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Revenue Driven Resource Allocation: Funding Authority, Incentives, and New Product Development Portfolio Management

14 Pages Posted: 25 Feb 2008 Last revised: 29 Oct 2015

Raul O. Chao

University of Virginia - Darden School of Business

Stelios Kavadias

University of Cambridge - Judge Business School

Cheryl Gaimon

Georgia Institute of Technology - Operations Management Area; Georgia Institute of Technology - Scheller College of Business

Date Written: February 1, 2008

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.

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

JEL Classification: O31, O32, C61, M52

Suggested Citation

Chao, Raul O. and Kavadias, Stelios and Gaimon, Cheryl, Revenue Driven Resource Allocation: Funding Authority, Incentives, and New Product Development Portfolio Management (February 1, 2008). Management Science, Vol. 55, No. 9, pp. 1556-1569, 2009. Available at SSRN: https://ssrn.com/abstract=1095333

Raul O. Chao (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-982-2681 (Phone)

Stylianos Kavadias

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, Cambridgeshire CB2 1AG
United Kingdom

HOME PAGE: http://www.jbs.cam.ac.uk/research/kavadiass.html

Cheryl Gaimon

Georgia Institute of Technology - Operations Management Area ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States
404-894-4934 (Phone)

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States

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