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Portfolio management for new products
BOOK
5 PROD INNOV 1997;14:526-534
REVIEWS
these four elements. Done well, this will lead to new technologies, new platforms, streams of derivative products, and expanded markets. Mark Deck Pittiglio Rabin Todd & McGrath
(PRTM)
Reference Michael E. Product Srrategy .foor High-Techn,ology Compnnies: How to Achieve Growth, Competitive Advantage, and Increased Prqfits. Burr Ridge. Illinois: Irwin Professional Publishing, 199.5.
1. McGrath,
Porfolio Management for New Products by R. G. Cooper, S. J. Edgett, and E. J. Kleinschmidt. Hamilton, Ontario: McMaster University, 1997. 131 + xi pages. $35.95 (paperback). This book addresses an important and timely topic in product development management: how to manage a portfolio of new-product projects for maximum competitive impact. Many managers struggle with allocating their increasingly tight resources to many product opportunities under multiple objectives. These authors provide clear and helpful guidance to such managers in setting up a portfolio management system. Several books and countless papers address specific techniques for managing the development portfolio, but this book stands out because it covers a variety of techniques and shows how they can be combined to build an effective management system for a real company. Although it is written by academics with a style that is at times academic, this book is clearly intended for managers. It applies to all types of products and services and uses a variety of them as examples. The examples are biased toward chemical and materials companies, however. This volume is based on a study of the portfolio management practices of 35 companies that apparently are leaders in building a comprehensive approach to portfolio management. The authors point out the dilemmas that these companies face, and they emphasize that none of the companies studied is yet satisfied with its current solution. The book includes many detailed examples from these companies, and in the last chapter the authors build a comprehensive composite example to illustrate how the pieces described in previous chapters can be assembled into a complete portfolio management system. At the same time, they state clearly that each of the companies studied uses a different approach, and, indeed, it appears that each
MANAG
529
company will need to develop a system tailored to its unique needs. There is no universal solution to portfolio management. Thus, the material provided here can be applied quite flexibly. It fits well with Cooper’s well-known stage-gate process [l], but it is not dependent on having a stage-gate process. The authors use an effective framework for laying out the basics, based on their three objectives of a portfolio management scheme. The first objective is maximizing the value of the portfolio, which can either be done on an absolute (bang) or a normalized (bang for the buck) basis. It can also be financially based or more qualitative in nature. Their second objective is balancing the portfolio, so that it reflects a desirable mix of long- and short-term opportunities, technology risks, geographical areas, or other attributes. The third objective is alignment with the corporate strategy. After covering the three objectives in Chapters 2-4, respectively, they discuss several complications in Chapter 5. For example, should resource commitments made to projects be firm? If management makes firm commitments to a project and does not alter them, mediocre projects can run through their gates, “like an express train,” without being stopped. On the other hand, if management constantly reshuffles resources among projects, developers become demoralized and waste their effort in shifting to the new assignments. Although this book is reasonably free of typographical errors, it does not reflect the level of review and editing that one would expect in a commercially published book. It does not have an index, and its preface is just a list of acknowledgments. It is quite short, especially considering its price. Even so, it is a bit repetitive, so with some tightening up, it would be even shorter. However, if we consider this book as Cooper, Edgett, and Kleinschmidt’s new product, then this is a perfect opportunity for them to apply incremental innovation [2], Chapter 4. Rather than take the time that a commercial publisher might have needed, they were apparently able to publish it faster through their institution. Now they can upgrade it in response to their readers’ initial feedback, then target it much more precisely through a commercial publisher than would have been possible for the first edition. And even though the initial edition is rather expensive, it still represents good value to those lead-readers who are genuinely interested in improving their portfolio management. Management of the new-product portfolio can be
530
I PROD INNOV 1997;14:526-534
MANAG
compared with management of an investment portfolio, and this is precisely what the authors do (see page 37). However, there is a pitfall here. Whereas diversification is advantageous for an investment portfolio, the concept of diversification can cause problems for a new-products portfolio. As management attempts to diversify (balance) the portfolio, they are tempted to “invest” in too many projects at once, thus stretching their resources. Diversification is often inexpensive for an investment portfolio, but because new-product projects cannot be made arbitrarily small, an attempt to diversify a development portfolio often leads to more projects than the firm can develop expeditiously. Some of the suggested portfolio assessment techniques require making assessments of the product’s financial performance. The authors mention that this is difficult to do accurately, especially early in the project when such estimates would be most valuable. However, in this reviewer’s opinion, they do not state this caution strongly enough. For example, Cooper cautions more strongly in his popular book [ 1, pp. 168-1731 about attempting to justify projects on a financial basis early in their development. The authors suggest that management should exert increasing control over go-kill decisions as a project progresses, because resource commitments increase correspondingly (pp. 105, 107). Although this is a common and natural tendency, it is not an effective time for management to apply its leverage. Others [2,3] suggest that management can make its biggest impact on the project early on, precisely when the issues are vague but when they are also malleable. One important topic in portfolio management is not covered at all in this book, and another is covered too lightly, in this reviewer’s opinion. This missing topic is product line planning [2,3], which establishes relationships within families of products, for example, which products should spawn which variants? Such planning fosters strategic focus, which is certainly within scope for this book. More importantly, it can stretch development resources greatly (also within scope), because it proactively encourages reuse of designs, thereby reducing the effort needed per product developed. The subject covered too lightly is the devastating effect of overloading the development portfolio. The authors state, “As result, projects end up in a queueserious log-jams in the process-and cycle time starts to increase” (page 2). If time to market is important, portfolio managers should be acutely aware that overloads directly dilute effort on a project, and this di-
BOOK
REVIEWS
rectly extends cycle time. An overloaded portfolio can easily double cycle time [2]. This issue is vital in a book on portfolio management, because it is precisely the portfolio managers who control the project load. Preston G. Smith CMC New Product Dynamics
References 1. Cooper, Robert G. Winning at New Products: Accelerating the Process from Iden to Lauxh. Reading, Mass.: Addison-Wesley, 1993. 2. Smith, Preston G. and Reinertsen, Donald Half the Time: New Tools, New Rules. Reinhold, 1997.
G. Developing Products in New York: Van Nostrand
3. Wheelwright, Steven C. and Clark, Kim C. Revolutionizing Product Development: Qwmtum Leaps it1 Speed, Ejjkiency and Quntity. New York: The Free Press, 1992.
The Innovation War by Christoph-Friedrich von Braun. Upper Saddle River, NJ Prentice Hall PTR, 1997. 304 pages. $24.95. This book raises some questions that all practitioners and academics involved in the new product development process should carefully consider: Why is R&D being pursued, and what is the return on all the resources being pumped into R&D? Originally published in Germany in 1994, this book created a stir in newspaper headlines and corporate boardrooms across Europe. Based on his extensive experience as an engineering consultant, strategic planner, and R&D strategist in the public and private sectors, Dr. von Braun puts together a convincing case that companies are playing an expensive game of “keeping up with the Jones”, i.e., investing in R&D merely because a competitor has a large R&D program. With all the attention today being placed on speeding new products to market, it is highly appropriate to step back and examine the “new” products being introduced and the amount of effort being devoted to their development. Piecing together information from various data sources, von Braun shows that R&D expenditures have steadily increased over time. By 1993, the US, Japan, Germany, Great Britain, and France were spending a combined total of approximately $1 billion per day on R&D. At the same time, however, von Braun finds that a large number of the world’s top electronic companies spent well over $100 billion more on R&D than they made in profits. Thus, it seems natural to ask whether too much is being spent on R&D given the level of product novelty being introduced. And, von Braun is not alone in asking this question as this general theme is also being raised by others [2,3].
5 PROD INNOV 1997;14:526-534
REVIEWS
these four elements. Done well, this will lead to new technologies, new platforms, streams of derivative products, and expanded markets. Mark Deck Pittiglio Rabin Todd & McGrath
(PRTM)
Reference Michael E. Product Srrategy .foor High-Techn,ology Compnnies: How to Achieve Growth, Competitive Advantage, and Increased Prqfits. Burr Ridge. Illinois: Irwin Professional Publishing, 199.5.
1. McGrath,
Porfolio Management for New Products by R. G. Cooper, S. J. Edgett, and E. J. Kleinschmidt. Hamilton, Ontario: McMaster University, 1997. 131 + xi pages. $35.95 (paperback). This book addresses an important and timely topic in product development management: how to manage a portfolio of new-product projects for maximum competitive impact. Many managers struggle with allocating their increasingly tight resources to many product opportunities under multiple objectives. These authors provide clear and helpful guidance to such managers in setting up a portfolio management system. Several books and countless papers address specific techniques for managing the development portfolio, but this book stands out because it covers a variety of techniques and shows how they can be combined to build an effective management system for a real company. Although it is written by academics with a style that is at times academic, this book is clearly intended for managers. It applies to all types of products and services and uses a variety of them as examples. The examples are biased toward chemical and materials companies, however. This volume is based on a study of the portfolio management practices of 35 companies that apparently are leaders in building a comprehensive approach to portfolio management. The authors point out the dilemmas that these companies face, and they emphasize that none of the companies studied is yet satisfied with its current solution. The book includes many detailed examples from these companies, and in the last chapter the authors build a comprehensive composite example to illustrate how the pieces described in previous chapters can be assembled into a complete portfolio management system. At the same time, they state clearly that each of the companies studied uses a different approach, and, indeed, it appears that each
MANAG
529
company will need to develop a system tailored to its unique needs. There is no universal solution to portfolio management. Thus, the material provided here can be applied quite flexibly. It fits well with Cooper’s well-known stage-gate process [l], but it is not dependent on having a stage-gate process. The authors use an effective framework for laying out the basics, based on their three objectives of a portfolio management scheme. The first objective is maximizing the value of the portfolio, which can either be done on an absolute (bang) or a normalized (bang for the buck) basis. It can also be financially based or more qualitative in nature. Their second objective is balancing the portfolio, so that it reflects a desirable mix of long- and short-term opportunities, technology risks, geographical areas, or other attributes. The third objective is alignment with the corporate strategy. After covering the three objectives in Chapters 2-4, respectively, they discuss several complications in Chapter 5. For example, should resource commitments made to projects be firm? If management makes firm commitments to a project and does not alter them, mediocre projects can run through their gates, “like an express train,” without being stopped. On the other hand, if management constantly reshuffles resources among projects, developers become demoralized and waste their effort in shifting to the new assignments. Although this book is reasonably free of typographical errors, it does not reflect the level of review and editing that one would expect in a commercially published book. It does not have an index, and its preface is just a list of acknowledgments. It is quite short, especially considering its price. Even so, it is a bit repetitive, so with some tightening up, it would be even shorter. However, if we consider this book as Cooper, Edgett, and Kleinschmidt’s new product, then this is a perfect opportunity for them to apply incremental innovation [2], Chapter 4. Rather than take the time that a commercial publisher might have needed, they were apparently able to publish it faster through their institution. Now they can upgrade it in response to their readers’ initial feedback, then target it much more precisely through a commercial publisher than would have been possible for the first edition. And even though the initial edition is rather expensive, it still represents good value to those lead-readers who are genuinely interested in improving their portfolio management. Management of the new-product portfolio can be
530
I PROD INNOV 1997;14:526-534
MANAG
compared with management of an investment portfolio, and this is precisely what the authors do (see page 37). However, there is a pitfall here. Whereas diversification is advantageous for an investment portfolio, the concept of diversification can cause problems for a new-products portfolio. As management attempts to diversify (balance) the portfolio, they are tempted to “invest” in too many projects at once, thus stretching their resources. Diversification is often inexpensive for an investment portfolio, but because new-product projects cannot be made arbitrarily small, an attempt to diversify a development portfolio often leads to more projects than the firm can develop expeditiously. Some of the suggested portfolio assessment techniques require making assessments of the product’s financial performance. The authors mention that this is difficult to do accurately, especially early in the project when such estimates would be most valuable. However, in this reviewer’s opinion, they do not state this caution strongly enough. For example, Cooper cautions more strongly in his popular book [ 1, pp. 168-1731 about attempting to justify projects on a financial basis early in their development. The authors suggest that management should exert increasing control over go-kill decisions as a project progresses, because resource commitments increase correspondingly (pp. 105, 107). Although this is a common and natural tendency, it is not an effective time for management to apply its leverage. Others [2,3] suggest that management can make its biggest impact on the project early on, precisely when the issues are vague but when they are also malleable. One important topic in portfolio management is not covered at all in this book, and another is covered too lightly, in this reviewer’s opinion. This missing topic is product line planning [2,3], which establishes relationships within families of products, for example, which products should spawn which variants? Such planning fosters strategic focus, which is certainly within scope for this book. More importantly, it can stretch development resources greatly (also within scope), because it proactively encourages reuse of designs, thereby reducing the effort needed per product developed. The subject covered too lightly is the devastating effect of overloading the development portfolio. The authors state, “As result, projects end up in a queueserious log-jams in the process-and cycle time starts to increase” (page 2). If time to market is important, portfolio managers should be acutely aware that overloads directly dilute effort on a project, and this di-
BOOK
REVIEWS
rectly extends cycle time. An overloaded portfolio can easily double cycle time [2]. This issue is vital in a book on portfolio management, because it is precisely the portfolio managers who control the project load. Preston G. Smith CMC New Product Dynamics
References 1. Cooper, Robert G. Winning at New Products: Accelerating the Process from Iden to Lauxh. Reading, Mass.: Addison-Wesley, 1993. 2. Smith, Preston G. and Reinertsen, Donald Half the Time: New Tools, New Rules. Reinhold, 1997.
G. Developing Products in New York: Van Nostrand
3. Wheelwright, Steven C. and Clark, Kim C. Revolutionizing Product Development: Qwmtum Leaps it1 Speed, Ejjkiency and Quntity. New York: The Free Press, 1992.
The Innovation War by Christoph-Friedrich von Braun. Upper Saddle River, NJ Prentice Hall PTR, 1997. 304 pages. $24.95. This book raises some questions that all practitioners and academics involved in the new product development process should carefully consider: Why is R&D being pursued, and what is the return on all the resources being pumped into R&D? Originally published in Germany in 1994, this book created a stir in newspaper headlines and corporate boardrooms across Europe. Based on his extensive experience as an engineering consultant, strategic planner, and R&D strategist in the public and private sectors, Dr. von Braun puts together a convincing case that companies are playing an expensive game of “keeping up with the Jones”, i.e., investing in R&D merely because a competitor has a large R&D program. With all the attention today being placed on speeding new products to market, it is highly appropriate to step back and examine the “new” products being introduced and the amount of effort being devoted to their development. Piecing together information from various data sources, von Braun shows that R&D expenditures have steadily increased over time. By 1993, the US, Japan, Germany, Great Britain, and France were spending a combined total of approximately $1 billion per day on R&D. At the same time, however, von Braun finds that a large number of the world’s top electronic companies spent well over $100 billion more on R&D than they made in profits. Thus, it seems natural to ask whether too much is being spent on R&D given the level of product novelty being introduced. And, von Braun is not alone in asking this question as this general theme is also being raised by others [2,3].