Product Innovation Best Practices Series

Portfolio Management for New Products

Picking The Winners

Reference Paper # 11
By: Dr. Robert G. Cooper
Dr. Scott J. Edgett

Compliments of:

Stage-Gate Inc. and

Product Development Institute Inc.

For information call +1-905-304-8797

www.stage-gate.com

© Product Development Institute Inc. 2001-2008

Portfolio Management for New Products:

Picking The Winners

By: Dr. Robert G. Cooper,
Dr. Scott J. Edgett

New product portfolio management is about how you invest your business’s product development
resources – project prioritization and resource allocation across development projects. This paper
addresses the four goals of portfolio management and the importance of having an established, high
quality Stage-Gate® system in place.

Keywords:
Stage-Gate®, new product process, portfolio management, project prioritization, and resource
allocation.

These pages contain copyright information of Product Development Institute and member company
Stage-Gate Inc., including logos, tag lines, trademarks and the content of this article. Reproducing in
whole or any part of this document is strictly forbidden without written permission from Product
Development Inc. or Stage-Gate Inc.

© Product Development Institute Inc. 2001-2008

.

Portfolio Management for New Products

Picking The Winners
By: Dr. Robert G. Cooper
Dr. Scott J. Edgett

Executive Summary study2. And top performing businesses tend to

rate the importance of portfolio management
much higher than do poorer performers. Here’s
New product portfolio management is about
• First, a successful new product effort is
why:
how you invest your business’s product de-
velopment resources – project prioritization fundamental to business success. This
and allocating resources across development logically translates into portfolio
projects. management: the ability to select today’s
projects that will become tomorrow’s new

• Second, new product development is the

There are four goals in portfolio manage- product winners.
ment – maximizing the value of the portfolio,
seeking the right balance of projects, ensur- manifestation of your business’s strategy.
ing that your portfolio is strategically aligned, One of the most important ways you
and making sure you don’t have too many operationalize strategy is through the new
projects for your limited resources. And there products you develop. If your new product
are many tools – some quantitative, others initiatives are wrong – the wrong projects, or
graphical, some strategic – designed to help the wrong balance— then you fail at

• Third, portfolio management is about

you chose the right portfolio of projects. implementing your business strategy.

resource allocation. In a business world

Most important, your new product process preoccupied with value to the shareholder
or Stage-Gate system must be working in and doing more with less, technology and
order to achieve effective portfolio manage- marketing resources are simply too scarce to
ment: it must deliver data integrity and also waste on the wrong projects. The
weed out the bad projects early. consequences of poor portfolio management
are evident: you squander scarce resources,
and as a result, starve the truly deserving
projects.
Maximizing Your Profits From R&D
Investments Four Goals in Portfolio Management
How should you most effectively invest your There are four goals in new product portfolio
product development resources? And how should management:
you prioritize your development projects and al-
locate resources among them? These are crucial Goal #1. Maximize the Value of Your
issues in new product portfolio management. Portfolio: Here the goal is to select new product
Much like a stock market portfolio manager, projects so as to maximize sum of the values or
those senior executives who manage to optimize commercial worths of all active projects in your
their R&D investments – to select winning new pipeline in terms of some business objective.
product projects and achieve the ideal balance Tools used to assess “project value”
and numbers of projects – will win in the long include3 :
run1.
3

© Product Development Institute Inc. 2001-2008

 Portfolio Management for New Products: Picking the Winners

• NPV: Determine the project’s net present Pictures portray balance much better than do
value and then rank projects by NPV divided numbers and lists, and so the techniques used
by the key or constraining resource (for ex- here are largely graphical in nature. These in-
ample, the R&D costs still left to be spent on clude:

•
the project; that is, by NPV/R&D). Projects
are rank-ordered according to this index until Bubble diagrams: Display your projects on a
out of resources, thus maximizing the value two-dimensional grid as bubbles as in Figure
of the portfolio (the sum of the NPVs across 3. The axes vary but the most popular chart
all projects) for a given or limited resource is the risk-reward bubble diagram, where
NPV is plotted versus probability of technical
•
expenditure.
ECV: The Expected Commercial Value success. Then seek an appropriate balance in
method uses decision-tree analysis, breaking numbers of projects (and spending) across

• Pie charts: Here show your spending

the project into decision stages – for the four quadrants.
example, Development and Commercializa-
tion (Figure 1). Define the various possible breakdowns as slices of pies in a pie chart.
outcomes of the project along with probabili- Popular pie charts include a breakdown by
ties of each occurring (for example probabili- project types, by market or segment, and by
ties of technical and commercial success). product line or product category.
The resulting ECV is then divided by the con- Both bubble diagrams and pie charts, unlike the
straining resource (as in the NPV method), maximization tools outlined above, are not
and projects are rank-ordered according to decision-models, but rather information display:
this index in order to maximize the bang for they depict the current portfolio and where the
buck. The method also approximates real resources are going – the “what is”. These charts
options theory, and thus is appropriate for provide a useful beginning for the discussion of
handling higher risk projects4. “what should be” – how should your resources
• Scoring model: Decision-makers rate projects be allocated.
on a number of questions that distinguish
superior projects, typically on 1-5 or 0-10 Goal #3. Your Portfolio Must Be Strategi-
scales. Add up these ratings to yield a cally Aligned: This means that all your projects
quantified Project Attractiveness Score, are “on strategy”; and that your breakdown of
which must clear a minimum hurdle. This spending across projects, areas, markets, etc.,
Score is a proxy for the “value of the project” must mirror your strategic priorities (your areas
but incorporates strategic, leverage and of focus and their respective priorities). Several
other considerations beyond just financial portfolio methods are designed to achieve

• Top-down, strategic buckets: Begin at the

measures. Projects are then rank-ordered strategic alignment:
according to this score until resources run
out. A typical scoring scheme is shown in top with your business’s strategy and from
Figure 2. that, the product innovation strategy for your
business – its goals, and where and how to
Goal #2. Seek Balance in Your Portfolio: focus your new product efforts. Next, make
Here the goal is to achieve a desired balance of splits in resources: “given your strategy,
projects in terms of a number of parameters; for where should you spend your money?”.
example, long term projects versus short ones; These splits can be by project types, product
or high risk versus lower risk projects; and across lines, markets or industry sectors, and so on.
various markets, technologies, product catego- Thus, you establish strategic buckets or en-
ries, and project types (e.g., new products, im- velopes of resources.
provements, cost reductions, maintenance and
fixes, and fundamental research).

© Product Development Institute Inc. 2001-2008

 Portfolio Management for New Products: Picking the Winners

Then, within each bucket or envelope, list all the people and time. Thus an over-riding goal is to
projects – active, on-hold and new – and ensure a balance between resources required for
rank these until you run out of resources in the active projects and resources available. Here

• Resource limits: The value maximization

that bucket. The result is multiple portfolios, are the ways:
one portfolio per bucket. Another result is
that your spending at year-end will truly re- methods (Goal #1) build in a resource limita-

• Top-down, product roadmap: Once again,

flect the strategic priorities of your business. tion – rank your projects until out of re-
sources. The same is true of bubble dia-
begin at the top, namely with your business grams (Goal #2): the sum of the areas of the
and product innovation strategy But here the bubbles – the resources devoted to each pro-
question is: “given that you have selected ject – should be a constant, and adding one
several areas of strategic focus – markets, more project to the diagram requires that

• Resource capacity analysis: Determine your

technologies or product types – what major another be deleted.
initiatives must you undertake in order to be
successful here?”. It’s analogous to the resource demand: prioritize your projects
military general asking: given that I wish to (best to worst) and add up the resources
succeed in this strategic arena, what major required by department for all active projects
initiatives and assaults must I undertake in (usually expressed in person-days per
order to win here? The end result is a map- month)7. Project management software, such
ping of these major initiatives along a time- as MS-Project, enables this roll-up of re-
line – the product roadmap (Figure 4). The source requirements. Then determine the
selected projects are 100% strategically available resources (the supply) per depart-

• Bottom-up: “Make good decisions on individ-

driven. ment – how much time people have to work
on these projects. A department-by-
ual projects, and the portfolio will take care department and month-by-month assess-
of itself” is a commonly accepted philosophy. ment usually reveals that there are too many
That is, make sure that your project gating projects; it suggests a project limit (the point
system is working well – that gates are ac- beyond which projects in the prioritized list
cepting good projects, and killing the poor should be put On Hold); and it identifies
ones – and the resulting portfolio will be a which departments are the bottlenecks.
solid one. Even better, to ensure strategic
alignment, use a scoring model at your pro- Your New Product Process Must Work
ject reviews and gates (Figure 2), and in- Before you charge ahead with portfolio manage-
clude a number of strategic questions in this ment, put first things first: make sure that your
model. Strategic alignment is all but assured: new product process or gating system is working
your portfolio will indeed consist of all “on well. A majority of product developers have im-
strategy” projects (although spending splits plemented Stage-Gate® systems, according to a
may not coincide with strategic priorities). PDMA study8, but experience suggests that many
Note that regardless of the strategic approach are due for an overhaul. An effective new prod-
here, all of these methods presuppose that your uct process is central to portfolio management
business does indeed have a product innovation for two reasons:
strategy, something that many businesses lack 1. First, regardless of the sophistication of the
according to our benchmarking study 5. portfolio models used, your input data must be
sound. And look to your new product process to
Goal #4. Pick the Right Number of Projects: deliver data integrity. Usually this is not the case.
Most companies have too many projects under- For example, our best practices survey revealed
way for the limited resources available6. The that, in spite of their theoretical rigor, financial
result is pipeline gridlock: projects end up in a models (NPV and ECV) yield the worst portfolios
queue; they take too long to reach the market; of projects, not because the models are wrong,
and key activities — for example, doing the up- but because the input data were so much in
front homework— are omitted because of a lack 5

© Product Development Institute Inc. 2001-2008

 Portfolio Management for New Products: Picking the Winners

error. Conclusion
Portfolio management is fundamental to new
2. Second, your gating process should at mini- product success. But it’s not as easy as it first
mum kill or cull out the bad projects, and in so seems. Not only must you seek to maximize the
doing, yield a better portfolio. Again often this value of your portfolio, but the development pro-
does not happen: management confessed to an jects in your portfolio must be appropriately bal-
inability to kill projects, the lack of effective gate anced, there must be the right numbers of pro-
criteria, and many projects simply “getting a life jects, and finally, the portfolio must be strategi-
of their own”. cally aligned. No one portfolio model can deliver
on all four goals, and so best-practice businesses
Data integrity means that the up-front homework tend to use multiple methods to select their pro-
in projects must be done. Many companies have jects. Finally, our studies reveal that any portfolio
improved the quality of execution and at the method outlined above is better than none at all,
same time provided far better data for project so our advice is: just do it!
selection by implementing a systematic Stage-
Gate new product process. Build into your proc- - End-
ess two stages of homework prior to the begin-

• the Scoping Stage, which entails a pre-

ning of Development (Figure 5):

liminary market, technical and business

• Building the Business Case, which in-

assessment

volves much more detailed market re-

search (a user needs-and-wants study,
competitive analysis, concept tests)
along with technical and manufacturing
assessments.
Incorporating in these two key stages as part of
your new product process not only results in bet-
ter and sharper product definition, a critical suc-
cess driver, but also much better data as inputs
to the various portfolio models above.

An effective new product process also means

effective gates. In best-practice businesses, this
translates into a menu of specified deliverables
for each gate, visible Go/Kill and prioritization
criteria at the gates (many companies use score-
cards to rate projects at gate meetings), defined
gatekeepers per gate, clear gate outputs, and
even “rules of engagement” for the gatekeeping
or leadership team of the business. If your gates
are weak – if they fail to weed out mediocre pro-
jects – then check yourself against gating best-
practices above. Perhaps it’s time to rethink your
new product process!

© Product Development Institute Inc. 2001-2008

 Portfolio Management for New Products: Picking the Winners

Figure 1. Determination of Expected Commercial Value of Project

© Product Development Institute Inc. 2001-2008

Portfolio Management for New Products: Picking the Winners

Figure 2. A typical Scoring Model For Project Prioritization

• Degree to which project aligns with our strategy

Strategic Alignment:

• Strategic importance

• Offers customers/users unique benefits

Product/Competitive Advantage:

• Meets customer needs better

• Provides value for money for the customer/user

• Market size
Market Attractiveness:

• Market growth rate

• Competitive intensity in the market (high=low score)

• Marketing synergies
Synergies (Leverages Our Core Competencies):

• Technological synergies
• Operations/manufacturing synergies

• Size of technical gap (large=low score)

Technical Feasibility:

• Technical complexity (barriers to overcome)

• Degree of technical uncertainty (high=low score)

(many/high = low score)

• Expected profitability (magnitude: NPV)

Risk Vs. Return:

• Return on investment (IRR)

• Payback period (years; many=low score)
• Certainty of return/profit estimates
• Low cost & fast to do

The six Factors are scored (0-10) for each project at gate review meetings by the ‘gatekeepers”.
Bulleted items are discussed to arrive at Factor Scores. Each Factor must clear a minimum
hurdle. They are then added (weighted or unweighted) to yield the Project Attractiveness Score,
which is used to make Go/Kill decisions at gates and to prioritize projects.

© Product Development Institute Inc. 2001-2008

 Portfolio Management for New Products: Picking the Winners

Figure 3. A Typical Risk-Reward Bubble Diagram

Projects are shown as bubbles. This high growth business has too many “White Elephants” and
too much spending in the “Bread & Butter” quadrant, not enough in the “Pearls” quantrant, and is
underfunding the “Oysters”. Example based on a growing Business Unit within a large chemical
company.

© Product Development Institute Inc. 2001-2008

 Portfolio Management for New Products: Picking the Winners

Figure 4. The Product Roadmap

The Product Roadmaps shows the major development initiatives (platforms and products) on a
timeline for several years into the future. This example is from a manufacturer of process equipment
(mixers & agitators)

Product Roadmap
Extensions into Chemical Mixers

Original Agitator Platform - Extension

Chemical Mixers: Basic Line

Plan Chemical Mixers: Special Impellers

extensions
& new Chemical Mixers: Hi-Power
platforms

Extensions into Petroleum Blenders

Platform Extension

Petroleum Blenders : Low Power Range

Petroleum Blenders : High Power

New Product Platform: Aerators

Aerator Platform

P&P Aerators: Line #1 (fixed mount)

Time
P&P Aerators: Line #2 (floating)

P&P Aerators: Hi-Power

Extensions into Aerators for Chemical Waste

Platform Extension

Chemical Aerators: Line #1

Chemical Aerators: Line #2

10

© Product Development Institute Inc. 2001-2008

 Portfolio Management for New Products: Picking the Winners

Figure 5. An overview of a Typical Stage-Gate® Process

There are five stages plus the idea or “Discovery” stage. Each stage is preceded by a gate, where
a team of “gatekeepers” (senior management) make Go’Kill decisions on projects. The stages are
where prescribed activities are undertaken by cross-functional project teams. Almost 70% of U.S.
product developers have implemented such Stage-Gate processes, according to a PDMA study.

Discovery

Driving New Products to Market

Idea Screen
Gate
1
Second Go to Go to Go to
Screen Development Testing Launch

Stage 1 Gate Stage 2 Gate Stage 3 Gate Stage 4 Gate Stage 5

2 3 4 5

Scoping Build Development Testing & Launch

Business Validation
Case

Stage-GateTM: A five-stage, five-gate model

along with Discovery and Post-Launch Review Post-Launch
Review

Source: Winning at New Products [4]

11

© Product Development Institute Inc. 2001-2008

 Portfolio Management for New Products: Picking the Winners

Additional Reading:
1
This essay is based on a number of books and articles by the authors: R.G. Cooper, S. J. Edgett & E.J.
Kleinschmidt, Portfolio Management for New Products. 2nd Edition, Cambridge, Mass: Perseus Books, 2001; Cooper,
R.G., Winning at New Products: Accelerating the Process from Idea to Launch, 3rd edition. Cambridge, Mass:
Perseus Books, 2001; Cooper, R.G., Edgett, S.J. & Kleinschmidt, E.J., “Portfolio management in new product
development: lessons from the leaders – Part I”, Research-Technology Management, Sept-Oct 1997, 16-28; Part II,
Nov-Dec 1997, 43-57. Also see: www.prod-dev.com.
2
Portfolio management best practice studies: R.G. Cooper, Edgett, S.J. & Kleinschmidt E.J, “Best practices for man-
aging R&D portfolios”, Research-Technology Management, 41, 4, July-Aug. 1998, 20-33; and: Cooper, R.G., Edgett,
S.J. & Kleinschmidt, E.J., “New product portfolio management: practices and performance”, Journal of Product In-
novation Management, 16,4, July 1999, pp 333-351.
3
For more information on all portfolio methods, see: Portfolio Management for New Products, reference note 1
above.
4
For a discussion of real options theory, see: T. Faulkner, "Applying 'Options Thinking' to R&D Valuation." Re-
search-Technology Management, May-June 1996, pp. 50-57.
5
New product benchmarking studies: Cooper, R.G., "New product leadership: building in the success factors," New
Product Development & Innovation Management, 1,2, 1999, 125-140; Cooper, R.G., “Product Innovation and Tech-
nology Strategy” in the “Succeeding in Technological Innovation” series, Research-Technology Management, 43,1,
Jan-Feb. 2000, 28-44; and: Cooper, R.G. & Kleinschmidt, E.J., “Winning businesses in product development: critical
success factors”, Research-Technology Management, 39, 4, July-Aug 1996, 18-29.
6
See articles in reference note 2; also: Cooper, R.G., Edgett, S.J. & Kleinschmidt, E.J., “New problems, new
solutions: making portfolio management more effective”, Research-Technology Management, 2000, 43, 2, 18-33.
7
For more on resource capacity analysis, see: Cooper, R.G., “The invisible success factors in product innovation,”
Journal of Product Innovation Management, 16, 2, April 1999, 115-133.
8
Stage-Gate processes are widely used by the top performing companies. See: A. Griffin, Drivers of NPD Success:
The 1997 PDMA Report ( Product Development & Management Association) 1997. For more information on Stage-
Gate processes, see Winning at New Products, reference note 1; and www.prod-dev.com

12

© Product Development Institute Inc. 2001-2008

 World’s Top Innovation Management Scholars
-Journal of Product Innovation Management, May 2007

Dr. Robert G. Cooper

Dr. Robert G. Cooper is one of the most influential innovation thought leaders in
the business world today. He pioneered the original research that led to many
ground-breaking discoveries including the Stage-Gate® Idea-to-Launch process.
Now implemented by almost 80% of North American companies, it is considered
to be one of the most important discoveries in the field of innovation
management. He has spent more than 30 years studying the practices and pitfalls
of 3,000+ new product projects in thousands of companies and has assembled the
world’s most comprehensive research on the topic. His presentations and practical
consulting advice have been widely applauded by corporate and business event
audiences throughout the world making him one of the most sought-after
speakers.

A prolific author, he has published more than 90 academic articles and seven
books, including the best selling ‘Winning at New Products, 3rd Edition’. He is the
recipient of numerous prestigious awards including the Crawford Fellow from the
Product Development and Management Association (PDMA) and the Maurice Hol-
land Award from the Industrial Research Institute (IRI). Dr. Cooper is a Professor
of Marketing and Technology Management at the Michael G. DeGroote School of
Business at McMaster University in Ontario, Canada and Distinguished Fellow at
the Institute for the Study of Business Markets (ISBM) at Penn State University in
Pennsylvania, USA.

Dr. Scott J. Edgett

Dr. Scott J. Edgett is internationally recognized as one of the world’s top ex-
perts in product innovation and is the pioneer of portfolio management for prod-
uct innovation. He is a high profile speaker and sought-after consultant. Dr.
Edgett has had extensive experience working with large multinational clients in a
variety of industries, principally focusing on issues affecting innovation leader-
ship and capability. He is credited with helping business executives and innova-
tion professionals successfully implement world-class innovation processes that
have generated outstanding results. His speaking engagements and consulting
work have taken him around the globe to work with some of the world’s best
innovators and companies among the Fortune 1000.

Dr. Edgett is Chief Executive Officer and co-founder, with Dr. Robert G. Cooper,
of both Product Development Institute and Stage-Gate Inc. He has spent more
than 20 years researching and developing innovation best practices and working
with organizations in product innovation. He is a prolific author having co-
authored six books including the popular ‘Portfolio Management for New Prod-
ucts, 2nd Edition’ and has published more than 60 academic articles. Dr. Edgett
is a former Professor of the Michael G. DeGroote School of Business, McMaster
University in Ontario and is a Faculty Scholar at the Institute for the Study of
Business Markets (ISBM) at Penn State University.

13

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