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Agenda
1. Efficient Frontier of New Product Portfolios
2. Portfolio Risk Assessments
3. Integration of Portfolio and Project Risk Management
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State of the Mobility Market
Double digit growth is a thing of the past
Growth areas for voice are China and India In NAR, declining voice ARPU will be countered with blended
offers driving data usage
Data adoption remains a major opportunity
Beginning to see data demand in enterprises Driven by lifestyle applications for mass market IMS enables operators to capture these segments
with blended services
Market Growth
Market Trends
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3G alternatives continue to generate interest EV-DO has first to market advantage Wi-Fi and WiMAX distract the DO market
Cost control and revenue growth still top priority
Capex and Opex efficiency still key in maturing markets
Squeezing value from embedded base while moving to Packet
Market consolidation
Non-traditional competitors entering to own telecom wallet Legislative impacts
Technologies
Operator Challenges
Landscape Challenges
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Efficient Frontier of New Product
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What is Product Portfolio Management?
Portfolio Management
A method to compare the attractiveness of alternative investments.
Unknown
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Product Portfolio Management
Portfolio management is a dynamic decision process, whereby a businesss list of
active new product (and R&D) projects is constantly updated and revised. In this
process, new projects are evaluated, selected, and prioritized; existing projects
may be accelerated, killed, or deprioritized; and resources are allocated andreallocated to the active projects.
Bob Cooper
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Two Asset Investment Decision
= 0= 0 = 1= 1
== --11
R2R2 A2A2
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R
eturn
R
eturn
R1R1
X1X1 X2X2RiskRisk
A1A1
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Varying Investment Levels, result in varying Rate of Returns
E(rE(rGG)) AssetAssetReturnReturn
New ProductNew Product
ReturnReturn
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WACCWACC
R
eturn
R
eturn
Investment LevelInvestment LevelNew Products are better evaluated as Projects, not as ongoing
Businesses
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= 0= 0 = 1= 1
== --11
R2R2 P2P2
Comparing Product to Asset Investments
Threats toIndependence1.Markets
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R
eturn
R
eturn
R1R1
X1X1 X2X2RiskRisk
P1P1
RiskRisk
.
3.Technology orPlatforms4.Resources5.Project Types
Put all your eggs in one basket and watch that basket! &Diversification is a hedge against stupidity! Warren Buffet
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Efficient Frontier for New Products (*)
E(rE(rGG))
O1O1
O2O2
Two PortfoliosTwo Portfolios
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rrff
G
ProjectsProjects
R
eturn
R
eturn
RiskRisk
= WACC= WACC EfficientEfficientFrontierFrontier
(*) Efficient Portfolios were first mentioned in H.M. Markowitz, Portfolio Selection, Journal of Finance,7:77-91 (March 1952)
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Limitations of Efficient Frontier Model
1. New Product Project Investment
Levels and Returns are linked
Return Rate drops as Project Investment
Level differs from Optimum
Optimum Portfolio is unlikely to result in
Portfolio Investment Level at the
Companys R&D Budget Level
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2. New Product Investments are rarelyindependent
3. Any Model purely based on IRR/NPV
ignores the Existence and Value of
Options
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Efficient Frontier Conclusion
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Helps to devise a New Product Strategy
Enhances traditional Risk / Return Maps
Visualizes the Return of New Product Projects
Explains, why we need to subtract the WACC from Returns, when using Return / RiskRatios for Prioritization
Theoretical Model, applicable to New Product Portfolios
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Portfolio Risk Assessments
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Inputs to the Portfolio Decision
Markets and Customer Lists
Resource Information and Total R&DSpending Level
Products and R&D Project Lists
Business Cases
Risk Assessments
The information you have is not theinformation you want.
The information you want is not theinformation you need.
The information you need is not theinformation you can obtain.
The information you can obtain costsmore than you want to pay.
Anonymous
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Risk in Product Portfolio Management
Quantities
Unit Cost
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Risk is the central element that influences financial behavior. Robert C. Merton (1999)
Unit PriceR&D
Expense
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Most Success Factors in New Product Development are Not Technical (*)
1. Unique, differentiated, superior Products
2. Strong Market Orientation
3. Sharp, early, fact-based Product Definition
4. Solid up-front Homework (competitive, market, technical, and financial Studies)5. True cross-functional Teams
6. Leverage (building on Core Strengths)
7. Market Attractiveness
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8. Quality Launch Processes (well-executed Marketing Actions)
9. Technical Competence/Technology Actions well-executed
(*) Source: Robert Cooper
Anything that wont sell, I dont want to invent. Its sale is proof ofutility, and utility is success. Thomas Edison
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Uncertainty Reduction for Risk Areas (*)
HighHigh
MediumMedium
ncertain
ty
ncertain
ty
Product LaunchProduct Launch
ProductProductPerformancePerformance
ProductProductUnit CostUnit Cost
MarketMarketAcceptanceAcceptance
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00 11 22 33 44 YearsYearsLowLow
LevelofU
LevelofU
(*) Source: F.M. Scherer , "New Perspectives on Economic Growth and Technological Innovation"prepared for publication by the British-North American Committee, and derived from Merton J. Peck andFrederic M. Scherer, "Uncertainty and Time in Program Decisions" in The Weapons Acquisition Process:
An Economic Analysis(Boston: Harvard Business School Press, 1962) pp. 299-323.
TechnicalTechnical
FeasibilityFeasibility
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Risk Assessments
Delay What competitive Scenario does your
Project face? (Consequence of Delay) Does your Project have any 3rd Party
Dependencies? When will the market/customer require
this Project? How long can we sell the product? The
shorter the riskier. Does your Project have any cross-
company Dependencies? What is the probability that this project
will be delayed by one or more releases?
Volume / Quantities What specific markets does this Project
support? Who are the Key Customers for your
Project and how many
Have customer commitments already beenmade?
What percentage of the project volumecomes from current products?
There is a 10% chance that the volume ofthis project will be reduced by ___.
Price What alternatives are buyers aware of
when making a purchase? Does the product have any unique
attributes that differentiate it from
competing products? What amount of change, technological or
business will the customer be required tomake?
How significant are buyers expendituresfor the product in absolute dollar terms?
Product Expenditures (Cost) relative to
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Profitability/ NPV
Risk Scores captureVariability
Correlation Coefficientscapture Weights
Delay has Impact oneither Price or Volume
Validate Questions
- There is a 10% chance that the discounted
price of this project will be reduced by ___.
Unit Cost Have Target Costs been established? Has Lucent built something similar before? Are the hardware requirements clear and
stable? Is the Product Definition clear and stable? What phase is the project currently in? What is the Cost Estimate based on? How volume-sensitive is the Unit Cost? There is a 10% chance that the unit cost of
this project will be increased by ___.
R&D Expense What is the estimated size and complexity
of this project? How much capital/other expense is
required? How stable are the requirements? Availability and readiness of development
staff? Availability and readiness of test staff? What are the schedule risks for this
project? Availability and readiness of lab space /
time?
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Sample Assessment Question
Example: Pricing Risk / Sensitivity
Q19 How significant are buyers expenditures for the product in absolute dollar terms? Product Expendituresrelative to CAPEX?
Very Small /
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Four Delay Scenarios
Competition
Product
Growth
Restricted Competition
(Interoperability Issues
/Network Effects)
Perfect Competition
(Standard Interfaces /
standalone Products)
No-Growth
Products
Customers dont switch toCompetitionVolume overall stays same Pricesomewhat reduced
Customers switch to CompetingProductsVolume is reduced throughout
Lifecycle
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High-Growth
Products
Customers dont switch toCompetitionVolume overall stays same Pricesomewhat reduced
Margins depressed more severelyin later Stages
Customers switch to CompetingProductsVolume is reduced throughout
Lifecycle, but more severely in
later Stages, due to lower GrowthSales
Just Two Parameters: 1) Delay Time and 2) Percent Revenue Reduction(Price or Volume)
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Four Delay Scenarios Revenue Outcomes (*)
Case 2 No-Growth / Perfect CompetitionCase 1 No-Growth / Restricted Competition
0%
20%
40%
60%
80%
100%
120%
-Q1
-Q3
-Q1
-Q3
-Q1
-Q3
-Q1
-Q3
-Q1
-Q3
-Q1
-Q3
0%
20%
40%
60%
80%
100%
120%
-Q1
-Q3
-Q1
-Q3
-Q1
-Q3
-Q1
-Q3
-Q1
-Q3
-Q1
-Q3
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Case 4 Hi-Growth / Perfect Competition
(*) Partial Source: Preston Smith, Don Reinertsen, Developing Products in Half the Time
Case 3 Hi-Growth / Restricted Competition
0%
50%
100%
150%
200%
250%
Y1-Q
1
Y1-Q
3
Y2-Q
1
Y2-Q
3
Y3-Q
1
Y3-Q
3
Y4-Q
1
Y4-Q
3
Y5-Q
1
Y5-Q
3
Y6-Q
1
Y6-Q
3
Initial Sales - Baseline Total Sales - Baseline
Initial Sales - Case 3 Total Sales - Case 3
0%
50%
100%
150%
200%
250%
Y1-Q
1
Y1-Q
3
Y2-Q
1
Y2-Q
3
Y3-Q
1
Y3-Q
3
Y4-Q
1
Y4-Q
3
Y5-Q
1
Y5-Q
3
Y6-Q
1
Y6-Q
3
Initial Sales - Baseline Total Sales - Baseline
Initial Sales - Case 4 Total Sales - Case 4
Y1
Y1
Y2
Y2
Y3
Y3
Y4
Y4
Y5
Y5
Y6
Y6
Initial Sales - Baseline Total Sales - Case 1
Y1
Y1
Y Y Y Y Y Y Y Y Y Y
Initial Sales - Baseline Total Sales - Case 2
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NPV Probability Distribution and Risk Weights / Impacts
Net Present Value Probability
Distribution
M ean = 387217.5
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
Tornado Diagram
0.826
0.485
-0.34
-0.028
Unit Price
Volume
Unit Cost
R&D Ex ense
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Positive Business with a low Probability to fall below NPV=$0
Wide Range of possible Outcomes
Typical Profile of Influence Factor Impact on NPV
0
-$0.4 $0.0 $0.4 $0.8 $1.2
Values in Millions-1 -0.8 -0.6 -0.4 -0.2 0 0.2 0.4 0.6 0.8 1
Std b Coefficients
R&D Expense, while an important Constraint, is almost never theFactor with the most Impact on Profitability
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Portfolio Risk Map (*)
bability
bability
V
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