Quantitative Diagnostics of a Product Portfolio and Creation of Innovation Agenda Mikhail Verbitsky and Patrick Casey GEN3 Partners,

Boston, Massachusetts 1. 2. 3. 4. Introduction. Portfolio mapping: how to compare apples and oranges? Trends of technology evolution as the planning tool Synergy of technical challenges: how many birds can you get with one stone? 5. Innovation prioritization strategy 6. Epilogue 1. Introduction It is now widely believed that innovation is the last resort that is still available for American manufacturers to survive in the competitive marketplace, and the amount of R&D resources allocated for product innovation has grown significantly during the last few years1. Naturally, the optimal allocation of these resources is of vital importance. At the same time, though innovation itself is often associated with employment of the most brilliant minds, and with development and utilization of the most advanced technologies, materials, and techniques, innovation planning is not very different from what it was years ago. Very often, it is simply based on a best judgment of those who are involved in decision making. The best judgment approach is particularly vulnerable to two types of error: (1) spreading scarce development resources over a lot of low-leverage maintenance projects, and (2) overlooking highleverage opportunities to improve current products in favor of apparently greener pastures. This is not for lack of new product portfolio management methodologies. The problem with most of these methodologies is that they rely on detailed financial projections for prospective products, which are notoriously inaccurate. It is simply not practical to accumulate and verify the information required for these models. At the other extreme are subjective scoring systems, which are quick to implement but can easily degenerate into an accumulation of unsubstantiated guesses. Prevailing methodologies often focus exclusively on new product proposals. As a consequence, they fail to account for all the opportunities present within

the existing product portfolio. Existing models also often dont account for synergies between prospective development efforts. In this paper, we will describe a structured approach that would allow corporate R&D planners to systematically build an innovation agenda. We offer a methodology for innovation planning that (1) focuses on growth through innovation, (2) uses readily available information as business metrics (3) takes full account of the opportunities to improve upon current products, and (4) addresses synergies between new development efforts. The related metrics are rigorously and consistently applied to generate an objective assessment concerning which products are the best targets for innovation. 2. Portfolio scanning: how to compare apples and oranges? Making a decision about resources allocation between different products implies that we are going to compare these products against each other. However, how can we compare hundreds or thousands of different products that comprise the companys product portfolio? They all often have different specifications, different prices, different markets, and different consumers. How can we compare apples and oranges? This is a very delicate, nontrivial, and interesting question. In fact, we are used to applying the expression to compare apples and oranges when we want to describe a wrong approach, or as a symbol of the impossible. In reality, we can compare apples and oranges, oranges and airplanes, airplanes and garbage bags, everything with everything, but only in terms of parameters which are common to all of them. Therefore the question about how to compare different products in a product portfolio can be translated into a question: What are the parameters which are common to all of the products in the portfolio? There are a few of such parameters. We will operate with three of them: (a) Every product has functions it is meant to perform, and therefore, the measure of how well a product performs its functions can be applied to every one of the products. We will call this parameter functional performance. Generally speaking, functional performance can be calculated in terms of any parameter. For our purpose of innovation planning, though, it is important to introduce at this point a products main parameters of customer value or MPV. MPV are those attributes of a product that represent its most critical functions and have the greatest significance in a customers purchasing decision. We will define innovation as significant movement along the Main Parameters of Customer Value. The implication of this definition is as follows: if we improve performance of our products in terms of not just any parameter, but MPV, we have a

much better chance of increasing or maintaining our market position through either share gain or price/margin enhancement. We will use the following measure of performance in terms of MPV: MPV Performance (P) is the average of performances relative to each MPV, weighted by the importance of each MPV. A perfect score is 1.0.

1 N P = i pi ; i = 1; pi 1..10 , NN = number of MPV = number of MPV 10 i =1 p i== performancrelative to to Major Parameter of Value i performance e relative MPVi i==importance ofof Major Parameter of Value i importance MPVi
(b) Every product has its price, but the price itself cannot be very useful for our comparison purposes, because airplanes will be always significantly more expensive than garbage bags. What is common between different products is not simply a price, but how their price relates to the price of comparable competitive products. We will use the following measure of the relative price:

Pricerelative =

$ $

Price

<Pricecomp>

<Pricecomp> = Average of Competitor Price With these two measures, all the products in a portfolio can be compared on the same scale. As an example, we have analyzed a portfolio of a company producing home appliances.

Product Line Inventory

Mobile phone Digital camera Iron Juice extractor DVD player Hair drier Vacuum cleaner Refrigerator LCD TV set

Microwave oven Video camera Washing machine Electric shaver Electric kettle Dishwasher Toaster Blender Meat grinder Coffee machine

Though these products are not as different as airplanes and garbage bags, there are significant differences between them in terms of their functions, specifications, prices, etc. For each of these products, we identified their MPVs, market requirements with regard to these parameters, product performance relative to the market requirements, performance of the competitive products, their prices and competitors prices. Note that prospective products are easily incorporated into the map if we have estimates for these parameters. The results of the analysis are shown on Figure 1.

Major Products Landscape

0.85
Mobile phone Digital camera Iron Juice extractor DVD player Hair dryer Vacuum cleaner Refrigerator LCD TV set Microwave oven Video camera Washing machine

MPV Performance relative to market requirements

0.80

0.75

0.70

Electric shaver Electric kettle Dishwasher Toaster

0.65

Blender Meat grinder Coffee maker

0.60 0.75
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0.80

0.85

0.90

0.95

1.00

1.05

1.10

1.15

1.20

1.25

Relative price
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Figure 1 We can see now that some products from this company portfolio (e.g., meat grinder, blender) provide high value for the consumers: they have relatively high performance in terms of their MPV and are significantly less expensive than their competitors. Some products (such as, for example, refrigerators and video-cameras) provide low value for their consumers: they have low performance in terms of MPV and they are more expensive than their competitors. Instead of a products individual performance, we can also consider how its performance relates to its competitors performance:

Prelative =

P <Pcomp>

<Pcomp> = Competitor Performance Figure 2 shows the portfolio landscape where the vertical axis is a products performance relative to its best competitors performance, and the horizontal axis is the relative (normalized to best competitor) price.

Major Products Landscape

1.25 1.20
Mobile phone Digital camera Iron Juice extractor DVD player Hair dryer Vacuum cleaner Refrigerator LCD TV set Microwave oven Video camera Washing machine Electric shaver Electric kettle Dishwasher Toaster Blender Meat grinder Coffee maker

Relative MPV Performance

1.15 1.10 1.05 1.00 0.95 0.90 0.85 0.80 0.75 0.75

0.80

0.85

0.90

0.95

1.00

1.05

1.10

1.15

1.20

1.25

Relative price
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Figure 2 The median line on the graph represents the line of equal value: products below this line provide less value to customers than do competitors products, and products above this line provide more value than competitors products. Interestingly, some products of our portfolio (e.g., video-cameras), though they do not provide very high value to customers, are still doing better than competitors products. Note that in particularly dynamic markets, we may want to compare products to projected competitive performance. (c) We will now introduce the third parameter, Gross Profit Potential (GPP), or the total profit pool available to participants in the market. For every product, the GPP will be calculated as the projected market size (current market size adjusted for compounded growth over the planning horizon) multiplied by the projected gross margin:

GPP = M x (1+M)N x GM
M = Current market size (millions) M = Rate of market growth GM = Gross Margin N = Planning horizon (years)
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In Figure 3, we show a general view of the product portfolio, where the horizontal axis is Relative (Normalized to Competitor) Customer Value (calculated as ratio of relative performance to relative price) and the vertical axis is Gross Profit Potential.

Major Products Landscape

4000 3500
Mobile phone Digital camera Iron Juice extractor DVD player Hair dryer Vacuum cleaner Refrigerator LCD TV set Microwave oven Video camera Washing machine Electric shaver Electric kettle Dishwasher Toaster Blender Meat grinder Coffee maker

Gross Profit Potential ($M)

3000 2500 2000 1500 1000 500 0 0.75

0.80

0.85

0.90

0.95

1.00

1.05

1.10

1.15

1.20

1.25

Relative (Normalized to Mean Competitor) Customer Value

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Figure 3 The vertical line in the middle of the graph is the line of equal value: products to the left of this line provide less value to their customers than competitors products, and products to the right of this line provide more value. We can clearly see now that our portfolio is composed of four groups of products: a) Products in the North-East quadrant provide relatively high value to their customers and address a large profit pool; b) Products in the South-East quadrant provide relatively high value to their customers but their GPP is low; c) Products in the North-West quadrant address a large profit pool but provide less value to their customers than do competitors; therefore, these products should expect high competitive pressure;

d) And finally, products in the South-West quadrant provide relatively low value to their customers and do not enjoy high GPP. The appropriate innovation strategy for a given product depends on its position on the Portfolio Map:

Different Innovation Strategies for Different Products

This diagram shows how we identify innovation strategies based on the quadrant that a product family is positioned in

Gross Profit Potential

Improve product features to gain greater share of category profits

Target Domain

Improve profit margin

We will focus on the product families that are located in the NW Quadrant. These products are in the high-potential market but provide low value to customers and therefore may loose market share. 6

Innovate to expand to new (adjacent) markets

Relative (normalized to mean competitor) Customer Value

2006 GEN3 Partners, Inc. Confidential

Figure 4 The premise we are operating with is that, assuming other critical factors for success are realized, there is a strong long-term correlation between relative delivered value and market share (which, in turn, determines the share of available profits). a) Products in the North-East quadrant are delivering significant value in attractive markets and should, barring other barriers to success, enjoy strong market share and corresponding profits. We seek to maintain the strong relative position of these products. b) Products in the North-West quadrant have high profit potential but are or may become vulnerable to competitive products with superior value. These are the high priority candidates for performance improvement.

c) Products in the southern hemisphere may have fundamentally low profit potential and should be given low prioritybut not before testing the potential to improve profit margins and/or expand market demand. d) Products in the South-East quadrant are delivering high value to markets with limited profit potential. It is possible that the same competencies that created this high value could be applied to more attractive adjacent markets. 3. Trends of technology evolution as the planning tool We will now focus on products that populate the North-West quadrant, because we have recognized them as primary candidates for performance improvement. Since the major focus of our study is innovation planning, we will spend some time in this section considering several approaches that may help us to look into the technical future. It has been discovered a while ago3 that there are some general patterns of technical systems evolution that can be observed in very different products, and that repeat across different markets and industries. Particularly, systems that increase their value that have components that are more controllable, and materials that demonstrate a higher degree of freedom have a much better chance of surviving in the marketplace. Some of these trends are shown on Figure 5. When these trends are considered in connection with specific products, they may suggest particular innovation activities that may be undertaken for these products future development. They may also indicate how difficult it will be to improve a product. As an example, we applied these trends to the inhabitants of the NorthWest quadrant of the landscape shown in Figure 3. These are mobile phones, digital cameras, refrigerators, washing machines, and vacuum cleaners.

Trend Analysis
Trend of Increasing Ideality

Trend of Transition to the Supersystem

Trend of Increasing Completeness of System Components

Trend of Increasing Degree of Trimming

Trend of Optimization of Flows

Trend of Increasing Coordination Trend of Elimination of Human Involvement

Trend of Increasing Controllability

Trend of Uneven Development of System Components

Trend of Increasing Dynamicity

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Figure 5 The trend of Transition to a Supersystem, as applied, for example, to mobile phones, suggests a number of innovation initiatives: Integration with other consumer communication / data storage / computing devices (e.g., radio set, TV set, PDA, flash memory, GPS receiver, audio recorder, audio books etc.) Integration with remote control units for different devices, car alarm remote control, etc. Integration with medical diagnostics devices (measuring pulse, temperature, blood pressure, glucose concentration), therapy devices (micro-current therapy, vibration massage), or automatic connection with emergency services Integration with personal safety detectors (detection of poisons, toxins etc.) Phone can operate as an identification system (embedded credit cards, electronic passes, tickets, keys) Integration with insects repellent

These types of provisional innovation initiatives for all innovation candidate products are shown in Figure 6.

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Provisional Innovation Initiatives

Mobile phones Integration with communication/data storage/computing devices. Integration with remote control units Integration with medical diagnostics and therapy devices Integration with personal safety detectors Integration with an identification system Integration with insects repellent Mobile phones with:
dynamic displays; dynamic keyboards; integrated display/keyboard; virtual keyboards and displays;

Vacuum cleaner Integration with air disinfection, moistening etc. Dust compacting/packing in disposable bags Floor polishing Automatic cordless cleaner Dynamic analysis of dust size and filtration adjustment Automatic nozzle adjustment to a floor type Voice-activated power control

Digital camera Integration with communication/data storage/computing devices Integration with other data recording devices Integration with other image processing devices Digital camera with
dynamic displays; dynamic keyboard (wheel, joystick) integrated display/keyboard; Hands free" photo camera (screen integrated into a kind of glasses)

Compact camera using another operation principle of battery Refrigerator Automatic food identification (barcodes or RFID) Automatic adjustment of chamber temperature Indication of an available food set and storage time expiry Automatic compilation/sending of electronic request into a food store when required food set should be renewed. Automatic food distribution/delivery Integration with food processing devices/services
Bottles/cans opening Meat/fish/poultry defrosting Vegetables/fruits cutting, salad mixing and dressing Cheese grating Cream blending Heating/dosing of baby food

completely voice-controlled phones Compact phones using another operation principle of battery
4000 3500 3000

Washing machine Integration with other systems of contamination removal

With bio-cleaning using bacteria; With cavitation; With electroosmosis; With ultrasound; With ultraviolet ozone generator
2500 2000 1500 1000

Automatic vegetables/fruits washing LCD TV on the front door or wall Integrated air conditioner 2006 GEN3 Partners, Inc. Confidential

Automatic detection of laundry type/quantity and contamination type, choice and dosing of detergents 17

Figure 6

4. Synergy of technical challenges: how many birds can you get with one stone? Let us review where we are at this point: a) We reduced the number of candidates for product innovations, focusing on those products that are on a good market but provide less value to consumers than do their competitors; b) For these best candidates, we applied trends of technology evolution and created a list of provisional innovation initiatives It is time now, before we start prioritizing these activities, to look more carefully at them with the goal of identifying potential synergies of technical challenges. All other things being equal, we want to start with the products that have the highest synergy index, since working on them benefits the largest number of products in the portfolio.

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There are different types of synergies: Type 1: When solutions of one technical challenge can be applicable to another; Type 2: When existing solutions, technologies, and materials used in production of one product may benefit the development of another; Type 3: If some products interact, the technical challenge for one of them can be eliminated by changing another; and Type 4: When problems with one product may actually serve as solutions for another

In Figure 7, we show Synergy of Technical Challenges as a table that illustrates the shared problems to be solved.

Synergy of Technical Challenges

Contradiction: Integration of several /home appliances Mobile phone Digital camera Washing machine Refrigerator Vacuum cleaner Interface convenience vs. compact size

Automatic Integration of operation regime several Long operation adaptability with operation time vs. respect to a principles compact size product type Contradiction:

Remote controlling

+ + + + +

+ +

+ + + + + + + + + +

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Figure 7 For example, the digital camera and mobile phone experience the same problem/contradiction: the batterys size should be larger for higher capacity, and it should it be smaller for convenience.

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Another view on synergy is shown in Figure 8. It shows how solutions obtained for one product may potentially benefit another one. For example, the ability to use a mobile phone for remote control of home appliances may be beneficial for washing machines, as well as for refrigerators and vacuum cleaners. Products that have several such connections will be considered as having a higher Synergy Index. and will therefore be given more credit for final prioritization.

Synergy of Technical Challenges

Digital camera
Integration into a single device Ergonomic interface for compact devices Small/light battery Voice control

Mobile phone
Remote controlling

Vacuum cleaner

Washing machine

Refrigerator

Integration of several cleaning approaches Automatic adjustment of operation mode for different products

Automatic adjustment of operation mode for different products

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Figure 8 5. Innovation prioritization strategy Four major factors will be taken into consideration for final prioritization of innovation initiatives: Competitive Urgency as an indication of near-term pressure from competitive products. The primary measure of competitive urgency is the MPV performance of our products and their competitors: products that are positioned on the left side of North-West quadrant are assumed to have a more urgent need for innovation. In our example, washing machines have a more immediate need for innovation than digital cameras. This can be augmented with a) projections of competitive performance rather than current

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competitive performance and b) recent trends in our market share as a measure of de facto competitive performance. Market Attractiveness as an indication of the long- term profits that may be realized by the product family. The primary measure of market attractiveness is Gross Profit Potential. This can be augmented with ratings of the market structural attractiveness and profitability of current market participants. Business Impact as an indication of the degree to which the company relies on this product family to meet it business plan. The primary measure of Business Impact is pro forma profits selected from a reasonable horizon. Technical Synergy Index as an indication of the degree to which innovation for this product family will benefit the overall portfolio. The Synergy Index was described above.

To make the factors comparable, we map the product in the NorthWest quadrant onto a five point scale with the product ranking highest on the primary indicator receiving a 5, and the product ranking lowest receiving a 1. Index augmentation is achieved by applying adjustments to the 5-point scale. Depending on the companys strategy, different weighting can be associated with these factors. Some typical approaches are shown in Figure 9.

Representative Strategies for Innovation Initiatives Prioritization

Priorities
Competitive Urgency Market Attractiveness Business Impact Technical Synergy

Defensive/Near-Term Focus 0%

Tactical/Plan Oriented 10%

40% 60% 50% 0%

30%

10%

Four principle strategies for priorities allocation: from conservative (near-term focus) to more aggressive (horizon-oriented)

Balanced

Horizon-Oriented 0% 20% 20% 60%

15%

15%

35%
21

35%

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Figure 9 14

These approaches vary from near-term focused approach (with an accent on competitive urgency and immediate business impact) to more horizonoriented approaches. We find that viewing the portfolio from multiple perspectives triggers meaningful strategic dialogue among management teams. Figure 10 shows innovation initiatives prioritization results for a balanced approach.
Innovation Initiatives Prioritization: Balanced Approach Example

Balanced Priorities Allocation Refrigerator 15% 15% Mobile phone Washing machine 35% 35% Digital camera Vacuum cleaners
Competitive Urgency Market Attractiveness Business Impact Technical Synergy 0.0 0.5 1.0

Relative Importance

1.5

2.0

2.5

3.0

3.5

4.0

Example of a recommended sequence of Initiatives based on a balanced priorities allocation.

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Figure 10

5. Epilogue We have just outlined a structured approach that allows corporate business planners to make well-founded decisions about innovation initiatives, and takes stock of the entire product portfolio and the interdependencies between development efforts. This approach consists of the following steps: a) Create inventory of existing products/product families b) For every product, identify its main parameters of value, market requirements to them, product performance in terms of main 15

parameters of value, product price. The same should be done for competitive products c) Build the Product Landscape (Gross Profit Potential vs. Relative Customer Value) and identify the best candidates for innovation the opportunity set d) For opportunity set products, apply trends of technology evolution and identify provisional innovation activities e) Review innovation activities to reveal synergy of technical challenges f) Perform final prioritization of innovation activities based on Competitive Urgency, Market Attractiveness, Business Impact, and Technical Synergy Index.

Acknowledgements: We are grateful to Michael Treacy, Sam Kogan, Simon Litvin, Gregg Bauer, George Martsinovsky, and Boris Volovik for their input, discussions, and support. References: 1. Michael Treacy: Innovation as a Last Resort, Harvard Business Review (July/August 2004) 2. Michael Treacy: Reinventing Innovation Annual PDMA International Meeting, Innovation in Global Product Development: Driving Sustainable Growth and Productivity across the Value Chain (October 22 26, 2005) 3. Genrich Altshuller: The Innovation Algorithm: TRIZ, Systematic Innovation and Technical Creativity, 1999. Technical Innovation Center, 312 pp

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