Strata, Structure, and Strategy for Resource Allocation and New Product Development Portfolio Management

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Chao, Raul O.
Kavadias, Stylianos
Gaimon, Cheryl
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Innovation and new product development (NPD) are critical to firm success and are often cited as means to a sustained competitive advantage. Unfortunately, the question of which innovation programs to pursue and how they should be funded is not trivial. This thesis examines the resource allocation and NPD portfolio problem. Special emphasis is placed on the organizational and behavioral factors that influence this problem. In doing so, we adopt a hierarchical perspective and posit that the resource allocation and NPD portfolio problem acquires a unique structure depending on the level at which the problem is considered. Beginning at the firm level, each study attempts to break open a black box to understand the drivers of effective resource allocation and NPD portfolio decisions at successively more detailed levels of analysis. We begin with an analysis of the firm's total R&D investment and we show how R&D intensity (the percentage of revenue that is reinvested in R&D) depends on a combination of NPD portfolio metrics and operational variables. We then extend the analysis to reveal how a simple evolutionary process explains the often cited consistency in R&D intensity at the industry level. Next, we analyze how the R&D investment is partitioned into "strategic buckets" consisting of NPD programs that are characterized by type of innovative activity (incremental or radical). We show how time commitment, technological/market complexity, and potential disruptions to the technology/market environment influence the balance between incremental and radical programs in the NPD portfolio. Finally, we analyze how individual NPD programs are funded and how they evolve over time in an organization setting that is defined by more or less autonomy. We find that how best to allocate resources depends on two types of autonomy bestowed upon managers: autonomy with respect to NPD funding and autonomy regarding how the NPD budget is monitored and controlled. We conclude with a discussion of the theoretical and managerial implications of our work.
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