r&d portfolio steering and strategy

R&D portfolio management as a tool for

strategy development and execution

10.10.2014 GloCell Oy 1

Theory, case examples and services

Executive summary

• Portfolio approach can improve R&D and innovation efficiency dramatically. We have references for more that 10X improvements.

• Challenge is the political willingness to admit the current situation and to plan strategy from there.

• Portfolio management is a function that measures how well the current strategy is delivering, and highlights gaps. It will provide strategic options how to fill the gaps and achieve strategic targets.

• Filling the gaps almost always requires a change/modification in strategy. In order to execute the new strategy a new structure is needed, as structure follows strategy. Portfolio will highlight which way to go.

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Executive summary

• Key success factor for implementing a portfolio steering is the reliability of the

data, this requires:

1. Innovation process that is focused on business value creation

2. Capability to do correct product project valuations

3. Ownership of the data needs to be with the business owner (P&L accountable)

4. All stakeholders are executing and held accountable for delivering the numbers

5. Data needs to drive decisions with consequences – budgets will be given or taken

away based on the data

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Example: Utilizing portfolio management as strategic tool “company’s” innovation

output has increased by 12X

4

20%30%

100%120%

150%

300%

Year 1

R&D investment

110

200

150

130

ROI% of R&D investment

Year 2 Year 3 Year 4 Year 5 Year 6

Portfolio measures how your strategy is working

5

IRR

, or

NP

V o

f p

roje

ct p

ipel

ine

Cumulative investment into pipeline

Corporate threshold

TAIL-END

1. Your tail- end is consequence of your current strategy

2. Need to change/expand strategy to bring in new TOP projects

3. Cutting the tail of current strategy releases funds to re-invest into the new strategy

Pipeline within current strategy

New pipeline under new / expanded strategy

This was achieved by realizing early - if the pipeline isn‘t delivering enough, our strategy is wrong

Additional benefits of portfolio steering

• Initially will show that the organization is wasting a lot of resources on interesting ideas,

but without an idea how to get it to the market -> right sizing to get cost savings (-20%)

• Enables that projects actually gets stopped as the resources are pulled out (harder to

run submarine projects) -> saves money (-5%)

• Will highlight the bottlenecks in executing growth strategy (almost always will be either

few individuals with a lot of experience or external budget) -> organizational

development and internal/external resource ratio optimization -> improve speed to

market

• Aligns organizations cross-functionally behind common priorities -> project delivery

times will improve significantly

• Market success rates improve as people are focusing on market delivery and not project

delivery

• Good front-end business analysis speeds up the development as the funnel becomes a

tunnel

6

Key questions for every organization

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Strategic planninghorizon (5-10 years)

Today

Base Base

Future

M&A

Innovation

Growth GAP

1. What is your growth target?

2. How much should come through innovation?

3. Do you know the growth you are getting from you innovation pipeline?

4. Is there a gap?

5. If yes, what are you going to do about it?

Innovation process needs to be business value driven

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Stage 2 Stage 4 LaunchStage 3 Stage 1 R

18 – 24 months

2nd business case +- 30%

Committed BC(+-10%)

Business case development and project planning Development

G GGG

Idea generation Scoping Feasibility Dev. and scale up and regist.

Launch plan(+-5%)

Cum. Project cost

1st business case +- 50%

Post Launch Review

3-10% of project cost

90-97% of project cost

In a well working pipeline 30% of projects are stopped and 30% finish every

year - Need a flexible system to re-allocate these resources to new projects

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• When ideas are mature enough (Gate 3) they request funding from the flexibudget

• Consumer value proposition • Credible development plan

• Developed business case

• When a project gets stopped the resources return to flexibudget3

Committed projectsNon-committed projects

Early stage projects Late stage projects

Not budgeted, only seed money to move projects forward (+internal resources)

Budgeted projects, projects fully funded to ensure project delivery

Non-allocated FLEXIBUDGET

pool

GATE

Feasibility Development Launch

Cumlative project cost

Flexibudget principles

Stopped poject resources return to flexibudget

Allocated seed budget for early stage projects

Flexibudget owned by CEO

After all this – you have a system where numbers are owned by the business,

are as reliable as they can be, and people are executing against them

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P

P

P

NPV 1

NPV 2

NPV 3

NPV 4

NPV 5

1st simulation

2nd simulation

3rd simulation

…

Run Xn

simulations to produce a distribution of all possible NPVs

NPV

Pro

ba

bilit

y

Continuous distribution of all possible outcomes and their probabilities

Since input variables can also be varied or defined as a range with probability distribution, Monte Carlo simulation also includes a sensitivity analysis

The value of input variables as well as the route taken through the decision tree is determined by a random number generator, subject to the allocated probabilities

Variable 1

Variable 2

Pro

bab

ility

Pro

bab

ility

…

Good project valuation (ideal)

95% certainty

TODAY FUTURE

Leads to great pipeline decision making

95% certainty

TODAY FUTURE

Business unit A Business unit B

Tail-end for re-investment

Project pipeline

How can you implement R&D portfolio

management?

Services and Deliverables

Juhani Lehtonen GloCell Oy 11

Facts about Successful Innovation Development

• Innovation is the key to long term success

• The best companies can create 10-fold value with innovation compared to M&A

• We’re talking about business and especially about growth

• This cannot be outsourced to special Innovation department or R&D

• The process of increasing the innovation maturity is long, politically difficult and strategic

• Company top level commitment is a must for success


It is a growth process - maturity levels

• Level 1 – First development process, no shared ownership, no buy-in from senior management (R&D driven)

• Level 2 – Commonly cross-functional alignment on process, first simple criteria on project selection (political decision making), front-end of innovation being built

• Level 3- Cross-functional process established with front-end process, portfolio process in place, first transparency and portfolio based decision making, no strategic steering of the portfolio

• Level 4 – Processes part of daily life, automated data handling, project selection/decision making being tied with corporate strategy

• Level 5- Portfolio data guiding strategy development, sophisticated portfolio analysis methodologies to assess optimums in terms of risk and return


It is a growth process with it‘s normal pains and gains


Neg

ati

ve

Po

sit

ive

Neutral

Maturity Level 1

Maturity Level 2

Maturity Level 3

Maturity Level 4

Maturity Level 5

Breakeven

Perceiv

ed

Ben

efi

t A

ccru

ed

18-36 months

10 months

16 months

24 months

36 months

Implementation of 6 Principles

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Key principles Main benefit In terms of transparency

Front-end, business value driven innovation process

Value driven product development and early stage idea of project value

Get project specific valuations, rNPVs

Capability to understand and scope value in the front end

Manage projects to try to create business value not interesting results

Risk perspective, different options, scenarios/options

Clear roles, responsibilities and accountabilities in the whole value chain from idea to sales

Alignment with business prioritiesOwnership of the numbers, trusting the numbers

Process of giving money and resources to value adding activities

Funding only value (as opposed to pet projects, politics)

We are not making up numbers for nothing – there is money and resources available for projects if we find a good quality business case

System to constantly re-allocate free resources to new business opportunities

High efficiency of resource use, competition for very limited resource

Bad business cases are identified, and stopped

All tied in with personal objectives and compensation

Holding each other accountable for results

Numbers mean something as people need to deliver the projections

#1

#2

#3

#4

#5

#6

Overview of steps and schedule: iterative

• Step 1 – Planning of the process

• Finding the most critical development areas

• Setting the targets for portfolio development

• 1-3 months

• Step 2-N – Implementation of “6 principles”

• Process alignment and creation

• Tool creation and implementation

• Maturity level development

• 12-36 months

• Step N+1 – Handover to customer

• Case by case support

• Special assistance

Juhani Lehtonen GloCell Oy

Outcome

1. Innovation process that is focused on business value creation

2. Capability to do correct product project valuations

3. Way of working where ownership of the data is with the business owner (P&L accountable)

4. Way of working where all stakeholders are executing and held accountable for delivering the numbers

5. Process where portfolio data drives decisions with consequences – budgets will be given or taken away based on the data


Thank you

Let’s create growth!

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