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Articles - Publication Date 3.6.2000
Picking The Winners
Companies now are applying information technology to the management side of innovation.
By Tim Stevens
One of the biggest challenges of forward-looking enterprises is deciding where to apply their R&D resources. Most companies have far more ideas and market opportunities than they can possibly afford to see through to commercialization. So how do they decide which ideas merit precious funds?
Following the example of Wall Street, Boeing Phantom Works, the Kent, Wash., research arm of Boeing Co., is now applying financial option calculations to assist in research-investment decisions.
Real-options portfolio evaluations, facilitated by risk-analysis software, allow Boeing to keep more research irons in the fire.
"Applying real-options theory is a breakthrough technique in [quantifying] the probable market value of R&D projects that not only have a great deal of risk and uncertainty in the future but have investment option points as well," says Michael Johnson, director, modeling and simulation, at Boeing Phantom Works.
The use of software to assess risk in project portfolio management represents another leveraging of information technology in R&D. A number of other IT applications are now beginning not only to support but also to add value to the management process of innovation. In fact, 3M Co., Du Pont & Co., and Dow Chemical Co., to name a few, have groups dedicated to the IT support of R&D. Other companies have business-process groups deploying information technology to aid the innovation process.
In addition to portfolio management, information technology is finding a home in new-product-commercialization processes, intellectual property management and exchange, competitive intelligence, evaluation of new business opportunities, and determining customer needs.
"It is clear that because of the uncertainty of R&D, the IT support challenges have not been mastered in the same way as design, or supply chain, or accounting," says Marco Iansiti, professor, technology and operations management, Harvard Business School (HBS), Cambridge, Mass. "Still, IT is doing a better job of addressing the R&D processes that are less uncertain (document management, for instance), and is making progress supporting processes that are uncertain."
Today, when product life cycles are short and competition to bring innovative products to market is fierce, savvy application of information technology to the business of R&D could mean the difference between success or failure.
Portfolio Proficiency
According to Iansiti, 90% of the professionals who attend HBS programs on leading product development identify resource management as the principal problem in portfolio optimization. "The core of the IT portfolio management solution is the ability to hook up strategic directions to real time and projected resource constraints of the organization," he says. "The theoretical portfolio is almost never completed. Good resource management will actually help get the portfolio done, and in a large engineering organization, this can only be achieved with some assistance from IT."
Information technology can play key roles in three stages of portfolio management: at the strategic stage when the mix of projects is determined and prioritized to optimize return, minimize cost, and minimize risk; when individual projects are being moved from idea generation to commercialization and beyond; and as management determines optimal deployment of resources and manpower across an entire portfolio of projects.
At the strategic stage, risk analysis software helps the portfolio manager better understand the potential risk/reward of R&D investments. Most create spreadsheet models of time, cost, future value, marketplace factors, strategic fit, and internal competencies to assess and rank investments. Complementing and working inside spreadsheet applications, risk analysis software allows the user to put probability distribution models in the spreadsheet cells, rather than single numbers or minimums/maximums alone. The software does thousa
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"People don't want to know if they will make $100 million or not on a new R&D investment; they want to know what is the probability that they will make $100 million."
Sam McLafferty, president, Palisade Corp.
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