Organizational Enablers for NPD Portfolio Selection

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.

Number of Pages in PDF File: 36

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

JEL Classification: O31, O32, M14

working papers series