A Theoretical Framework for Managing the New Product Development Portfolio: When and How to Use Strategic Buckets

Abstract

Developing the "right" new products is critical to firm success and is often cited as a key competitive dimension. This paper explores new product development (NPD) portfolio strategy and the balance between incremental and radical innovation. We characterize innovative effort through a normative theoretical framework that addresses a popular practice in NPD portfolio management: the use of strategic buckets. Strategic buckets encourage the division of the overall NPD resource budget into smaller, more focused budgets that are defined by the type of innovative effort (incremental or radical). We show that time commitment determines the balance between incremental and radical innovation. When managers execute this balance, they are often confounded by (i) environmental complexity, defined as the number of unknown interdependencies among technology and market parameters that determine product performance; and (ii) environmental instability, the probability of changes to the underlying performance functions. Although both of these factors confound managers, we find that they have completely opposite effects on the NPD portfolio balance. Environmental complexity shifts the balance toward radical innovation. Conversely, environmental instability shifts the balance toward incremental innovation. Risk considerations and implications for theory and practice are also discussed.new product development, NPD portfolio strategy, incremental innovation, radical innovation, strategic buckets, complex systems, evolutionary systems

Antecedents and implications of disruptive innovation: Evidence from China

“…Moreover, given the uncertainties surrounding disruptive innovations, long-term-oriented, subjective-based incentive plans should be adopted instead of short-term-oriented, formula-based incentive plans for key executives (Govindarajan & Kopalle, 2006), so that the senior managers will not be confined by rigid incentives (such as market size, growth rate, profitability). Empirical research also suggests that resource allocation processes using strategic buckets to manage sustaining versus disruptive projects independently are more effective in allowing disruptive innovation to flourish (Chao & Kavadias, 2007;Hogan, 2005). Companies should allocate financial and human resources to identify new potential customers, construct relationships with these customers, and develop knowledge about them (Danneels, 2002(Danneels, , 2003(Danneels, , 2004, because it is the emerging segments that value disruptive innovations at the time of their introduction (Govindarajan, Kopalle, & Danneels, 2011).…”

“…A substantial body of literature has explored the conditions under which disruptive innovation is likely to arise from an organisation, including its resource allocation processes (Chao & Kavadias, 2007;Hogan, 2005;Nelson & Winter, 1982); its organisational structure (Cohen & Klepper, 1996;Lee & Chen, 2009;Tsai & Wang, 2005); and its organisational culture (Henderson, 2006;Tushman & O'Reilly, 2002). Despite the progress, the nature of the innovation processes that enable disruptive innovation deserves further examination (Yu & Hang, 2010).…”

NPD project portfolio selection using reinvestment strategy in competitive environment

“…ain focus of analysis Key Tools (Gerchak & Parlar, 1999) The competitive situation between two firms for resource allocation on limited R&D projects Game theory (Souza, 2004) The competition between two firms for introducing new products to market Game theory (Chao & Kavadias, 2008) Balance between incremental and radical innovations for developing right new products in portfolio Strategic Bucket (Golany & Rothblum, 2008) Investments in development projects within competitive environments under uncertainty Linear Programming (Solak et al, 2010) (Wei & Chang, 2011) Uncertainty and impact of several criteria on decision making for selecting new products Fuzzy Linear Programming (Canbolat et al, 2012) A race among multiple firms that compete over the development of a product Game theory (Belenky, 2012) Reinvesting during time horizon in project portfolio selection Boolean Programming (Wang & Yang, 2012) Managerial flexibility in an innovative R&D project Real Options (Lin & Zhou, 2013) The Cross-market effect on R&D project portfolio Game theory (Hassanzadeh et al, 2014) Imprecise information in objective of R&D project selection Robust Optimization (Jafarzadeh et al, 2015) Flexible time horizon considering reinvestment in project selection Integer Programming (Kettunen et al, 2015) Managerial flexibility for developing new product in competitive environment Dynamic Programming (Wang & Song, 2016) Time-dependent budget on reinvestment strategy Integer Programming…”

Towards decision analytics in product portfolio management

“…A method for possibly coping with and achieving alignment between strategy and portfolio is called the "strategic bucket method". A strategic bucket can be defined as "money set aside for new product development aligned with a particular strategy" (Chao & Kavadias, 2007). For the fourth goal, the right number of projects, it is all about allocating the right resources to the right projects.…”