Organizational enablers for NPD portfolio selection

Despite substantial research that advocates the “right” portfolio of new product development initiatives for the firm, one important aspect has been overlooked: Creating a portfolio of new product development initiatives is not equivalent to choosing from a menu of initiatives. Rather, these initiatives are defined by and within the organization. Thus, portfolio selection rests upon two challenges: 1) the cross-functional nature of collaborative tasks; and 2) the role of explicit and implicit incentives on innovative outcomes. This paper explores how these factors ultimately determine the initiatives an organization pursues. We abstract a new product development organization as two functional managers who report to senior management and analyze the strategic interactions between all three stakeholders. Senior management decides whether to empower the functional managers to define the initiative and how to reward them contingent on the outcome. We evaluate how the asymmetry of information regarding each function’s capability, and the explicit and implicit rewards and penalties imposed on the functional managers affect the upfront resource allocation. We find a profound effect of the information asymmetry: the set of initiatives the firm deems profitable is reduced, thus impeding the organization’s potential to innovate. To counter such a shortcoming, senior management may optimally misalign the objectives of the stakeholders

Search for the best alternative: an experimental approach

Effectively implementing any dimension of a company’s strategy requires a careful balance between ensuring a sufficient number of opportunities have been explored and the execution has taken place in a timely manner for a specific initiative. Naturally, the importance of specific characteristics of an initiative will vary according to the strategic objective. Alternatives vary in their likelihood of success, how sensitive their value is to time, and the resources required to explore additional options. Extant research has established optimal rules for what constitutes a sufficient degree of exploration, and how to go about exploring alternatives. Yet, how individuals vary their behavior according to the characteristics of an initiative is not well understood. We use a controlled experiment to study how individuals’ decisions are impacted by these characteristics. As expected, individuals perform significantly worse than optimal behavior would predict. However, the underlying drivers of this performance deviation critically depend on the characteristics of the initiative. Individuals who face simple initiatives that lack sensitivity to time tend to evaluate far too many options. In contrast, when a simple initiative’s value is sensitive to time, individuals tend to evaluate far too few options. When the individuals face more difficult initiatives, they do not exhibit such extreme tendencies in terms of how many alternatives they evaluate. Rather, for the most challenging initiatives, individuals exhibit near optimal behavior in terms of how many alternatives they evaluate. Our findings help to provide insight to managers on where they should focus their attention in terms of pushing for more or less exploration