Innovation Portfolio Management:

Balancing Value and Risk

The Growth Team Membership (GTM)

GTM is a subscription program that GTM provides best practices, events, and
supportsexecutives within the functionsthat services that enable executives to address
report tothe CEO challenges within their companies
CEOs Growth Team GTM: Creating Client Value

GTMs case-based best practices help executives:

R&D/
R&D/
Innovation
Innovation

Corporate Sales
Strategy Leadership Speed the design and implementation of initiatives
by not reinventing the wheel

Marketing
CEO Corporate
Development
Save money and reduce risk by avoiding mistakes
made by other companies

Investors/ Market Accelerate problem-solving with a crossindustry

Finance Research
perspective
Competitive
Intelligence
Improve their functions and companies
performance and productivity

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SmartOrg

Software and Services to help you discover your most valuable opportunities.
SmartOrg provides solutions for the economic evaluation of opportunities, especially
when the future is clouded with uncertainty. Customers use SmartOrg to build
their capability in driving innovation from idea to commercial result, and in selecting
projects and improving returns in their portfolio. Customers include Boeing, Chevron,
Dow Agrosciences, Bayer, HP, Scholle, and Teva. Our flagship application, Portfolio
Navigator is an agile decision support system for project and portfolio evaluation.
For additional information, please visit www.smartorg.com or
send email to info@smartorg.com

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Profiled Best Practice Company

Beta Inc.

Firm: Beta Inc.*

Industry: Information and Communication Technology
Headquarters: United States
Geographic Footprint: Global
Ownership: Public
Revenue (2011): $35 billion USD

* Beta Inc. is a pseudonym. All data in this guidebook are illustrative.

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Growth Challenge

Problem:
Beta seeks to generate better returns from its product portfolio
(both existing products and those still in development). However, the
company struggles to evaluate and compare the value and risk of all
projects, which hampers funding and decisionmaking.

* Risk is defined as the range of uncertainty around the commercial value of the project.

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Betas portfolio management process evaluates projects individually and as part of
the innovation portfolio
Innovation Portfolio Management Process and System

Process Owner
ROLE
Facilitates and maintains the portfolio
management process and system Screen Project
Evaluate Project
Executive Team
ROLE
Sets the companys innovation strategy
Portfolio
and manages the innovation portfolio
Management
System
Track
Project Teams Calibrate
Progress
ROLE Information
Develops the project and tracks its
metrics in the Portfolio Management
System

Calibration Committee Adjust the Balance the

ROLE Portfolio Strategy Portfolio
Conducts a peer review of all the
projects in the Portfolio Management
System before prioritization and
funding decisions are made
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 Limit entry into the portfolio management process

Screen Project

Portfolio Screening Criteria

Is there a market opportunity? Can we win? Can we make money?

The process owner evaluates the projects The process owner examines Betas The process owner benchmarks the
potential based on multiple attractiveness competitive position in the projects projects forecasted values against the
indicators. designated market. investment hurdle for its Life Cycle
StageEmerge, Grow, or Mature.

Market Attractiveness Indicators Competitive Advantage Indicators Investment Life Cycle Stage
Hurdle EMERGE GROW MATURE
Market need Does it fit with our strategic Productivity
direction? Rate (NPV/ >5 >10 >15
Cost)
Market size Does it take advantage of our core
Payback <10 <8 <6
competencies? Years

Market growth rate What is our market share?

What is our brand presence?

Market saturation
Do we have appropriate
distribution?

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Establish proof points to assess the chance of success at each product development
phase
Evaluate Project Proof Point Development
Case in Point: Mark
PROOF POINTS
Proof Points allow the Project Team to determine project viability and anticipate difficult development phases. The Project Team
uses the following question as a prompt to identify proof points:
What would you want to know before mortgaging your house to fund theproduct?

Product Chance
Cost
Development Proof Point Duration of
(USD)
Phase Success
If the integration goes smoothly, we should have a Increase the
60% chance of completing the pilot phase. Due to predictive
the loyalty of our customers, it will be easy to find five performance $1
current customers to participate in a pilot of Mark. Demo of three major One Year million 50%
marketing
Project Team campaigns by
50%
In my judgment, we have a 50% Prove product
chance of successfully completing marketability Three $2
the demo. We just acquired Pilot through a 60%
months million
a technology that allows us to pilot with five
analyze social media chatter. customers
Sign up three
major marketing $5
Distribution agencies to One Year 80%
million
Securing three major marketing agencies to distribute distribute the
Mark will be easy. I think we have an 80% chance of product
completing the distribution phase. Overall Chance of Success 24%

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Estimate the projects commercial value using a concise, fixed set of indicators

Evaluate Project

Forecasting Commercial Value Workshop

Seven Indicators Discuss Estimate Document

of Commercial Value
1. Total available market The Project Team discusses The Project Team estimates The Project Team documents
the available evidence on high, base, and low values for the rationale for the range of
2. Market penetration theproject. each of the seven indicators. uncertainty.
3. Potential market share
4. Market duration
5. Unit price
6. Fixed annual cost Range of Uncertainty
7. Sales and marketing costs Indicator High Base Low
Potential
market 40% 25% 10%
share
Project Team

Our market share could be as low However, since there is little competition in this space,
as 10% if competitors get to market our market share could be as high as 40%. We seem
before we do. most likely to garner approximately 25%.

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Pinpoint the indicators with the greatest impact on a projects
netpresentvalue(NPV)
Evaluate Project
Tornado Diagram
Case in Point: Mark

Commercial ContributionNPV ($ million)

(50) 0 50 100 150 200 250 300

Total Available Market (thousands of units)
Potential Market Share (percentage)
10
Unit Price ($ thousands) 20
5 20 The longer bars signify factors
who have high levels of uncertainty
40
and impact on the projects Base
Case NPV.
60

Market Penetration (percentage) 0.1 0.3

Market Duration (years) 4 10 The smaller bars signify factors

with less uncertainty and a lower
Fixed Annual Cost ($ millions) 7 3
impact on the NPV.

Sales and Marketing Cost ($ millions) 30 10

The width of thecombined
uncertainty bar indicates the
Base Case = 84
overall uncertainty of the projects
commercial value: downside risk
Combined Uncertainty
and upside potential.

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 Improve project value and reduce risk by addressing the areas of
greatestuncertainty
Evaluate Project Project Refinement
Case in Point: Mark

Initial Evaluation Clarification Adjusted Evaluation

The total available market, potential To refine its assumptions, the By adjusting the total available market,
market share, and unit price have the Project Team: unit price, and potential market share
highest ranges of uncertainty and are the values, the downside risk is reduced and
greatest sources of risk. the Base Case NPV of the project is
increased.
Organizes a
Commercial ContributionNPV ($ million) Commercial ContributionNPV ($ million)
(100) 0 100 200 300 400 500 600
conference on social (100) 0 100 200 300 400 500 600
media data analysis
Total Available Market 5 20 Potential Market Share 15 45

Potential Market Share 10 40 Surveys 1,000 social Unit Price 30 80

Unit Price 20 60 media professionals Market Penetration 0.1 0.3

on their data analysis
Market Penetration 0.1 0.3 needs and product Total Available Market 10 25

Market Duration 4 10 use Market Duration 4 10

Fixed Annual Cost 7 3 Fixed Annual Cost 7 3

Conducts in-depth
Sales & Marketing Cost 30 10 interviews with Sales & Marketing Cost 30 10

Base Case = 84 20% of the survey Base Case = 250

respondents
Combined Uncertainty Combined Uncertainty

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 Use peer reviews to ensure project team assumptions are credible and comparable

Calibrate Information Calibration Committee Review

Case in Point: Mark versus Fly

Compare Mark to Compare Mark and Refine Marks Assumptions

the Portfolio at Large Flys Indicators andExpectations

Commercial ContributionNPV ($ million) Commercial ContributionNPV ($ million) Commercial ContributionNPV ($ million)

Mark
(500) 0 500 1,000 1,500 (500) 0 500 1,000 1,500 (500) 0 500 1,000 1,500

Fly Unit Price Flow

($ thousands) 30 Mark 80 Base Case
Flow Mark = 490
Project Project
Mark Base Case = 250 Fly (500) 0 500 1,000 1,500
Fly

Life Unit Price Life

($ thousands) 70 Fly 125
AB AB

Zoom
Fly and Mark are targeting the
same industry, but their assumptions
about the unit price vary widely.
According to the Portfolio Management
System, the Fly Project Team researched
Calibration pricing models for this industry. Therefore, we
Committee
trust the Fly teams assumptions about the
Why does Fly have a better upside
unit price, and we should use its pricing model
potential than Mark?
for Mark. We should use this pricing model
for future projects in this industry as well.

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 Prioritize all projects for funding in the portfolio based on their comparative value,
cost, and uncertainty

Balance the Portfolio

CFO Chart: Commercial Contribution Chart:

Measures Investment Productivity Compares Combined Uncertainty

The CFO Chart permits apple-to-apple comparison by classifying each project as The Commercial Contribution Chart
high, medium, or low investment productivity and plotting them in descending order ranks projects combined uncertainty
of productivity. bars, by their Base Case NPV, to
underline risk and potential value.

High
Medium Productivity Commercial ContributionNPV ($ million)
Productivity Low Productivity Projects
Projects
Projects (500) 0 500 1,000 1,500

Life Flow
600 Zoom
AB Mark
500 Mark
Flow Fly
Cumulative 400
Project
Value ($ Life
million) 300
Fly
200 AB

100 Zoom

0
0 5 10 15 20 25 30 35 40 45
Cumulative Cost ($ million)

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Assess the portfolios ability to meet strategic and business line goals

Balance the Portfolio

Managing Portfolio Mix Project Value by Product Line

The Executive Team assesses the portfolio mix using the The Executive Team conducts a side-by-side comparison of
following classification scheme: Bread & Butter, Oysters, Pearls, the projects in each product line to assess potential value,
and White Elephants. product mix, and gaps.

Bread & Butter (B & B) Pearls (P)

The red lines indicate the product
lines projected financial goals.
1.0 450
B&B P
0.8 Fly
300
0.6 Life
Chance of
Success Project Value Zoom
Fly
0.4 ($ million)
Trim Flow Life
Zorfus 150 Trim
Morph Morph
0.2 Mark
Flow Mark
WE Zoom O Zorfus
0.0 0
0 200 400 600 800 1,000 Data ERM Mobility Social Media
Project Value Given Success Warehouse
(NPV $ million) Product Line

White Elephants (WE) Oysters (O)

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Adjust financial goals and resource constraints to optimize the portfolio

Adjust the Portfolio Strategy

Portfolio Strategy and Long-Term Financial Goals

Will we meet our revenue goal? What can we do to meet our goals?

The Executive Team assesses the portfolios ability
to meet the companys financial goals.
Our goal is to generate $500
million in revenue from
innovation by 2015. However,
the expected value of our
portfolios revenue for 2015 is
only $250 million. We need
to identify ways to improve
the portfolios value.
The Executive Team can use several options to improve the portfolios value:
Adjust the portfolio strategy Improve risk-adjusted value
Improve the Chance of Success
for the projects in the portfolio.
If we hire an external marketing
team to assist with Fly, Mark, and
Life, we will have the resources we
Executive need to support these projects, Executive
Team ensure they meet their proof Team
points, and achieve our goals.

Expected Value ($ million) Cumulative Project Resource Requirements

2012 2013 2014 2015 Portfolio Projects

Revenue 0 6 54 250 Zorfus Fly Mark Life

Cost 0 5 47 202 Productivity 94.63 71.18 15.25 2.3

Profit 0 1 7 48 R&D FTE 3.6 4.8 8.4 12

Cumulative
Marketing FTE 2.7 4 6.7 9.4
Resources
Non-staff Cost $5.9 $10.9 $16.8 $22.7
RedTotal
values
Cost indicate$6.5 $11.5 $18.1 $24.6
resource restraints.
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Revisit assumptions and refine projects based on their commercial value and
impact on the portfolio mix
Track Progress

Annual Value-Tracking Assessment Track Portfolio Mix

Case in Point: Mark Case in Point: Mark

The Executive Team assesses how each projects

The Executive Team conducts annual in-depth project reviews for projects
role in the portfolio shifts and adjusts the
with a +/-10% difference invalue.
portfolio strategy accordingly.

450 Fly 1.0

Improved P
B&B
Mark
0.8 Fly
300 Mark
Current Project 0.6
Value (NPV Chance of Trim
$million) Success
0.4
150 Trim Flow Flow
Life Morph Zorfus
Zorfus 0.2
Morph Worsened
Zoom WE Zoom O
Life
0 0.0
0 150 300 450 0 200 400 600 800 1,000
Previous Project Value Current Project Value Given
(NPV $ million) Success (NPV $ million)

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Business Results

Portfolio Performance Metrics Portfolio Return

10 20
2010 2011 Improvement 30 15 2011
60
8
Ideas screened 20 35 60% $2 billion

Shareholder 6 2010
Projects approved 10 15 50% Value ($100 5
for development 10
millions) 4 50 15
Numbers in red signify the
Projects launched 3 6 100%
2 investment productivity for
each project.
Projects terminated 4 8 100% 0
0 50 100 150 200
Average Investment
($millions)

Project Management Improvement

The portfolio management process has helped Beta:

Reduce the amount of time it takes a project to move through the innovation process
Portfolio
Management System Improved efficiency by removing four man years of overhead effort from the annual
portfolio cycle
Conduct consistent project evaluations, including comparison of different types of
projects for funding decisions
Weed out underperforming projects quickly
Facilitate cross-regional projects

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17
 Access the full Best Practice Guidebook

growth team m e m b e r s h i p
growth team m e m b e r s h i p
best practice guidebook 12
growth team m e m b e rBest Practice
s h i p Guidebook
3 best practice guidebook

Innovation Portfolio Management:

Beta
Balancing Value and Beta
Inc. management process evaluates projects individually and as part of the innovation portfolio
Contents
Betas portfolio
Risk Inc. Innovation Portfolio Management Process and System
For the full version ofOverview
the Page 3 HEADQUARTERS United States
Beta Process Owner
Inc.* GEOGRAPHIC FOOTPRINT Global
Screen Project 4 Challenge Solution
guidebook, please click here. COMPOSITION
INDUSTRY OWNERSHIP Public
Evaluate Senior product development
Project 5 manager and a staff of
The Guidebook includes:
Information and EMPLOYEES
Beta seeks to generate better returns
two experienced engineers
Communication Technology
from(2011) 10,00015,000
its product Beta implements a six-step portfolio management
Calibrate Information
ROLE 9 portfolio (both existing products and those still in Screen Project
process to focus on the most Evaluate
valuable Project
opportunities.
Full content and REVENUE
guidance
Balance
(2011) Facilitates and maintainsdevelopment).
the Portfolio
$35 billion USDprocess and system 10
the portfolio management
However, the company struggles to Screen new and ongoing Model each projects
evaluate and compare the value and risk of all projects,projects for entrance value via seven
Key Lessons Learned Adjust the Portfolio
which hampers funding and decision-making. into the Portfolio
Management System
indicators and ranges of
StrategyExecutive Team 12 uncertainty
Tools and Resources COMPOSITION
Track Progress CEO and senior management
13 Portfolio
Section Applicability to and Finance
Manufacturing,
in R&D, Marketing,
Solution Components Management System
Business Results 14 Business Results Resources Required
Executive Functions
ROLE
Track Progress
Key Lessons Learned Sets the companys
15innovation strategy and manages
the innovation portfolio Adjust the
Screen EvaluateUpdate
100% increase in products Calibrate
information
successfully launched Balance the
Process ownerPortfolio Track
and small processCalibrate
team
Supporting Tools R&D/ Project Project annually to review
Information Portfolio
portfolio management Progress Information
30% increase in the portfolios return on Strategy and qualityConduct
assurance
a peer review
& Resources Innovation
R&D/ 16 projects that are over-
Project Teams
Innovation
investment (ROI) Portfolio Management Softwareportfolio of the projects in the
Corporate
Glossary
Corporate of TermsSales 16 or under-performing
Strategy
Strategy COMPOSITION
Leadership evaluation and tracking Portfolio Management
Representatives from R&D, Product Launch, The Portfolio Management System to validate
Investment Criteria
by Life Cycle Marketing,
Stage Sales, Betas Key Lessons Learned
17and Finance; each team is led
System is a project evaluator and assumptions and refine
Marketing
CEO Corporate
by a Project
DevelopmentLeader who reports directly to the portfolio analyzer that executive projects
How to Build Executive a Team and project teams use to track,
There is no perfect portfolio management process. Instead focus on agility and the business impact of your
assess, and refine innovations.
Tornado
Investors/ Diagram Market
ROLEResearch 18 portfolio. Then iterate at each portfolio cycle, always improving and increasing project and portfolio value.
Finance

SmartOrgCompetitive Develops the project

19 and tracks its metrics in the
Portfolio Management System
Intelligence Successfully combining portfolio and project management requires the right balance of people, process, and
Adjust the Portfolio
systems. Over- or under-resourcing any of these areas may undermine the success of the other two. Too much
Strategy Balance the Portfolio
attention to systems can lead to excessive documentation, and a disproportionate focus on processes can result
Calibration Committee
Contact the Growth Team Manage Membership
resource (GTM) Prioritize projects and and slow
in automating obsolete approaches. Finally, too much attention on
constraints and modify
people can lead to an ad hoc system
COMPOSITION down the process. balance the portfolio
the portfolio strategy based on value,
Project Leaders; select technical, market or topical
experts; and the Executive Team GTMresearch@frost com www gtm frost com uncertainty,
twitterand strategic
com/Frost_GTM
READ MORE goals
ROLE
* Beta Inc. is a pseudonym. All data in this guidebook are illustrative.
The contents of these pages are copyright
Conducts a peer review
2012 Frost
of all&the
Sullivan.
projectsAllinrights
the reserved.
Portfolio Management System before portfolio
The contents of theseprioritization
pages are copyright 2012decisions
and funding Frost & Sullivan.
are madeAll rights reserved. Source: Beta Inc.; SmartOrg; Growth Team Membership research.

The contents of these pages are copyright 2012 Frost & Sullivan. All rights reserved. Source: Beta Inc.; SmartOrg; Growth Team Membership research.

The contents of these pages are copyright 2012 Frost & Sullivan. All rights reserved. SmartOrg; Growth Team Membership research.

18