By Tarun Soni
Much has been written about technology strategy as well as research and development project valuations. Yes, allocation of scarce resources towards research and development priorities remains more of an art – with a zero-sum game behavior dynamic.
The tension that exists is usually between the urgent and the strategic, the known certain (relatively speaking) ROI and the unknown uncertain ROI – and most organizations attempt to resolve this with business cases. However, a pure business case based prioritization biases the choices towards the tactical, near term choices – another manifestation of the disruptive technology dilemma described by Christensen.
On the market front this bias manifests itself in the tendency to fund efforts that apply to existing, well understood markets often at the expense of emerging markets. On the technology front, there is a tendency to fund existing product maturation since that is well understood and has a clear path to a deliverable – often at the expense of either infrastructure or disruptive innovation. In the financial world, this would be the equivalent of investing only in Treasury bills, since the returns are known and without risk.
The financial world then gives us a hint on how to handle this conundrum – portfolio management. Each of the market/technology options in the above matrix become specific classes with some risk reward position, and hence they can be treated as part of a portfolio. And R&D investments can be defined as fractions for each part of the portfolio. The actual risk position for the full portfolio can be defined based on corporate priorities – for example a startup may choose to have a different risk posture than a highly mature corporation.
An example portfolio may choose to use specific allocations. On the market front they may look like “60% for existing markets, 30% for adjacent markets and 10% for emerging markets”. Similarly on the product front a portfolio may choose to invest as “15% for infrastructure, 50% for product maturation, 15% for capability demonstrations and finally 20% for disruption and innovation”. Such an allocation then produces a portfolio that notionally spreads R&D Investments as shown in the figure. Note that any investments into infrastructure and tools (if treated as part of the R&D budget) should span all markets and product development needs.
Putting this into practice requires some specific steps in the planning phase. [1] Choose a ratio of investment priorities across the landscape before selecting the actual investments and projects. [2] Classify investment projects into the above categories. [3] Accept that there will be some ‘known good ROI’ projects that land up being unfunded in exchange for some speculative innovative efforts.
Clearly the boundaries for these classifications contain a lot of gray-zone space and additional efforts towards developing projects that can feed multiple spots in the landscape can find more efficiencies – especially in the ‘more certain’ side of the matrix.
Digging deeper
1. Christensen, C. M. The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail. Boston, MA: Harvard Business School Press, 1997.
2. “Is It Real? Can We Win? Is It Worth It? Managing Risk and Reward in an Innovation Portfolio,” George Day, Harvard Business Review, December, 2007.
3. Cooper, R.G., Edgett, S. J. & Kleinschmidt, E. J. Portfolio Management for New Products, 2nd Edition, Cambridge MA.
About the Author
Dr. Tarun Soni is a Fellow at Northrop Grumman Corporation and Chief Engineer for their Communications Business Unit. He has a doctorate degree from the University of California, San Diego, and an MBA from the University of California, Los Angeles. The views expressed are those of the author and do not reflect the official policy or position of Northrop Grumman Corporation. Contact him at tarun.soni@ngc.com.
