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A Theoretical Framework for Managing the NPD Portfolio: When and How to Use Strategic Buckets
Raul O. Chao University of Virginia - Darden Graduate School of Business Administration Stylianos Kavadias Georgia Institute of Technology - Operations Management Area May 1, 2008 Chao, R. and Kavadias, S., "A Theoretical Framework for Managing the NPD Portfolio: When and How to Use Strategic Buckets", Management Science, Vol. 54, No. 5, p. 907-921, 2008 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.
Keywords: New Product Development, NPD Portfolio Strategy, Incremental and Radical Innovation, Strategic Buckets, Complexity Theory JEL Classifications: L1, O3, O31, O32, C61, G31, D83, D92 Working Paper SeriesDate posted: February 19, 2008 ; Last revised: March 25, 2009Suggested CitationContact Information
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