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Abstract:
Developing the "right" new products is critical to firm success and is often cited as a key competitive dimension. This paper explores new product development (NPD) portfolio strategy and the balance between incremental and radical innovation. We characterize innovative effort through a normative theoretical framework that addresses a popular practice in NPD portfolio management: the use of strategic buckets. Strategic buckets encourage the division of the overall NPD resource budget into smaller, more focused budgets that are defined by the type of innovative effort (incremental or radical). We show that time commitment determines the balance between incremental and radical innovation. When managers execute this balance, they are often confounded by: (i) environmental complexity, defined as the number of unknown interdependencies among technology and market parameters that determine product performance; and (ii) environmental instability, the probability of changes to the underlying performance functions. Although both of these factors confound managers, we find that they have completely opposite effects on the NPD portfolio balance. Environmental complexity shifts the balance toward radical innovation. Conversely, environmental instability shifts the balance toward incremental innovation. Risk considerations and implications for theory and practice are also discussed.

New Product Development, NPD Portfolio Strategy, Incremental and Radical Innovation, Strategic Buckets, Complexity Theory

Abstract:
The first step in transforming strategy from a hopeful statement about the future to an operational reality is to allocate resources to innovation and new product development (NPD) programs. We explore how funding authority affects a manager's allocation of resources between multiple programs in a portfolio. Funding may be either fixed or variable depending on the extent to which the manager is free to use revenue derived from existing product sales to fund NPD efforts. Our results indicate that the allocation of resources between existing product improvement (relatively incremental projects) and new product development (more radical projects) depends critically on the funding authority. We find that the use of variable funding drives higher effort toward improving existing products and developing new products. However, variable funding induces the manager to focus on existing product improvement to a greater degree than new product development, and leads to an incremental balance in the NPD portfolio. In addition, we highlight a substitution effect between explicit incentives (compensation parameters) and implicit incentives (career concerns). Explicit incentives are reduced as career concerns become more salient.

Innovation and New Product Development, Resource Allocation Strategy, Portfolio Strategy, Organization Design, Incentives

Abstract:
One of the most challenging decisions associated with new product development (NPD) projects is their termination. Literature from a variety of research fields, spanning from psychology to operations management, confirms the difficulty of the stopping decision, even within capable organizations. Several detailed case studies iterate the often-cited claim that projects get a life of their own, and they illustrate how escalation of commitment leads to detrimental effects. Among the various reasons cited for such a systematic persistence, a prominent one is the seeming inability of NPD teams to reach a common understanding of what constitutes negative information, and, more importantly, to act upon it. To capture the critical role of such information biasing, we build our model around the concept of information fidelity, i.e. the degree of accuracy that the decision-maker assigns to the new information. Given the cross-functional nature of modern NPD teams, we posit that team members may interpret the same information differently due to different organizational roles. The goal of our study is to understand how this interpretive diversity affects project termination decisions. Our analysis reveals the complex role of diversity. Depending on the underlying project uncertainty, diversity might either become a source of conservatism, causing the team to stop projects earlier than necessary, or a source of escalation, leading to costly delays in project termination decisions. Thus, the existence of distinct thought worlds within an organization gives rise to systematic biases, even when the decision-makers are perfectly rational. Our results are robust across different team hierarchical structures, and they are magnified in the presence of social conformity. Interestingly, seemingly opposing managerial strategies, namely the diversification of the team composition and the pressure to conform to a target, may complement each other in amplifying escalation phenomena.

Project Termination, Escalation of Commitment, Team Diversity, Information Processing

Abstract:
A key metric for the assessment of innovative activity at the firm level is R&D intensity. R&D intensity is the ratio of a firm's R&D investment to its revenue (the percentage of revenue that is reinvested in R&D). Empirical and anecdotal evidence suggests that R&D intensity within an industry is remarkably consistent. Despite this consistency in R&D spending, firms tend to be differentiated with respect to their NPD portfolio strategy and overall performance. This study aims to explain the observed consistency in R&D intensity for firms within an industry, despite the varying choices in terms of how much the firm invests in R&D and how resources are allocated among projects in a portfolio. We consider the implications of firm level factors, such as NPD portfolio composition, as well as industry level factors, such as competition intensity and environmental stability. We find that R&D intensity alone does not explain firm performance. Rather, it is the proper alignment between R&D intensity (how much the firm invests) and NPD portfolio strategy (how the firm invests the money) that drives profitability. More importantly, the proper alignment critically depends on two industry factors: competition intensity and environmental stability.

Abstract:
A key metric for the assessment of innovative activity at the firm level is R&D intensity. R&D intensity is the ratio of a firm's R&D investment to its revenue (the percentage of revenue that is reinvested in R&D). Empirical and anecdotal evidence suggests that R&D intensity within an industry is remarkably consistent. Despite this consistency in R&D spending, firms tend to be differentiated with respect to their NPD portfolio strategy and overall performance. This study aims to explain the observed consistency in R&D intensity for firms within an industry, despite the varying choices in terms of how much the firm invests in R&D and how resources are allocated among projects in a portfolio. We consider the implications of firm level factors, such as NPD portfolio composition, as well as industry level factors, such as competition intensity and environmental stability. We find that R&D intensity alone does not explain firm performance. Rather, it is the proper alignment between R&D intensity (how much the firm invests) and NPD portfolio strategy (how the firm invests the money) that drives profitability. More importantly, the proper alignment critically depends on two industry factors - competition intensity and environmental stability.

Research and Development, New Product Development, R&D Intensity, Innovation, Portfolio Management

Abstract:
Many end-product manufacturers, in a variety of industries, acquire even their core technologies from upstream technology provider while focusing primarily on efficient integration and/or assembly. In this paper we analyze the strategic interaction between a technology firm who introduces a new subsystem technology and such end-product manufacturers (henceforth called integrators). We identify two design characteristics of a subsystem - the fraction of end-product functionalities pre-packaged into the subsystem and the technology embedded in the subsystem - and we examine their impact on the optimal introduction strategy.

We find that offering a subsystem that performs a large number of end-product functions (i.e., highly integrated subsystem) has a dual effect on the provider's profits. On the positive side, the provider may extract larger ease-of-use rent from the integrators, as such subsystems are easier/cheaper to integrate into their end-products. On the negative side, such subsystems may curtail the integrator's ability to differentiate from his competitors, and thus, render their adoption less valuable. The result uncovers the danger of subsystem over-integration that providers should account for when laying out their technology roadmaps.

Abstract:
It has long been recognized that the purchasing behavior of consumers depends not only on the product characteristics but also on other considerations such as their intrinsic desire for exclusivity. We study the implications of such consumer behavior on the design and introduction decisions for a durable product, namely the durability and pricing choices of the firm. An extensive body of literature argues for the benefits of planned obsolescence. We draw upon these traditional market models of vertically differentiated durable products to incorporate exclusivity-seeking behavior, and show that firms should instead consider designing products that undergo slow value erosion in conjunction with a high-price, low-volume product introduction strategy. The rationale is to use the high price to jointly exploit the value inherent in a more durable product and to sell a low volume to achieve the product exclusivity valued by exclusivity-seeking consumers.

Durability Choice, Snobbish or Exclusivity Seeking Behavior, Demand Externalities

Abstract:
Despite substantial research that advocates the 'right' portfolio of NPD initiatives for the firm, one important aspect has been overlooked: creating a portfolio of NPD initiatives is not equivalent to ‘choosing from a menu' of initiatives. NPD initiatives are defined by and within the organization. Thus, portfolio selection rests upon two challenges: the cross-functional nature of tasks, which require collaboration; and the subtle dependence of innovative outcomes on explicit and implicit incentives. In this paper, we explore how the interplay between these challenges determines the initiatives that are ultimately supported by the NPD organization. We abstract the NPD organization as two functional managers, who report to a common vice president (VP), and analyze the strategic interactions of all three stakeholders. The VP decides whether to empower the managers to define the initiative and how to reward them contingent on the outcome. We evaluate how: (i) asymmetry of information regarding each function's capability, and (ii) the explicit rewards and implicit penalties managers receive based on the outcomes, affect their upfront resource commitments. We find a profound effect of the information asymmetry: the set of initiatives the organization deems profitable is reduced, thus impeding its potential to innovate. To counter such a shortcoming, the VP may optimally misalign the payoffs of the stakeholders, either by changing the incentive plans or by empowering the organization.

NPD Portfolio, Incentives for Innovation, Tolerance for Failure, Agency Theory

Abstract:
A number of studies on innovation and technological change show that scientific knowledge is rarely fully contractible, but instead disseminates through various communication channels. At an operational level, these knowledge spillovers translate as follows: R&D managers obtain information regarding the technological potential of different options that stem from past research accomplishments. A case study conducted by the authors in a leading research center shows the existence of such informational spillovers, and more importantly, their critical role in shaping firms' future R&D efforts. We develop a model that conceptualizes R&D as a process of exploration trials for new technological improvements that may emerge from the same or different scientific domains. Firms account for strategic intent when assessing the direction of their R&D efforts because they compete within similar markets. We find that R&D search choices are strongly path dependent. Future decisions rely on a threshold policy: technological breakthroughs prompt search within the same scientific domain, a herding-like behavior. Yet, moderate improvements may divert firms to explore new areas. We show that the managerial implications of such learning mechanisms on the R&D search path are not uniform. A limited ability to infer the remaining potential from past outcomes of a scientific domain prompts firms to diversify their R&D efforts. At the same time, an increased ability to learn from different scientific domains, due to strong similarities in their underlying knowledge base, renders diversification preferable.

R&D Spillovers, Informational Spillovers, Competitive R&D