How Much Risk Is In Your New Product Development Portfolio?
Developing and launching innovative new products is a risky business. Even with an abundance of innovation literature and know-how, success rates for new products is disappointingly low (see “research on new product success rates” below).
But not taking measured risk to pursue innovative new products leads to stagnation and eventually declining growth! An equally unacceptable risk and outcome. A company, especially a high-tech company, trying to eliminate risk by sticking to tried-and-true products and technologies will design themselves right out of business.
So the solution isn’t to eliminate risk in your product development portfolio but to properly manage the risk. Just like managing your investment portfolio, a balance approach of high risk, high return innovations and low risk, moderate return product line extensions provides predictable results.
Research On New Product Success Rate
The industry track record for launching innovative new products is disappointingly poor. Though there have been countless research projects studying success rates, it turns out that the results of these reports are all over the map. For example, here are some often cited results:
One in every 58 ideas
– Booz, Allen & Hamilton
One in 3000!
– Stevens and Burley
One in 11 ideas
– R.J. Thompson
One in 7 ideas
– A. Griffin (PDMA Best Practices)
(Of) approximately 16,000 new products introduced each year, less than one in ten are successful
– Ayers et al., 1997
Clay Christensen states in his book “The Innovator’s Solution” :
“Over 60 percent of all new-product development efforts are scuttled before they ever reach the market. Of the 40 percent that do see the light of day, 40 percent fail to become profitable and are withdrawn from the market.”
“By the time you add it all up, three-quarters of the money spent in product development investments result in products that do not succeed commercially.”
Why so much variance in the research results on innovation success rates?
The simple explanation is that it’s a matter of definition:
At what point do you start the measurement?
When the idea is drafted into a preliminary concept statement?
Or when the idea first pops into your head?
Or only when the product concept begins formal development?
What is the definition of new product?
New to world? (white space product)
New to market product?
Product improvement/cost reduction?
And what’s the criteria and definition for success?
Met or exceeded profitability forecast in the business case?
Was at least profitable? – i.e. we didn’t lose money?
Was a lost leader but good learning opportunity and provides future market inroads where we will be profitable?
“Not everything that counts can be measured. Not everything that can be measured counts.”
— Albert Einstein
To manage your project portfolio risk, you need to define and agree amongst your team on what to measure and then how. One of the first decisions you need to do is classify the types of projects in your portfolio by risk/reward relationships to create strategic buckets that you can track and measure. The strategic buckets will provide visibility to where your dollars are being invested and the returns from each project within the strategic buckets.
At the end of each year (or quarter), your team should do a portfolio review and create an innovation report assessing your portfolio performance. Based on the facts, you can then rebalance the strategic buckets as necessary.
What categories should you use for your strategic buckets?
There are any number of ways to categorize your development project types. The key is to make the definitions unique enough that they have meaningful differentiation form each other. And simple enough so everyone will understand what they are so they can be managed in the right context. Here’s a suggested schema you can start with in defining your strategic buckets.
1) Line Extensions: Improvements to existing offering in existing markets. These projects are a combination of “safe bets” and “cash cows.” Every portfolio needs these. But if you have too many of these, you won’t be able to keep up with the competition who will eventual create new innovations to redefine the rules of the game where you can’t win anymore.
2) Sustaining Innovation: This is similar to line extensions except that it requires significant technical R&D investment along with associated risk. In a growing market, competitors can compete along “vectors-of-differentiation” for quite some time and sustain market leadership. But as Clay Christensen noted in his book “The Innovators Dilemma,” eventual these vectors-of-differentiation over serve an existing market leaving new promising markets ripe for a competitor with a disruptive solution.
3) Adjacent and “new-to-you” innovations: These either extend existing products to new markets or leverage existing capabilities to bring new solutions to existing markets. They are good bets both in terms of upside potential and your firms ability to execute.
4) Disruptive and “new to world” innovations: These reframe markets and creates new ones. They are high risk bets but have tremendous upside potential. Taken alone (i.e. all your investments go into this bucket), they represent too much risk for most companies. But when blended with the other strategic buckets, these projects add diversity to your overall portfolio lowering the risk that your company will get blindsided by a disruptive solution.
When all rolled up at the end of the day
A well balanced project portfolio will provide predictable growth year over year. While perhaps not as stunning as hitting a grand slam, an occasional strikeout won’t send you packing either. If the goal of your company is to be a long-term player, then a balance approach will keep you in the game for the long-haul.
Stay balanced and compete to win!