Helsinki University of Technology Systems Analysis Laboratory

A Portfolio Model for the A Portfolio Model for the

Allocation of Resources to Allocation of Resources to

Standardization Activities Standardization Activities

Antti Toppila, Ahti Salo and Juuso LiesiöSystems Analysis Laboratory

Helsinki University of Technology

P.O. Box 1100, 02015 TKK, Finland

http://www.sal.tkk.fi

firstname.lastname@tkk.fi

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Helsinki University of Technology Systems Analysis Laboratory

Technical standardizationTechnical standardization Agreement on a property of a good

or service– E.g. railroad gauge, plug

Important part of R&D in the

Telecommunication industry– Compatibility and interoperability

– Access to a common pool of knowledge

– Economies of scale

Our client was Nokia– Worlds largest mobile phone

manufacturer (2007)» Spent more than EUR 5 billion into R&D

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Helsinki University of Technology Systems Analysis Laboratory

ResourceResource allocation into standardization allocation into standardization

Challenges in standardization portfolio management– Value from standardization are difficult to assess

– Hundreds of linked standardization activities to manage

– Investments need to be aligned with company core competences

– Contribution to market growth should be explicitly considered

Value capturing through widely adopted technologies– Widely adopted technologies yield more sales

– Widely adopted technologies need development

– Standardization contributes to the emergence of widely adopted technologies

– Widely adopted technologies may emerge without standards through intensive

technology development

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Helsinki University of Technology Systems Analysis Laboratory

Standardization activity modelStandardization activity model

Commit rS rD resources to an

activity

Standardization successful?

0

ps (rs )

no

Decision node

Uncertainty node

Value node

1- ps (rs )

yes

Sales

Widely adopted technology successful?

Widely adopted technology successful?

pd+(rD )

1-pd+ (rD )

yes

yes

no

Sales

pd- (rD )

1-pd-(rD )

noNo Sales

No Sales

rs = Standardization resources

rd = Development resources

ps = Standardization success probability

pd+ = Development success probability (assuming standardization success)

pd-= Development success probability (assuming standardization failure)

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Helsinki University of Technology Systems Analysis Laboratory

Standardization activity portfolio Standardization activity portfolio

Activities managed concurrently

– Shared budget constraints

– Interactions among activities

Portfolio model– Uncertainties of activities

modeled with decision trees

– Decisions variables: resource allocation to the activities

– Maximize portfolio expected sales

Discretized problem solved with Zero-One Linear Programming

A

B

C

X

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Helsinki University of Technology Systems Analysis Laboratory

Elicitation of parametersElicitation of parameters Current resource plan a point of

departure

Estimates of success probabilities and

prospective sales

– Sales expressed as an interval, e.g. [50,100] M€

– Resource levels discretized

» Standardization and (conditional) development

success elicited for -100%, -50%, +0% and

+100% changes to current level

Calculation of total success probability

ptot = ps pd+ + (1 – ps ) pd-

rs

ps

1

0

rd

1

0

pd+

pd-

Pro

b.

of s

ucc

ess

Pro

b.

of s

ucc

ess

ptot

-100% -50% +0% +100%

-100% -50% +0% +100%

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Helsinki University of Technology Systems Analysis Laboratory

Efficiency of the current allocationEfficiency of the current allocation

Optimal resource allocation significantly different from the current

Budget

Exp

ecte

d s

ales

Maximum expected sales with current resources

Minimum resource requirement for current expected sales

Current resource allocation

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Helsinki University of Technology Systems Analysis Laboratory

Activity-specific decision recommendationsActivity-specific decision recommendations Interval sales imply multiple optimal

resource allocations

Core Index for each activity-specific

combined resource allocation is defined as

the share of optimal portfolios with this

allocation (cf. RPM; Liesiö et al. 2007)

– Black: All optimal portfolios contain the allocation

– Gray: Some optimal portfolios contain the allocation

– White: No optimal portfolios with the allocation

Provides reallocation recommendations

Activity B

Standardization resources

-100% -50% +0% +100%

-10

0%

-50

%+

0%

+1

00

%

Dev

elop

men

t res

ourc

es-1

00

%-5

0%

+0

%+

10

0%

Activity A

r d

rs

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Helsinki University of Technology Systems Analysis Laboratory

Activity interactionsActivity interactions

Challenging to model– Numerous interactions identified

– Some of these difficult to quantify

– No statistical model for reference

Systematic elicitation and qualitative visualization of interaction networks useful

– Overview of linked activities

– Clustering of closely related activities

Used a heuristic to model pairwise interactions

Crit

icalC

ritic

al

Competes

Critical

Beneficial

Critical

Beneficial

Critical

Competes

Com

pete

s

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Helsinki University of Technology Systems Analysis Laboratory

Impact of heuristic interactionsImpact of heuristic interactions

Penalties/rewards for

decreasing/increasing

attractiveness of linked activities– Proportional to size of benefit, etc.

Decision recommendations with

and without interactions– Holistic view of the impact

– Reveals the interactions that affect the

decision» Not always the strongest interactions

– Enables revision of interactions

-100% -50% +0% +100%

-10

0%

-50

%+

0%

+1

00

%

Without interaction

-100% -50% +0% +100%

-10

0%

-50

%+

0%

+1

00

%

With interactions

CriticalA C

Standardization resources of AD

evel

opm

ent r

esou

rces

of A

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Helsinki University of Technology Systems Analysis Laboratory

ConclusionsConclusions

Complex decision making problem– Intangible conceptual structure

– Need for transparent parameter elicitation and analysis

Portfolio model for allocation of resources– Benefits of standards concretized through widely adopted technologies

– Robust decision recommendations for resource adjustments

Unified management framework for standardization

activities– Equitable treatment of all activities

– Common terminology to discuss resource allocation into standardization

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Helsinki University of Technology Systems Analysis Laboratory

References References

– Cooper, R., Edgett, E. and Kleinschmidt, E. (1997). Portfolio Management for New

Product Development: Lessons Learned from the Leaders-I, Research Technology

Management, vol. 40, pp. 16-19.

– Liesiö, J., Mild, P. and Salo, A. (2007) Preference Programming for Robust Portfolio

Modeling and Project Selection. European Journal of Operational Research, vol. 181, pp.

1488-1505.

– Salo, A. and Liesiö, J. (2006). A Case Study in Participatory Priority-Setting for a

Scandinavian Research Program. International Journal of Information Technology &

Decision Making, vol. 5, pp. 65-88.

– Sharpe, P. and Keelin, T. (1998). How SmithKline Beecham Makes Better Resource-

Allocation Decisions. Harvard Business Review, March-April, pp. 45-57.

– Shurmer, M. and Lea, G. (1995). Telecommunications Standardization and Intellectual

Property Rights: A Fundamental Dilemma? Standard-View, vol. 3, pp. 50-59.