New Products, New Solutions: Making Portfolio Management More Effective

52

Abstracts / The Journal of Product Innovation Management 18 (2001) 51–58

appear in this issue and/or have made at least one contribution over the last twelve months: Paul B. de Laat, University of Groningen (PdL) Geoffrey P. Lantos, Stonehill College (GPL) Joshua D. Martin, Temple University (JDM) Kevin Mole, Wolverhampton Business School (KM) Anne Stringfellow, Thunderbird University (AS) The author of any abstract can be determined by the initials given at the end of the abstract citation, unless the Abstracts editor wrote the abstract. My sincere thanks to all contributors for their fine work. If you are interested in joining the abstracting staff, please contact the Abstracts editor. Building an Innovation Factory Andrew Hargadon and Robert L. Sutton, Harvard Business Review, May-June 2000, pp. 157–166. In this article, the authors argue that the “lone genius” inventor is a misconception. After several years of studying product innovation, they conclude that the true innovators are the people that can take an idea from one context and see how it could be applied in a different one. This is important, because it means that true innovation is a process that can be systematized and applied. They present examples of several companies that use such a system for innovation, and conclude that innovation success has more to do with organization and attitude than with solitary genius. The common element in innovation systems is the knowledge-brokering cycle, by which ideas are obtained, kept alive, imagined in a nonobvious context, and successfully applied. As a historical example, Robert Fulton observed the use of steam engines in mines, thought about how this technology could be applied to boat propulsion, and developed the first successful steamboat. The rest of this abstract presents the steps of the knowledge-brokering cycle in further detail. 1. Capturing good ideas. The most successful “knowledge brokers” span a wide range of markets, industries, and locations when scanning for ideas. Rather than filing away promising ideas, employees “play” with it (mentally, if not actually physically), thinking about how it works and imagining other possible applications. Designers at the product design firm IDEO, for example, will routinely take common objects apart, and visit idea-stimulating sites as diverse as an airplane junkyard and the Barbie Hall of Fame. Collecting related writings, and observing products in use, are important steps. Another design firm, Design Continuum, had a project in which they were to improve knee surgery techniques. They set doctors up in a cadaver lab (located in a hotel), watched how they worked, and observed that the doctors had developed techniques that allowed them to make up for a “missing third arm.” This observation led to the creation of a new, easier-to-use surgical tool. On another project involving kitchen faucets, a new faucet design was developed after examining valves used in autos, medical products, and toys. 2. Keeping ideas alive. The best knowledge broker firms are skilled at keeping ideas alive. IDEO designers collect parts, toys, and other “junk” of all kinds, and sharing among designers is encouraged. Several IDEO offices have “Tech Boxes” in which designers place hundreds of diverse materials and objects. Each piece is sited on the company’s intranet and the curators of the different Tech Boxes have weekly conference calls. McKinsey Consulting has a Rapid Response Team that links any consultant with a problem to others who might be able to solve it, within 24 hr. This kind of network requires a clear understanding of “who knows what.” 3. Imagining New Uses for Old Ideas. Even the simplest of ideas can suffice. The idea for the screw-on fixture for the common light bulb originated when one of Edison’s technicians thought of the threaded

lid on kerosene bottles–the design has not changed since then. When developing a new pulsed lavage (a product to clean wounds with saline solution), Design Continuum designers thought of batterypowered squirt guns. The same firm developed the innovative Reebok Pump shoe using ideas derived from inflatable splints, IV bags, and diagnostic pumps and valves. The building that houses Bill Gross’s Internet start-up factory, Idealab!, as well as IDEO studios, are set up to encourage employees to hear and see everyone else’s problems, and to help whenever possible. 4. Putting Promising Concepts to the Test. The idea needs to be turned quickly into a real product that can be assessed. The attitude should be “easy come, easy go”: ideas should be thought of as inexpensive toys to enjoy, tinker with, and perhaps develop into another idea. The authors describe the attitude as “nothing-invented-here.” Rather than seeking to claim glory for solving the problem at hand, the designers should be looking for the best possible solution regardless of its origin. The all-too-familiar “not-invented-here” syndrome, by contrast, is fatal to real product innovation. Turning once again to IDEO, its designers built a full-size foam model of a new Amtrak train to assess seating and layout. Idealab! is also very experienced with developing low-cost prototypes, such as the one that eventually developed into CarsDirect.com. It’s also good to keep track of the failures. Edison’s lab tried insulating transatlantic cables with carbon putty, but soon discovered it did not work underwater. A few years later, the same putty was used as the insulator in another application, which made the telephone commercially feasible. The authors conclude by noting that many firms, such as 3M and Hewlett-Packard, have their own internal systems for knowledge brokering, and other firms or divisions occasionally rent an outside broker (such as when an unfamiliar field will be entered, and the broker has the requisite knowledge and experience).

New Products, New Solutions: Making Portfolio Management More Effective Robert G. Cooper, Scott J. Edgett and Elko J. Kleinschmidt, ResearchTechnology Management, March-April 2000, pp. 18 –33. There are two routes for businesses to succeed with new products: they need to do projects right, and also to do the right projects. Cross-functional teams, voice-of-the-customer, and project management help businesses do projects right. Portfolio management methods are usually used by businesses in selecting the right projects. In their research of portfolio management practices, Cooper, Edgett and Kleinschmidt have found that the common portfolio methods have flaws that can compromise their effectiveness. This article reviews the problems, and also indicates how to overcome them. Portfolio methods have become prominent over recent years, and tend to do well on ensuring strategic alignment (projects selected are consistent with business strategy) and on selecting high value projects. They are weaker, however, at selecting the right number and mix of projects, and at ensuring timely completion of projects. Four interrelated problems seem to be the root cause of these difficulties, which are outlined below. 1. Resource balancing. Product development groups often complain that resource demands (human, financial, and time) outstrip supply, as too many new product projects get approved. Evaluation tools such as net present value (NPV) let too many projects “Go” on the “Go/Kill” decision, and/or management is reluctant to say no to some promising initiatives. NPV calculations often do not factor in resource constraints. Instead, each project is considered on its own merit, with the result that finances and human resources get committed to multiple projects. With little time available to do market studies, “Go/Kill” decisions end up getting made without solid market information. Furthermore, the stress on NPD team members increases and the team can break down. 2. Project selection methods do not discriminate. NPV is calculated

Abstracts / The Journal of Product Innovation Management 18 (2001) 51–58 against a risk-adjusted cost of capital. That is, if the project passes some designated hurdle rate, a “Go” decision is made. Since all projects are ranked individually (and not force-ranked against each other), all may come out as “Go!” As a result, the method used does not discriminate between top-priority projects and other projects. Scoring models often used in project evaluation are valuable, but also rate projects against absolute criteria rather than force-ranking them. Many projects come out with midrange scores (e.g., 60 out of 100) and, again, discrimination is compromised. High-scoring projects that consume large resources may get preference over several good, inexpensive, but lower-scoring projects; thus resources may not get allocated efficiently. 3. No solid information for “Go/Kill” Decisions. Front-end NPD activities include market and technical assessments, early market studies, and business analyses. If the front-end work is done poorly, management will not have the quality of information needed to make good decisions. These activities are strongly tied to ultimate product success, as they are needed for early, sharp product definition, which reduces time to market. Furthermore, the portfolio is improved: the “dog” projects can be eliminated sooner, and the odds of doing the “right” projects are increased. 4. Too many small projects. Management is often tempted to focus on quick-hit projects that provide short-term shareholder value, especially when markets are dynamic and it is difficult to justify unpredictable long-term projects. Short-term projects are clearly important; but an overreliance on them means that the firm will pass up the opportunity to develop genuine new products, platforms, or technologies. A product innovation strategy is lacking in these firms. Cooper et al. use the term “strategic buckets” to refer to different project types (e.g., major, long-term, technology developments vs. shorter projects, modifications and extensions). Money should be set aside for each bucket, otherwise the focus will almost certainly be on quick-fix, short-term projects. The authors make several recommendations to overcome these problems. 1. Improve information. Stage-gate processes improve the quality of information generated in a new product project. The important front-end activities are emphasized, and the related deliverables become the NPD team’s objectives. Evaluation criteria are clearly defined and used to improve “Go/Kill” decision-making. Businesses that employ a stage-gate process have higher success rates, and meet sales and profit objectives more often. 2. Introduce Resource Capacity Analysis. Focus on the number of person-days of work required for each project, and the availability of these resources. For future projects, determine what resources will be required to reach the established goals, then make hard decisions as to whether the goals are realistic or more resources are required. 3. Develop a product innovation and technology strategy (PITS). This will ensure a correct allocation of resources across short- versus long-term projects, high- versus low-risk projects, new platform development versus extensions, and so on. The PITS should state the percentage of business sales that will come from new products, the arenas for focus, the deployment of resources, and the attack plan or strategic stance (e.g., innovator vs. fast follower; high performance vs. low cost). In short, stage-gate processes and portfolio management tools complement each other. The authors identify three goals of portfolio management, and present the portfolio tools most suited to each. 1. Value Maximization. NPV and yes/no checklist questions can be used to assess the portfolio in terms of profitability or a related business objective. Scoring models are useful in that they incorporate strategic and leverage considerations as well as financial consideration.

53

2. Balance. To attain a balance across several parameters (long-term vs. short term projects, etc.), visual charts like bubble diagrams are useful, as are pie charts that show spending by project type or market. 3. Strategic direction. To make sure the portfolio is consistent with business strategy, strategic buckets designated by top management, and funds are allocated to each bucket based on strategic considerations. As an example, Allied Signal uses three buckets, platform projects, new products, and minor projects, and separately manages a portfolio within each bucket.

The Brand Report Card Kevin Lane Keller, Harvard Business Review, January-February 2000, pp. 147–157. Brand equity management is critical to maintaining customer loyalty and a steady profit stream. Kevin Lane Keller argues that most brand managers do not have a complete understanding of all the factors that make up a strong brand, and focus instead on only one or two of these factors. In this article, he presents a set of ten characteristics shared by the world’s strongest brands – a brand report card that can be used to assess where a brand is strongest and where it needs improvement. 1. The brand delivers benefits that customers desire. Brand image, service, and other tangibles and intangibles combine with product attributes to create a “whole” – something customer might not even know they want. Starbucks started out selling coffee beans. Company chairman Howard Schultz was inspired to recreate the Italian coffee bar and focused his efforts on getting closer to the “heart and soul” of coffee: the coffee house. By maintaining control over bean selection, roasting, and consumption through vertical integration, Starbucks can continuously deliver superior benefits to its customers. 2. The brand stays relevant. Gillette invests heavily in product improvements, such as Mach3, that provide improved benefit to customers. Minor advancements are signaled by brand modifiers (such as AtraPlus or SensorExcel). Consistency of image is maintained through the use of the long-running slogan, “The best a man can get.” 3. Pricing strategy is based on customer perceptions of value. Poor understanding of value from the customer’s viewpoint leads to poor pricing decisions. P&G once tried a cost-cutting change in the formulation of Cascade dishwashing detergent, but the decline in performance was attacked by competitive brand advertising and P&G soon returned to the original formula. On the other hand, P&G’s “everyday low pricing” strategy, coupled with operations streamlining and lower costs, has resulted in great improvements in profit margins. 4. The brand is properly positioned. This implies being similar to and different from competing brands in identifiable ways. Successful brands emphasize points of parity as well as points of difference that provide competitive advantage. Mercedes-Benz emphasizes product superiority while matching customer service expectations. Saturn emphasizes superior customer service while meeting quality expectations. Visa successfully repositioned itself relative to American Express by launching Gold and Platinum cards, and playing up its usefulness for national and international travel with its “everywhere you want to be” ad campaign. 5. The brand is consistent. Conflicting messages will confuse customers. Between the 1970s and the mid-1990s, Michelob ads announced that “The weekend was made for Michelob,” “The night was made for Michelob,” and “Some days were made for Michelob.” Another campaign told consumers that “A special day requires a special beer.” Interestingly, over this time period, sales dropped from over 8 million barrels per year to under 2 million. 6. The brand portfolio and hierarchy make sense. Maintaining dif-