Archive for November, 2010

Avoid the Short Term Treadmill in R&D Investments

Tuesday, November 9th, 2010

Reading a recent article published by Harvard Business School, it occurred to me that executives allocating R&D funding could take a lesson from financial institutions’ experience in 2008.

One factor in accelerating the economic collapse was that financial firms had put themselves on a treadmill of short term debt.   The attraction of short term debt was low interest, but short term financing requires firms to “roll” their debt, continuously selling new bonds to repay maturing ones.  When the crisis hit, bond investors bolted for the exits, so firms could no longer sell new bonds, forcing them to sell assets to repay maturing debt.  Suddenly everyone was trying to sell assets at the same time, and asset prices plummeted, quickly pushing firms toward insolvency or government bailouts.

What does this have to do with new product strategy?  Executives balancing R&D funding among product lines should avoid putting their companies on a treadmill of short term returns.

The temptation to invest in short lifecycle products is that they can produce faster revenue growth for a given level of R&D productivity (new revenue per R&D dollar).  However, over-investment in short life products puts the new product program on a treadmill.  As revenue from one product generation matures and declines, it must quickly be replaced with even more new revenue to sustain growth:  A decline in R&D productivity can lead to a frightening drop in revenue growth.

Among other strategic considerations, executives should carefully consider the treadmill effect when allocating R&D funding among product lines and avoid the risks of over reliance on short term returns.

The Orthodoxy of the Plan

Friday, November 5th, 2010

The Orthodoxy of the Plan permeates product development:  Mid-project change is costly, and you have to freeze plans to keep the project on track.  But in dynamic environments, The Orthodoxy will increase costs.

An orthodoxy is a belief system so strongly entrenched that people who question it are considered heretics.  Think of Galileo saying the Earth moves around the Sun. Orthodoxies resist correction.  Disconfirming evidence can strengthen the belief rather than weakening it, as researchers studying American politics have found.

The Orthodoxy works when you’re developing products in a stable, slow-moving market, but these days, whose markets are stable?  In fast-changing environments, The Orthodoxy actually increases project disruptions.

Here’s an example.  You’re considering two design options, A and B (gear vs. belt drive, monochrome vs. color display etc.)  Both options have their merits, but in order to freeze the plan, you make the best decision based on available information, let’s say option A.

So far, so good.  But what if a competitor’s product launch resets customers’ expectations before your product launch?  You’re forced to redesign with option B, repeat testing, and probably correct other things that depended on option A.  Your schedule slips and expenses overrun your budget.

I’ve talked with many developers who say that the cost of a change like this is the cost of redesigning for option B, but that’s not the case – Option B was necessary.  The real cost of change is the time and expense you wasted developing option A. 

Heretical as it may seem, freezing the A/B decision increased the cost of change.  You pursued option A, but freezing plans didn’t eliminate the A/B uncertainty, only swept it under the rug.  You stopped gathering more market intelligence and sunk time and effort into option A.

It would have been better to postpone the A/B decision until you had more information.  That might have increased project cost, perhaps for prototypes or more customer visits, you would have bought insurance against a much more expensive change later.

In a dynamic market, you should deal explicitly with uncertainty, instead of following The Orthodoxy of the Plan and sweeping uncertainty under the rug.

For more information:

You can find information about Galileo all over the place.

“When Corrections Fail: the Persistence of Misperceptions” by Brendan Nyhan and Jason Reifler, http://www-personal.umich.edu/~bnyhan/nyhan-reifler.pdf,  is the study about how orthodoxies resist correction.

Flexible Product Development by Preston G. Smith, Josey-Bass 2007, Chapter 7 explains flexible decision making.

I offer a 2-day workshop on Flexible Product Development.  Contact me to learn more.