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Optimizing Financial Return on NPD Innovation

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by: Don Creswell, SmartOrg Inc.
People + Process + Tools
Making choices among product candidates to develop and sell,
markets to penetrate, technologies to pursue and other factors that have a
bearing on success involves forecasting future revenues, cost and time where
there is a dearth, even total absence, of data. The future is fuzzy and
uncertainty is the norm.
Companies that design, develop and market products face this
dilemma at one time or another. To deal with uncertainty and avoid taking risks
that may jeopardize one's career, many decision-makers choose a safe path based
on conservative assumptions around such things as the addressable market,
price, volume, margins and other factors. The result? Mediocre results at best.
A conservative, risk-adverse culture seriously reduces a
company's ability to excel at innovation, where uncertainty and attendant risks
are to be expected and failure rates are high.
So what do you do? Don't take risks and your innovation efforts
fail to produce great products. Take risks, fail and take the consequences. As
the ruler in the Broadway musical 'The King and I' said, 'Is a puzzlement.'
Many, if not most, companies address risk and uncertainty (if
they do it at all) via check lists, scorecards, and other subjective methods,
which while better than nothing, are quite inadequate to the task of supporting
decisions that can affect investments of tens or hundreds of millions of dollars.
In their Best Practice Guidebook 'Innovation Portfolio
Management: Balancing Value and Risk,' authors SmartOrg and Frost &
Sullivan describe how Beta Inc. (a pseudonym for a real company) deals head-on
with the challenges surrounding new product development. The six-step process
addresses individual project (product) evaluation as well as development and
management of a portfolio that balances the risk and return from a mix of
projects. The objective is to optimize the overall return on the investment in
innovative new products, while making room for an acceptable amount of risk in
the service of innovation.
Beta's organization is typical of companies that have adopted
the innovation portfolio process:

Process Owner: Beta's four-tier
portfolio team consists of a process owner who is responsible for facilitating
and managing the portfolio process and system.
Executive Team: C-level and senior management in R&D,
marketing, manufacturing and finance set the company's innovation strategy and
manage the innovation portfolio.
Project Teams: Representatives from R&D, product launch,
marketing, sales and finance, whose leaders report directly to the executive
team and who develop and track metrics in the portfolio management system.
Calibration Committee: Project leaders, technical, market or
topical experts and the executive team conduct peer review of the projects in
the system before portfolio prioritization and funding decisions are made.

A six-step process guides Beta's innovation portfolio decision
Screen Project: Screen new and
ongoing projects for selection and entrance into the portfolio management
Evaluate Project: Model each project's value via seven indicators
and ranges of uncertainty.
Calibrate Information: Conduct a peer review of the project in the
system to validate assumptions and refine projects.
Balance the Portfolio: Prioritize projects and balance the
portfolio based on value, uncertainty and strategic goals.
Adjust the Portfolio Strategy: Manage resource constraints and
modify the portfolio strategy.
Track Progress: Update information to review projects that are
over- or under-performing.
Analytics and Tools

Software tools such as SmartOrg's Portfolio Navigator' support
decision, risk and economic analysis of each project and then assemble projects
into a portfolio or multiple portfolios (business units, product categories,
technologies, geography, etc.). A well-balanced portfolio significantly
improves the odds of optimizing the financial value produced by your investment
in innovative products.
Analytics are not ends in themselves, but serve as input to
conversation and deliberation among decision makers and stakeholders who
contribute their judgment, experience and wisdom to the decision-making

The complete
process is described in the Frost & Sullivan Best
Practice Guidebook
Portfolio Management: Balancing Value and Risk.'

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