product portfolio risk management
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Assessing and Managing Risks of Product PortfoliosProduct Portfolios
Ruedi Klein, NPDP, PMP
Product Manager
Alcatel-Lucent
Agenda
1. ‘Efficient Frontier’ of New Product Portfolios
2. Portfolio Risk Assessments
3. Integration of Portfolio and Project Risk Management
All Rights Reserved © Alcatel-Lucent 20072 | Assessing and Managing Risks of Product Portfolios | May 2008
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
All Rights Reserved © Alcatel-Lucent 20073 | Assessing and Managing Risks of Product Portfolios | May 2008
� 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
1‘Efficient Frontier’ of New Product
Portfolios
All Rights Reserved © Alcatel-Lucent 20074 | Assessing and Managing Risks of Product Portfolios | May 2008
1 Portfolios
What is Product Portfolio Management?
Portfolio Management
A method to compare the attractiveness of alternative investments.
Unknown
All Rights Reserved © Alcatel-Lucent 20075 | Assessing and Managing Risks of Product Portfolios | May 2008
Product Portfolio Management
Portfolio management is a dynamic decision process, whereby a business’s 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 and
reallocated to the active projects.
Bob Cooper
Objectives of Portfolio Management (*)
1. Maximization of Value
� Allocate Resources to maximize the Value of the Portfolio in terms of some Company Objective
2. Balance
� Achieve a balance of Projects in terms of a Number of Parameters
3. Strategic Direction
All Rights Reserved © Alcatel-Lucent 20076 | Assessing and Managing Risks of Product Portfolios | May 2008
� Portfolio is strategically aligned and truly reflects the Business’s Strategy
(*) Cooper, Robert G.; Edgett, Scott J.; Kleinschmidt, Elko J.” Portfolio Management for New Products”, 1998, Addison-Wesley
‘Strategic’ Projects
A project is ‘strategic’, when the money will come outside the planning horizon. In business case lingo the project has a ‘Terminal
Value’.
Two Asset Investment Decision
ρρρρρρρρ = 0= 0 ρρ= 1= 1
ρρρρρρρρ = = --11
R2R2 A2A2
All Rights Reserved © Alcatel-Lucent 20077 | Assessing and Managing Risks of Product Portfolios | May 2008
Re
turn
Re
turn
R1R1
X1X1 X2X2RiskRisk
A1A1
Varying Investment Levels, result in varying Rate of Returns
E(rE(rGG)) Asset Asset ReturnReturn
New Product New Product ReturnReturn
All Rights Reserved © Alcatel-Lucent 20078 | Assessing and Managing Risks of Product Portfolios | May 2008
WACCWACC
Re
turn
Re
turn
Investment LevelInvestment LevelNew Products are better evaluated as Projects, not as ongoing
Businesses
ρρρρρρρρ = 0= 0 ρρ= 1= 1
ρρρρρρρρ = = --11
R2R2 P2P2
Comparing Product to Asset Investments
Threats to Independence1.Markets2.Product Lines
All Rights Reserved © Alcatel-Lucent 20079 | Assessing and Managing Risks of Product Portfolios | May 2008
Re
turn
Re
turn
R1R1
X1X1 X2X2RiskRisk
P1P1
RiskRisk
2.Product Lines3.Technology or Platforms4.Resources5.Project Types
“Put all your eggs in one basket and watch that basket!” & “Diversification is a hedge against stupidity!” – Warren Buffet
Efficient Frontier for New Products (*)
E(rE(rGG))
IndividualIndividualO1O1
O2O2
Two PortfoliosTwo Portfolios
All Rights Reserved © Alcatel-Lucent 200710 | Assessing and Managing Risks of Product Portfolios | May 2008
rrff
σσσσG
IndividualIndividualProjectsProjects
Re
turn
Re
turn
RiskRisk
= WACC= WACC ‘Efficient’ ‘Efficient’ FrontierFrontier
(*) Efficient Portfolios were first mentioned in H.M. Markowitz, “Portfolio Selection”, Journal of Finance, 7:77-91 (March 1952)
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
Company’s R&D Budget Level
All Rights Reserved © Alcatel-Lucent 200711 | Assessing and Managing Risks of Product Portfolios | May 2008
2. New Product Investments are rarely
independent
3. Any Model purely based on IRR/NPV
ignores the Existence and Value of
Options
Efficient Frontier Conclusion
All Rights Reserved © Alcatel-Lucent 200712 | Assessing and Managing Risks of Product Portfolios | May 2008
� 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 / Risk
Ratios for Prioritization
Theoretical Model, applicable to New Product Portfolios
2Portfolio Risk Assessments
All Rights Reserved © Alcatel-Lucent 200713 | Assessing and Managing Risks of Product Portfolios | May 2008
2
Inputs to the Portfolio Decision
� Markets and Customer Lists
� Resource Information and Total R&D Spending Level
� Products and R&D Project Lists
� Business Cases
� Risk Assessments
“The information you have is not the information you want.
The information you want is not the information you need.
The information you need is not the information you can obtain.
The information you can obtain costs more than you want to pay.”
– Anonymous
All Rights Reserved © Alcatel-Lucent 200714 | Assessing and Managing Risks of Product Portfolios | May 2008
Risk in Product Portfolio Management
Quantities
Unit Cost
&
All Rights Reserved © Alcatel-Lucent 200715 | Assessing and Managing Risks of Product Portfolios | May 2008
“Risk is the central element that influences financial behavior.” –Robert C. Merton (1999)
Unit PriceR&D
Expense
&
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
All Rights Reserved © Alcatel-Lucent 200716 | Assessing and Managing Risks of Product Portfolios | May 2008
7. Market Attractiveness
8. Quality Launch Processes (well-executed Marketing Actions)
9. Technical Competence/Technology Actions well-executed
(*) Source: Robert Cooper
“Anything that won’t sell, I don’t want to invent. Its sale is proof of utility, and utility is success.” – Thomas Edison
Uncertainty Reduction for Risk Areas (*)
HighHigh
MediumMedium
Level o
f U
ncert
ain
tyL
evel o
f U
ncert
ain
ty
Product LaunchProduct Launch
ProductProductPerformancePerformance
ProductProductUnit CostUnit Cost
MarketMarketAcceptanceAcceptance
All Rights Reserved © Alcatel-Lucent 200717 | Assessing and Managing Risks of Product Portfolios | May 2008
00 11 22 33 44 YearsYears
LowLow
Level o
f U
ncert
ain
tyL
evel o
f U
ncert
ain
ty
(*) 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 and Frederic 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.
TechnicalTechnicalFeasibilityFeasibility
PerformancePerformance
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 been
made?• What percentage of the project volume
comes from current products?• There is a 10% chance that the volume of
this 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 to make?
• How significant are buyers expenditures for the product in absolute dollar terms?
• Product Expenditures (Cost) relative to End-Benefits?
All Rights Reserved © Alcatel-Lucent 200718 | Assessing and Managing Risks of Product Portfolios | May 2008
Profitability/ NPV
• Risk Scores capture Variability
• Correlation Coefficients capture Weights
• Delay has Impact on either Price or Volume
• Validate Questions
End-Benefits?• 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?
Sample Assessment Question
Example: Pricing Risk / Sensitivity
Q19 How significant are buyers expenditures for the product in absolute dollar terms? Product Expenditures relative to CAPEX?
Very Small / <1% of Total CAPEX .............................................................................................................
Small / <5% of Total CAPEX ....................................................................................................................
Medium / <10% of Total CAPEX................................................................................................................
High / <25% of Total CAPEX ....................................................................................................................
Very High / >25% of Total CAPEX .............................................................................................................
All Rights Reserved © Alcatel-Lucent 200719 | Assessing and Managing Risks of Product Portfolios | May 2008
� Five Categories – Multiple-Choice
� Anchored Scales – As unambiguous as possible
� Easily answerable, if a Customer Value Proposition exists
� Run a Dry-Run with someone, who sees the Survey for the first Time
� Derive Risk Scores / Variability
(*) CAPEX – Capital Expenditures
Four Delay Scenarios
Competition
Product
Growth
Restricted Competition
(Interoperability Issues
/Network Effects)
Perfect Competition
(Standard Interfaces /
standalone Products)
No-Growth
Products
Customers don’t switch to CompetitionVolume overall stays same – Price somewhat reduced
Customers switch to Competing ProductsVolume is reduced throughout Lifecycle
All Rights Reserved © Alcatel-Lucent 200720 | Assessing and Managing Risks of Product Portfolios | May 2008
High-Growth
Products
Customers don’t switch to CompetitionVolume overall stays same – Price somewhat reducedMargins depressed more severely in later Stages
Customers switch to Competing ProductsVolume is reduced throughout Lifecycle, but more severely in later Stages, due to lower Growth Sales
Just Two Parameters: 1) Delay Time and 2) Percent Revenue Reduction (Price or Volume)
Four Delay Scenarios – Revenue Outcomes (*)
Case 2 – No-Growth / Perfect CompetitionCase 1 – No-Growth / Restricted Competition
0%
20%
40%
60%
80%
100%
120%
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
0%
20%
40%
60%
80%
100%
120%
Y1
-Q1
Y1
-Q3
Y2
-Q1
Y2
-Q3
Y3
-Q1
Y3
-Q3
Y4
-Q1
Y4
-Q3
Y5
-Q1
Y5
-Q3
Y6
-Q1
Y6
-Q3
All Rights Reserved © Alcatel-Lucent 200721 | Assessing and Managing Risks of Product Portfolios | May 2008
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-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 - Case 1
Y1
-Q1
Y1
-Q3
Y2
-Q1
Y2
-Q3
Y3
-Q1
Y3
-Q3
Y4
-Q1
Y4
-Q3
Y5
-Q1
Y5
-Q3
Y6
-Q1
Y6
-Q3
Initial Sales - Baseline Total Sales - Case 2
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 Expense
All Rights Reserved © Alcatel-Lucent 200722 | Assessing and Managing Risks of Product Portfolios | May 2008
� 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
R&D Expense
Std b Coefficients
R&D Expense, while an important Constraint, is almost never the Factor with the most Impact on Profitability
Portfolio Risk Map (*)
Pro
bab
ilit
yP
rob
ab
ilit
yN
PV
< 0
NP
V <
0100%100%
Expected Expected LossesLosses
50%50%
All Rights Reserved © Alcatel-Lucent 200723 | Assessing and Managing Risks of Product Portfolios | May 2008
(*) Adapted from Preston G. Smith and Guy M. Merritt, “Proactive Risk Management – Controlling Uncertainty in Product Development”, 2002, Productivity Press
Pro
bab
ilit
yP
rob
ab
ilit
yN
PV
< 0
NP
V <
0
Maximum LossMaximum Loss[000s][000s]
$1,000 $10,000$10,000
10%10%
$100,000$100,000 $1,000,000$1,000,000
LossesLosses
3Integration of Portfolio and Project Risk
Management
All Rights Reserved © Alcatel-Lucent 200724 | Assessing and Managing Risks of Product Portfolios | May 2008
3 Management
CMMi Risk Management Process Area (*)
DetermineRisk Sources
AndCategories
Define RiskParameters
EstablishA Risk
ManagementStrategy
IdentifyRisks
Prepare for Risk ManagementIdentify and
Analyze Risks
All Rights Reserved © Alcatel-Lucent 200725 | Assessing and Managing Risks of Product Portfolios | May 2008
ImplementRisk
MitigationPlans
DevelopRisk
MitigationPlans
Evaluate,Categorize,
And PrioritizeRisks
(*) © 2002 by Carnegie Mellon University
Risk Repository
MitigateRisks
Project Level Risk Analysis (*)
Probability of Risk Event
Probability of Impact
Total
LossImpactRisk Event
Ex. Gate 1 Postponed Ex. Delay Release by 2 Weeks Ex. Missed
Ex. 30% Ex. 80%
All Rights Reserved © Alcatel-Lucent 200726 | Assessing and Managing Risks of Product Portfolios | May 2008
Risk Event Driver(s)
Impact Driver(s)
(*) Source: Preston G. Smith and Guy M. Merritt, “Proactive Risk Management – Controlling Uncertainty in Product Development”, 2002, Productivity Press
Ex. Dev. Not ready to commit
Ex. Takes 2 Weeks to re-schedule Gates
Ex. Missed major Customer Budget Cycle$50M NPV
“Volatility per se, be it related to weather, portfolio returns, or the timing of one’s morning newspaper delivery, is simply a benign
statistical probability factor that tells us nothing about risk until coupled with a consequence” – Robert H. Jeffrey, 1984
15
20
25
30
35
40
45
Typical Distribution of Technical Risks
All Rights Reserved © Alcatel-Lucent 200727 | Assessing and Managing Risks of Product Portfolios | May 2008
0
5
10
15
Sched
ule
Res
ourc
e Sof
twar
e
Featu
re C
hurn
H
ardw
are
Techn
olog
ical
Pro
cess
C
ost
Produ
ct R
oadm
ap
Exter
nal
Req
uire
men
ts
Vendo
r Per
form
ance
Con
tract
ual
Org
aniz
atio
nal/M
anag
eria
l
Risk Resolution Process (*)
Review Risks
Defer Action for more Info
Develop Action Plans
Take no Action(Accept Risk)
All Rights Reserved © Alcatel-Lucent 200728 | Assessing and Managing Risks of Product Portfolios | May 2008
Avoid Risk Transfer Risk to a 3rd Party
Provide Redundancy
Mitigate Risk
Reserves of Budget/Schedule
Contingency if Risk Event Occurs
Prevention of the Risk Event
(*) Source: Preston G. Smith and Guy M. Merritt, “Proactive Risk Management – Controlling Uncertainty in Product Development”, 2002, Productivity Press
Risk Management Benefits and Uses
� Crucial Part of Investment
Evaluation
� Integration with Project
Management is 2-Way
� Risk Assessment –Continuity is Key
� Lower Costs and less Chaos
All Rights Reserved © Alcatel-Lucent 200729 | Assessing and Managing Risks of Product Portfolios | May 2008
� Lower Costs and less Chaos
Next Steps – Implementation
1. Start with a Review / Identify Areas of Weakness
2. Put in Place a simple regular Risk Assessment within your Portfolio Review Process
3. Using Prompt Lists
4. Covering the whole Portfolio
5. Involving all Stakeholders
All Rights Reserved © Alcatel-Lucent 200730 | Assessing and Managing Risks of Product Portfolios | May 2008
5. Involving all Stakeholders
6. Follow-Through
7. Making sure identified Risks are addressed
8. Risks are known throughout Company
9. Don’t let Risk get a bad Name
“In preparing for Battle I have always found that Plans are useless, but Planning is indispensable.” – Dwight Eisenhower
www.alcatel-lucent.com
All Rights Reserved © Alcatel-Lucent 200731 | Assessing and Managing Risks of Product Portfolios | May 2008
Ruedi Klein, NPDP, PMPProduct ManagerAlcatel-LucentTel. (973) 386-6695ruediklein@alcatel-lucent.comhttp://www.alcatel-lucent.com
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