uncertainty
Growth Team Membership™ research.
Use peer reviews to ensure project team assumptions are credible and comparable
Calibration Committee Review
Calibrate Information
Case in Point: Mark
Compare Mark to
the Portfolio at Large
Compare Mark and
Fly’s Indicators
Commercial Contribution Given
Technical Success NPV ($million)
(500)
0
500
1,000
1,500
Mark
Life
AB
(500)
Unit Price
($ thousands)
Flow
Project
0
30
500
1,000
(500)
1,500
(500)
Unit Price
($ thousands)
0
70
500
1,000
Fly
Why does Fly have a better range
of NPV than Mark?
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Calibration
Committee
500
1,000
1,500
Fly
Project
Fly
0
Mark
Mark 80
Fly and Mark are targeting the
same industry, but their assumptions
about the unit price vary widely.
12
Commercial Contribution Given
Technical Success NPV ($million)
Commercial Contribution Given
Technical Success NPV ($million)
Mark
Fly
Refine Mark’s Assumptions
and Expectations
1,500
Flow
Life
125
AB
According to the Portfolio Management
System, the Fly Project Team researched
pricing models for this industry. Therefore,
we trust the Fly team’s assumptions about
the unit price, and we should use its pricing
model for Mark.
Growth Team Membership™ research.
Prioritize all projects in the portfolio based on their comparative value, cost,
and risk
Balance the Portfolio
CFO Chart:
Measures Investment Productivity
Commercial Uncertainty Chart:
Measures Combined Uncertainty
The CFO Chart ranks each project’s economic value based on its investment
productivity and categorizes the projects as high, medium, or low productivity.
High
Productivity
Projects
Medium Productivity
Projects
Cumulative
Value
($million)
Fly
Flow
400
(500)
Life
Zoom
500
Commercial Contribution Given
Technical Success NPV ($million)
Low Productivity Projects
700
600
The Commercial Uncertainty Chart
highlights each project’s risk and
potential value via the combined
uncertainty bar.
500
1,000
1,500
Mark
AB
Fly
Mark
Flow
Project
300
200
Life
Zoom
100
0
0
AB
0
5
10
15
20
25
30
35
40
45
Cumulative Cost ($million)
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13
Growth Team Membership™ research.
Assess the portfolio’s ability to meet strategic and business line goals
Balance the Portfolio
Managing Portfolio Mix
Project Value by Product Line
The Executive Team assesses the portfolio mix using the
following classification scheme: Bread & Butter, Oysters, Pearls,
and White Elephants.
Bread & Butter (B & B)
1.0
Pearls (P)
B&B
Life
0.4
0.0
450
Fly
0.6
0.2
The red lines indicate the product
line’s projected financial goals.
P
0.8
Probability
of Technical
Success
Trim
Morph
AB
WE
0
Flow
Zorfus
Mark
Zoom
200
1,000
Zoom
Fly
0
Life
Trim
AB
Morph
Data
Warehouse
Zorfus
Flow
ERM
Mobility
Mark
Social Media
Product Line
Oysters (O)
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14
300
Project Value
(Expected NPV
$millions)
150
O
400
600
800
Expected Commercial
Contribution ($million)
White Elephants (WE)
The Executive Team conducts a side-by-side comparison of
the projects in each product line to assess potential value,
product mix, and gaps.
Growth Team Membership™ research.
Adjust financial goals and resource constraints to optimize the portfolio
Adjust the Portfolio Strategy
Portfolio Strategy and Long-Term Financial Goals
The Executive Team’s evaluation of the current portfolio’s
financial performance has strategic implications.
Risk-Adjusted Financial Projections ($million)
Revenue
Cost
Profit
2013
6
5
1
2014
54
47
7
2015
250
202
48
Potential Financial Projections ($million)
Revenue
Cost
Profit
2012
0
0
0
2013
20
19
1
2014
260
208
52
2015
600
480
120
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15
The Executive Team assesses the cumulative employee and
non-staff needs of the projects.
Executive
Team
Beta’s goal is to grow by $500 million in four years
from new innovations. The risk-adjusted financial
projections indicate we won’t meet that goal. However,
the potential financial projections indicate we can.
What can we do to achieve the goal?
2012
0
0
0
Portfolio’s Cumulative Resource Requirements
If we hire an external marketing team to assist with
Fly, Mark, and Life, we will have the resources we
need to meet the projected target.
Cumulative Project Resource Requirements
Portfolio Projects
Zorfus
Productivity
94.63
R&D FTE
Cumulative Marketing FTE
Resources Non-staff Cost
Fly
Mark
Life
71.18 15.25
2.3
3.6
4.8
8.4
12
2.7
4
6.7
9.4
$5.9
$10.9 $16.8 $22.7
Total Cost
$6.5 $11.5 $18.1 $24.6
Red values indicate
Growth Team Membership™ research.
resource restraints.
Conduct annual assessments and refine projects based on their commercial value
and impact on the portfolio mix
Track Progress
Annual Value-Tracking Assessment
Track Portfolio Mix
Case in Point: Mark
Case in Point: Mark
The Executive Team conducts annual in-depth project reviews for projects
with a +/- 10% change in value.
Conduct a
Root Cause Analysis
The Project Team uses the
Portfolio Management System
to identify the root cause of the
change in project value.
450
Expected NPV
Current Evaluation
($million)
Determine Next Steps
1.0
The Executive Team prescribes
next steps to address the
root cause.
0.8
B&B
P
AB
Fly
Improved
Probability
of Technical
Success
300
Trim
0.4
Flow
Mark
150
Fly
Mark
0.6
Morph
0.2
Flow
Trim
Zorfus
AB Life Morph
0
0 Zoom
150
Life
Worsened
300
Expected NPV Baseline
Evaluation ($million)
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16
The Executive Team assesses how each project’s
role in the portfolio shifts and adjusts the portfolio
strategy accordingly.
450
0.0
WE
0
Zorfus
Zoom
200
O
400
600
800
Expected Commercial
Contribution ($million)
1,000
Growth Team Membership™ research.
Business Results
Portfolio Performance Metrics
Portfolio Return
2010
2011
Improvement
Ideas screened
20
35
60%
Projects approved
for development
10
15
50%
Projects launched
3
6
100%
Projects terminated
4
8
100%
10
60
8
15 2011
$2 billion
Shareholder 6
Value ($100
millions) 4
50
10
15
2010
5
The numbers in red are the
investment productivity for
each project.
2
0
20
30
0
50
100
150
200
Expected Investment
($millions)
Project Management Improvement
The portfolio management process has helped Beta:
Portfolio
Management System
•Reduce the amount of time it takes a project to move through the innovation process
•Improved efficiency by removing four man years of overhead effort from the annual
portfolio cycle
•Conduct consistent project evaluations, including comparison of different types of
projects for funding decisions
•Weed out underperforming projects quickly
•Facilitate cross-regional projects
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17
Growth Team Membership™ research.
GTM Members can access the full 17-page Best Practice Guidebook
1
growth team m e m b e r s h i p™
best best
practice
guidebook
practice
guidebook
growth
team
m em
mebm
e rb sehrisp™
growth
team
h i p™
Best Practice Guidebook
2 3
Screen Project
Beta’s portfolio managementkey
process
evaluatesLimit
projects
both
individually
andmanagement
as part of the innovation portfolio
takeaway:
entry
into
the portfolio
Innovation Portfolio Management:
Balancing
and
Risk
Innovation
Management
Process
andValue
System
process
usingPortfolio
specific
strategic
and
economic
criteria
The Executive Team assesses each project’s strategic fit, likelihood of success, and commercial potential
guidebook
summary
Portfolio Screening Criteria
Download the complete
Executive Team
COMPOSITION
Best Practice Guidebook
Firm: Beta Inc.
CEO and senior management in R&D,
Screen Project
Industry: Information
and
Communication
Technology
Marketing,
Manufacturing,
and Finance
Evaluate Project
Is there
a market
opportunity?
Can we win?
Can we make money?
at your Growth Team
Screen new and ongoing
Headquarters:
United States
ROLE
Model each project‘s
projects
entrance
Sets theTeam
company’s
strategy
and
Thevalue
Executive
Team
benchmarks the project’s projected
The Executive Team examines
Beta’sfor
competitive
The Executive
evaluates
the project’s
potential
via seven
core
Membership™ clientGeographic
portal.
Footprint:
Globalinnovation
Inc.
into themarket.
Portfolio
values
againstand
the
investment
position in the project’s designated
based onmanages
the sizethe
andinnovation
growth ofportfolio
the market.
indicators
ranges
of hurdle for its Life Cycle
Ownership: Public
Management System
Stage*—Emerge,
uncertainty Grow, or Mature. The project is either
The Guidebook includes:
Revenue (2011):
$3–5 Attractiveness
billion USD
Market
Indicators
Competitive Advantage Indicators
cleared to enter the portfolio management process
Doesitfitwithourstrategicdirection? Portfolio or rejected based on the potential economic return
•Full content and guidanceMarket need
(measured by productivity rate and payback years).
Problem:
Does it takeBusiness
advantageResults:
of our core Management System
Project Teams
Market size
Beta seeks to generate
better returns from its product portfolio (bothcompetencies?• 100% increase in products successfully launched
•Key Lessons Learned
Life Cycle Stage
Investment
COMPOSITION
Track Progress
existing products
and growth
those still
development). However, the company
• 30% increase in the portfolio’s ROI Hurdle
Market
rateinR&D,
Whatisourmarketshare?
Representatives
from
Product Launch,
EMERGE
GROW
MATURE
of
all
projects
in
its
struggles
to
evaluate
and
compare
the
value
and
risk
•Tools and Resources
Update information
Marketing, Sales, and Finance; each team is led
Productivity Rate Calibrate Information
Whatisourbrandpresence?
Market
saturation
Resources
Required:
development pipeline,
which
confuses
funding
and
decision‑making.
to
pinpoint
and
revise
>5
>10
>15
by a Project Leader—the project owner who
(NPV/Cost)
Conduct a peer review
Section
• Executive team—senior management
in R&D, Marketing,
projects
that are over‑
reports directly to the Executive Team
Dowehaveappropriatedistribution?
1
Beta
2
of<10
the projects <in8the
Solution:
Payback Years
<6
or under‑performing Manufacturing, and Finance
ROLE
Portfolio Management
Beta implements
a six‑step, portfolio management process to focus on
The
Portfolio
Management
Portfolio
Management
Software—portfolio
evaluation
and to
tracking
•
Performs the day‑to‑day activities to develop
System
validate
the most valuable
opportunities.
portfolio
process:
System is a project evaluator
andmanagement
the project
and track The
its metrics
in themanagement
Portfolio
assumptionsandrefine
• Project Mark
teams—cross‑functional
project
teams to oversee
Case-In-Point:
portfolio analyzer that executive
• Screensprojectsforentranceintotheportfoliobasedonstrategicfit
Management System
projects
thedevelopmentofspecificproducts
Background:Betaisoneofthetopthreefirmsinthestatisticalanalysissoftwareindustry.AnengineeratBetahasproposedanewproduct,Mark,whichanalyzesmarketing
and project teams use to track,
and economic
value
campaigneffectivenessviathesocialmediaactivitiesassociatedwithaspecificproduct/service. assess,andrefineinnovations.
Applicability of Best Practice to Executive Functions:
• Models,evaluates,andrefinesprojectsusingsevenkeyindicatorsand
Mark is Applicability
an EMERGE stage project; based on its
• Beta’s strategy is to target emerging
data‑intensive
• The
social media data analysis market needs
ranges
of uncertainty
Function
potential market, it should meet the investment
software that can provide insight and compile data
market segments.Adjust
The potential
to grow Beta’s
the Portfolio
• Uses calibration committees to standardize assumptions across the
R&D/Innovation
hurdlesthe
for Portfolio
its stage.
presence in this fast‑growing
market segment
from multiple
social media networks.
Calibration
Committee
Strategy
Balance
portfolio
makes this a strategically
relevant
project.
Corporate
Strategy
• TheCOMPOSITION
social media data analysis market is a new and
Manage
resource
Prioritize projects and
• Balances
the
portfolio
to
meet
business
and
strategic
goals
• Beta creates statistical
analysis
poorly
served
sub‑sector
statistical
Project
Leaders,
select within
technical
experts,analysis
and
constraints
andproducts
modify that
balance the portfolio
• Conducts
annual
assessments
the
Executive
Team of projects and the portfolio’s utilize large repositories
software.
of data
to produce
the portfolio
strategy
based on value,
economic
and
strategic
value
actionable
insights;
this
product
relies
on
similar
ROLE
uncertainty, and strategic
• The social media data analysis sub‑sector is
competencies.
Conducts
a peer
review
of all year
the projects
goals
growing
by more
than
15% each
and is in
1
is a pseudonym.
All statistics in this guidebook are illustrative.
the Portfolio Management System prior to
• Beta controls 30% 2ofBeta
the Inc.
market
for statistical
expectedtobealargemarketwithinfiveyears.
Risk
is
defined
as
the
range
of
uncertainty
around the commercial value of the project.
portfolio prioritization and funding
analysis products and 5% of the social media data
analysis sub‑sector.
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DRAFT
DRAFT
DRAFT
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18
Betasection
Inc.; SmartOrg;
Teamon
Membership™
research.
* See the Tools & Source:
Resources
for more Growth
information
the Product Life
Cycle Stages.
Source: Beta Inc.; SmartOrg; Growth Team Membership™ research.
Growth Team Membership™ research.