NPD Tales

Ideas Thoughts and Comments on Product Development

Increasing NPD Productivity – Portfolio (4 of 5)

Portfolio Management when applied to new product development is simply a multivariate analysis of the factors that determine the importance of a new product development opportunity and a method of assigning a priority to each opportunity.

At it’s basic level it should involve some quantitative analysis of the forecast revenue, profit and return on R&D investment.  The biggest challenge here is to get accurate sales forecasts, it’s usually easier to predict R&D costs.  I have seen analysis that has used simple statistical analysis of the product financials to take into margins of error for the forecasts and estimates.

More complex analysis of qualitative factors (like technical risk, existing market fit and strategic value) can be achieved by assigning quantitative values to them.  At this point the analysis becomes much more interesting – advanced visualisation can be used to determine the viability and priority of each project against the whole portfolio and where it fits in the overall innovation strategy.

portfolio management bubble

Of course it’s important not to get carried away – an incremental approach of starting simple and increasing the complexity of analysis over an extended period of time can deliver early benefits before finding the optimum level.

Prioritising Projects

In product development departments why do we run several projects concurrently?

The explanation that stands up to most scrutiny is that it ensures efficient use of resources – you don’t want your embedded software programmers sat around idly waiting for the target hardware to be completed.

Then of course there’s the argument that putting too many people on one project generates an overhead that affects productivity.

But all too often the opportunity to prioritise one project over the others and reduce the time to market is ignored or only explored when the project is running late…

Economic Analysis

At some point during the start of the product development process, most organisations will review the financial details of a potential project.  Generally, the key figures are associated with product cost, sale price, volumes and development cost.  These will be analysed to provide figures for margin, overall revenue and payback period.  These figures will provide indication as to whether the development project should go ahead.

For most manufacturing organisations the analysis is based on the assumption that the product revenue is realised only at the point at which the product is sold.  More astute manufacturing organisations exploit opportunities to gather recurring revenue based on their products and this can greatly increase the viability of product development projects.

More interestingly, I was recently involved with organisations that primarily provide services based on third party products.  Financial analysis of the development of their own bespoke products with lower cost, increased performance and hence increased recurring revenue identified some very lucrative opportunities.

New product development is not just for manufacturers…