A Fresh Look at R&D Decisions: Learning from the Best
Jason LeBoeuf and Marc Drucker
Originally published: 2012 (PDMA Visions Magazine • Issue 2, 2012 • Vol 36 • No 2)
Read time: 10 minutes
The R&D Manager’s Dilemma Consider this: You are the research and development (R&D) manager tasked with making the business-critical decision of which new product development programs your organization will pursue. The mix of new programs includes an assortment of incremental improvements and breakthrough innovations. Each prospective project brings its own degree of risk, development timeline, requirements and potential for return. The early-stage opportunities you’re consideration are, by nature, ambiguous in their potential performance, while the late-stage projects have a higher level of certainty.
As the R&D manager, how do you decide which projects should receive funding and resources for development, and how much information do you need to make a sound decision? There has been much written about R&D portfolio decision making. However, as a group of MBA students taking what we hoped was a fresh look at this challenge, we wanted to learn how the top innovators made project selections and understand how their best practices could be applied to any R&D portfolio decision.
Although this challenge seemed daunting, our research revealed that today’s R&D leaders appear to overlap on a number of very similar decision-making metrics. We’ve concluded that other R&D leaders can also use these metrics to increase the effectiveness of their own new product development initiatives. With more effective R&D decisions, leaders can improve business performance, increase throughput, better align with business strategy, raise work in progress (WIP) value and support the investment in long-term innovation.
The Research Method
The Babson College-Newlogic research group set out to uncover and articulate how lead-ing innovators make their go/no-go R&D portfolio decisions. As a team of unbiased MBA students with guidance from Newlogic’s senior consultants, the mission was to determine what, if any, common portfolio decision criteria is used by today’s best innovating organizations. The team theorized the decision criteria used by leading innovators would define, in essence, a best practice that could be used by any innovation organization.
Our first step was to establish which companies make the best R&D portfolio decisions. The true significance of making good R&D portfolio decisions is that they lead to the most innovative outcomes. Thus, the team concluded that today’s best innovators are also today’s best R&D portfolio decision makers. These top innovators were determined by compiling the results from the innovation awards distributed by publications such as PDMA’s Visions, The Economist, The Wall Street Journal, Fast Company and Businessweek. All together, we identified 48 organizations that were consistently recognized for their corporate innovation efforts. As expected, the list is comprised of mostly high-tech companies widely known for their innovations, led by HP, IBM and Apple. However, others, such as McDonald’s, Starbucks and PepsiCo, have also been frequently recognized for their innovative endeavors.
Using the list of target companies as a guide, the team successfully interviewed R&D decision makers in 10 of the businesses on the list. These interviews were done in an open-ended fashion, so the leaders could describe, in their own words, what was most important to them. After synthesizing and organizing the data, the Babson team determined that the meaningful R&D decision metrics fell within four heading: Financial, Strategic, Market and Resources.
A note about risk and timing: Risk and timing were also significant themes throughout the primary research; however, it was deter-mined that these two aspects were already woven into each of the four categories.
How Leading Innovators Make Portfolio Decisions
The Babson team discovered that leading innovators had 10 simple metrics in common that were used to measure and forecast the success of an R&D project.
Four of the metrics are purely financial—net present value (NPV), break-even, return on investment (ROI) and project cost.
Net Present Value
The research group noticed that decision makers often matched a project’s NPV against their internal policy to assess attractiveness. The advantage of NPV is that it considers project performance from a long-term perspective, while encumbering many risks and assumptions such as cost of goods, revenue and tax risk.
By considering break-even, the Babson team found that leading innovators are able to quickly compare projects in a succinct financial measure that accounts for time to market, capital expenditure requirements and profitability.
Return on Investment
Managers can judge the effectiveness of the ROI calculation by asking themselves, “Does this opportunity meet our internal investment hurdles (typically stated as ROI)?”
Cost objectives stands alone because it gives an organization insight into its own budgeting, which for most, may be an especially sensitive consideration.
Fitness for Market
Fitness for market was decidedly the most critical and all-encompassing market metric uncovered by the research. Fitness to market accounts for all other aspects of marketing, such as market share and growth potential, while naturally relating to the other metrics. Although it’s only a single metric, we found that it often carried a higher weight in the decision-making process of the leading innovators.
People and Resources
A capabilities analysis can be a constructive tool to highlight any gaps and limitations the organization may encounter. Understanding these shortfalls can lead to a modified development plan or the decision that the hurdle is just too large, and the project is not feasible.
Ability to Sell
This metric was created to encompass much of the data that directly linked marketing and sales to resources. It captures the strong relationship between capabilities and marketing, while forcing the organization to look beyond the development cycle at hand. If the personnel, relationships and/or expertise are not currently in place to sell the product in development, the gap should be recognized.
Technology Road Map
As technology is constantly evolving, product development must follow suite through alignment with the organizations technology road map. It is important for R&D leaders to understand the technical environment and to determine how well and for how long the new product will be relevant.
Fit to Corporate Strategy
As with a technical strategy, it is important that R&D decisions follow logic that maintains a corporate direction while considering the potential impact of outside factors. Variables such as existing technology, intellectual property and competitors within the market may have a considerable effect on the success of an R&D project and should be accounted for.
It was important for many of the companies to examine the marketplace for gaps. These voids can be seen as product opportunities and a source of competitive advantage.
To make this information useful, each metric was expanded into a question that captured the spirit of the measure while remaining neutral enough to be universally applied. This succinct question table forms the foundation for the guidelines that can be applied by any R&D organization. By simplifying the process of portfolio optimization, any R&D leader can make R&D portfolio decisions the way leading innovators do.
An important feature of the framework is its ability to understand and account for the ambiguous nature of early-stage R&D projects. When a new product isn’t more than a napkin sketch, calculating a precise financial metric, like NPV or ROI, does not add significant value to the decision-making process. However, the research revealed that this ambiguity could be accounted for in the inputs (e.g. how the questions are answered). Input ranges such as high/med/low or high/low/most likely allow for the ambiguous responses and estimations that accompany young product ideas. As product ideas mature and develop-ment projects progress, it is expected that the range of each answer will reduce and more concrete inputs can be provided.
Value of the Framework
The value of this framework is not only to show us that today’s innovation leaders make R&D decisions in similar ways, but it also provides the benefits of education to those who apply their own guidelines. As an organization delves into each KPI to collect data, it engages in a process that individually evaluates the key aspects of its own successful product development. Reflecting on both successful and unsuccessful past R&D initiatives, R&D leaders can understand the characteristics of a successful project and model today’s acceptance criterion around those qualities. Answering each question in the framework and comparing it to the acceptable criteria is an opportunity to discover potential shortfalls. Decision makers can then investigate the trouble areas and determine if the issue can be overcome or if the project should be declined.
The Babson College-Newlogic research discovered that today’s leading innovators use a surprisingly similar and succinct set of simple metrics when making their R&D portfolio decisions. It appears that the key to the success of leading innovators is that these metrics are objective and used consistently. From this learning, we can propose that any R&D leader can use this framework to make R&D portfolio decisions in the same way as today’s leading innovators. Regardless of the quantity or characteristics of the projects that make up the R&D portfolio, making better R&D decisions can lead to more innovative outcomes and a greater potential for product success.
About the Presenters
Jason Leboeuf is recent graduate of Babson College’s-Franklin W. Olin Graduate School of Business. He also holds a Bachelor of Science degree in mechanical engineering from Worcester Polytechnic Institute and has been a contributor to CompactPCI Advanced & MicroTCA Systems magazine.
Marc Drucker is founder and president of Newlogic, Inc. During his more than 15 years in product development and management, Drucker has received more than 10 patents and several design awards. He has created growth opportunities for many clients, including Hewlett-Packard, Unilever, Miller, Stryker Medical, Qualcomm and Johnson and Johnson. Prior to Newlogic, Drucker was a senior manager at Arthur D. Little (Cambridge, Mass.)
Editor’s note: This research project was per-formed by a team of MBA candidates, consist-ing of Ryan McVey, Patrick Murphy and Jason Leboeuf, as part of a Management Consulting Field Experience at the F.W. Olin School of Business at Babson College, in conjunction with Newlogic, Inc. of Newton, Mass.