1997 Product Development Book Reviews

 

Portfolio Management for New Products by R. G. Cooper, S. J. Edgett, and E. J. Kleinschmidt. Hamilton, Ontario: McMaster University, 1997. 131 + xi pages. $35.95 (paperback).*

This book addresses an important and timely topic in product development management: how to manage a portfolio of new-product projects for maximum competitive impact. Many managers struggle with allocating their increasingly tight resources to many product opportunities under multiple objectives. These authors provide clear and helpful guidance to such managers in setting up a portfolio management system. Several books and countless papers address specific techniques for managing the development portfolio, but this book stands out because it covers a variety of techniques and shows how they can be combined to build an effective management system for a real company.

Although it is written by academics with a style that is at times academic, this book is clearly intended for managers. It applies to all types of products and services and uses a variety of them as examples. The examples are biased toward chemical and materials companies, however.

This volume is based on a study of the portfolio management practices of 35 companies that apparently are leaders in building a comprehensive approach to portfolio management. The authors point out the dilemmas that these companies face, and they emphasize that none of the companies studied is yet satisfied with its current solution. The book includes many detailed examples from these companies, and in the last chapter the authors build a comprehensive composite example to illustrate how the pieces described in previous chapters can be assembled into a complete portfolio management system. At the same time, they state clearly that each of the companies studied uses a different approach, and, indeed, it appears that each company will need to develop a system tailored to its unique needs. There is no universal solution to portfolio management.

Thus, the material provided here can be applied quite flexibly. It fits well with Cooper's well-known stage-gate process [1], but it is not dependent on having a stage-gate process.

The authors use an effective framework for laying out the basics, based on their three objectives of a portfolio management scheme. The first objective is maximizing the value of the portfolio, which can either be done on an absolute (bang) or a normalized (bang for the buck) basis. It can also be financially based or more qualitative in nature. Their second objective is balancing the portfolio, so that it reflects a desirable mix of long- and short-term opportunities, technology risks, geographical areas, or other attributes. The third objective is alignment with the corporate strategy.

After covering the three objectives in Chapters 2-4, respectively, they discuss several complications in Chapter 5. For example, should resource commitments made to projects be firm? If management makes firm commitments to a project and does not alter them, mediocre projects can run through their gates, "like an express train," without being stopped. On the other hand, if management constantly reshuffles resources among projects, developers become demoralized and waste their effort in shifting to the new assignments.

Although this book is reasonably free of typographical errors, it does not reflect the level of review and editing that one would expect in a commercially published book. It does not have an index, and its preface is just a list of acknowledgments. It is quite short, especially considering its price. Even so, it is a bit repetitive, so with some tightening up, it would be even shorter.

However, if we consider this book as Cooper, Edgett, and Kleinschmidt's new product, then this is a perfect opportunity for them to apply incremental innovation [2], Chapter 4. Rather than take the time that a commercial publisher might have needed, they were apparently able to publish it faster through their institution. Now they can upgrade it in response to their readers' initial feedback, then target it much more precisely through a commercial publisher than would have been possible for the first edition. And even though the initial edition is rather expensive, it still represents good value to those lead-readers who are genuinely interested in improving their portfolio management.

Management of the new-product portfolio can be compared with management of an investment portfolio, and this is precisely what the authors do (see page 37). However, there is a pitfall here. Whereas diversification is advantageous for an investment portfolio, the concept of diversification can cause problems for a new-products portfolio. As management attempts to diversify (balance) the portfolio, they are tempted to "invest" in too many projects at once, thus stretching their resources. Diversification is often inexpensive for an investment portfolio, but because new-product projects cannot be made arbitrarily small, an attempt to diversify a development portfolio often leads to more projects than the firm can develop expeditiously. Some of the suggested portfolio assessment techniques require making assessments of the product's financial performance. The authors mention that this is difficult to do accurately, especially early in the project when such estimates would be most valuable. However, in this reviewer's opinion, they do not state this caution strongly enough. For example, Cooper cautions more strongly in his popular book [1, pp. 168-173] about attempting to justify projects on a financial basis early in their development.

The authors suggest that management should exert increasing control over go-kill decisions as a project progresses, because resource commitments increase correspondingly (pp. 105, 107). Although this is a common and natural tendency, it is not an effective time for management to apply its leverage. Others [2,3] suggest that management can make its biggest impact on the project early on, precisely when the issues are vague but when they are also malleable.

One important topic in portfolio management is not covered at all in this book, and another is covered too lightly, in this reviewer's opinion. This missing topic is product line planning [2,3], which establishes relationships within families of products, for example, which products should spawn which variants? Such planning fosters strategic focus, which is certainly within scope for this book. More importantly, it can stretch development resources greatly (also within scope), because it proactively encourages reuse of designs, thereby reducing the effort needed per product developed.

The subject covered too lightly is the devastating effect of overloading the development portfolio. The authors state, "As result, projects end up in a queue-serious log-jams in the process-and cycle time starts to increase" (page 2). If time to market is important, portfolio managers should be acutely aware that overloads directly dilute effort on a project, and this directly extends cycle time. An overloaded portfolio can easily double cycle time [2]. This issue is vital in a book on portfolio management, because it is precisely the portfolio managers who control the project load.

Preston G. Smith CMC

New Product Dynamics

References 1. Cooper, Robert G, Winning at New Products: Accelerating the Process from Idea to Launch. Reading, Mass.: Addison-Wesley, 1993.

2. Smith, Preston G. and Reinertsen, Donald G. Developing Products in Half the Time: New Rules, New Tools. New York: Van Nostrand Reinhold, 1998.

3. Wheelwright, Steven C. and Clark, Kim C. Revolutionizing Product Development: Quantum Leaps in Speed, Efficiency and Quality. New York: The Free Press, 1992.

(Reviewed in the Journal of Product Innovation Management, November 1997, pp. 529-530.)

*Webmaster's note: As suggested above, Cooper, et al. have republished this book through Addison Wesley (1998). The new version is reviewed in the Journal of Product Innovation Management, July 1999, pp. 411-413.

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The Development Factory: Unlocking the Potential of Process Innovation, by Gary P. Pisano. Boston: Harvard Business Review Press, 1997. 343 + xii pages. $35.00.

This book covers a subject that should receive far more attention than it does from PDMA and this journal. Pisano's subject is developing the manufacturing process that accompanies a new product. By studying one industry closely, he shows us how attention to manufacturing processes is a key to not only product success but also long-term competitive strength.

The Development Factory is an academic study of the pharmaceutical industry. This is not a textbook. Researchers and industrial product development and manufacturing managers in industries quite apart from pharmaceuticals will learn from it, as will those interested in new drug development. Although the book has clear research value, this is a review for managers in industry. Manufacturing, along with marketing and R&D, is a key player in the development of a new product. The R&D-manufacturing linkage is just as likely to be weak in a given firm as is the marketing-R&D linkage. Yet, the latter attracts far more attention in the PDMA community than the former. Pisano shows us that manufacturing:

? Is not trivial or assured of success (except for software products)

? Involves central management issues much broader than the technical topics, such as design for assembly or concurrent engineering, with which it is usually associated

? Is an essential ingredient in a firm's new products strategy and a driver of its competitive advantage

In the conventional view of manufacturing, Pisano asserts, process development "tends to draw attention only in those mature industries or segments where product designs have standardized and low-cost manufacturing has become the primary source of competitive advantage" (p. 274). The objective of this book is to explain how manufacturing process options can contribute to new product development.

Pharmaceuticals turns out to be an excellent industry in which to observe current challenges in manufacturing. This industry is now facing major challenges on several fronts: increased regulatory control, price bargaining pressure by managed health care networks, greater competition in drug treatment options (yielding smaller, shorter-life markets), and the much greater complexity of modem drug molecules. Drug companies are healthy enough to respond to these challenges, and they are responding creatively.

The book centers on a study of 23 process development projects in 11 drug companies. Thirteen of the projects are for conventional chemical synthesis processes, the remaining 10 depend on biotechnology; this split provides some of the book's key insights. The study depends largely on interviews and data collection, because the sample size is too small for most statistical approaches.

Although Pisano devotes little attention to expanding his findings to other industries, he does suggest that many other products depend on sophisticated manufacturing processes having substantial risk. Examples include semiconductors, disposable contacts, specialty chemicals, the Gillette Sensor razor, and Post-It notes.

Throughout the book, the author develops a construct of learning before doing versus learning by doing, the idea being that it is preferable to discover manufacturability problems before making commercial-size batches. Firms that chemically synthesize drugs have, over the years, been exposed to a rich base of experience. To the extent that a company has systematically collected such knowledge, it can benefit from learning before doing. In contrast, biotechnology processes are far from this state of knowledge, so they are limited to learning by doing. Besides the cycle-time advantages of getting the learning out of the way early, there are substantial product cost implications. Normally, a company works down the manufacturing learning curve as it learns by doing, but if most of the learning is out of the way before doing, the whole manufacturing learning curve essentially translates downward. Such early product cost reductions are clearly good news for product developers.

Professor Pisano is wise enough not to extend the construct far beyond the pharmaceutical industry, but I will venture to suggest one extension. In mechanical product development, recent advances in computerized tools have presented us with amazing capabilities to learn before doing, by analyzing a product's performance before building it. Similar computerized tools are opening new abilities to learning by doing, by quickly manufacturing in modest lot sizes through so-called rapid tooling techniques. This book's findings could help developers of such mechanical products to sort out effective computer analysis versus rapid tooling options.

The shortcoming of this book for the product development manager is that its gems are widely dispersed. Chapters 3-5 delve into pharmaceutical R&D in considerable detail to set the stage, but they offer few product development insights to those from other industries. However, those who skip these chapters may fail to comprehend some valuable points in later chapters. For instance, deep in the early chapters is some key industry jargon, such as new chemical entity (NCE) and the concept of route (see p. 125), neither of which is in the index.

The payoff for the persistent product developer starts in chapters 6 and 7. Then in chapter 8, the author covers a subject crucial to consistent improvement of one's product development process: systematically applying the lessons learned from one project to succeeding ones. In Pisano's fascinating case studies, Organizations A and B intentionally collect and apply what they have learned from previous projects, and their performance improves accordingly. Organizations C and D forfeit their opportunities to learn, and their performance remains inconsistent.

Pisano expands his scope in chapter 9, showing how his concepts apply to a range of process development decisions. He uses three case studies from pharmaceuticals and two automotive cases. A central theme illustrated here is that process development decisions may be taken as isolated events but in fact have a cumulative effect on future capabilities. "Any given process development decision has two effects: the intended first-order effects on performance (cost, flexibility, or quality) and the often-unintended second-order effects on the evolution of future capabilities . . . . Individual process R&D decisions are not discrete events; rather, they are part of a series of actions over which the firm's capabilities are built" (pp. 270-271). The manager who recognizes these so-called second-order effects and builds on them will be in a stronger position to further improve performance tomorrow.

This is brand new material for the manager who wants to be aware of the latest thinking from Harvard Business School. Unfortunately, by the time it gets distilled for easy reading, it will no longer be new.

Preston G. Smith

New Product Dynamics

(Reviewed in the Journal of Product Innovation Management, March 1997, pp. 141-142.)

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