This page outlines a novel innovation management tool which was created by SRC and explains the motivations. It is designed to assist the management of research and development project portfolios for new products. Readers are cautioned that the technique is theoretical and has not been evaluated and proven via real-life case studies. The technique is called research risk strategy analysis and takes a portfolio approach to R&D projects. It directly takes into account estimates of project risk of failure. It is designed to apply to those industries which rely heavily on internal new product development projects and where those projects are concept based as opposed to discovery based.
What is RSA?
Research risk strategy analysis is a new statistical tool for analyzing, controlling and managing the risks associated with corporate R&D project portfolios for new products in technological, innovation-based industries. This is achieved via risk based approaches to portfolio design and project selection versus strategic priorities for growth, innovation and product types. It is intended for use by corporate executives who are in control of or who influence a company or business unit's internal new product development strategy. Risk strategy analysis (RSA) focuses on risk of failure as a key factor in all projects aimed at the development of new products. For example, a 1995 survey by the Product Development Management Association (PDMA) indicates that on average it currently takes about 6.6 ideas to generate one successful new product. This is a 76% risk of failure for each idea. This figure declines to a 50% to 60% failure rate for those projects which enter the development stage. A risk strategy is defined by a specific extent and type of involvement in research and development activities for new products in terms of the different levels of technical and commercial risk associated with the different types and relative numbers of projects making up the portfolio, referred to here as the project mix. Projects are categorized into types such as high risk for breakthrough products and medium risk for product line extensions. Using RSA, the risk strategy or project mix is analyzed in terms of statistical risk of failure as opposed to probable success outcome. As a result of this approach the minimum likely overall success of a portfolio design can be determined at a preassigned overall level of risk of failure to achieve that minimum success. Given a number of input parameters…
as an analysis tool, RSA is designed to yield answers..
to the following types of question…
as a portfolio design and management tool, RSA..
RSA is specifically designed for application in industries..
Who originated the technique?
RSA was developed by Dr. David Wadlow, President of Sensors Research Consulting, Inc. in 1998. Dr. Wadlow has over 17 years of experience in US corporate research. The key details of the technique are described in an initial paper published at this website. See contents for a link to this paper. This paper may be downloaded for further evaluation by interested individuals according to the SRC terms for doing so.
Some motivations
Risk and Innovation
Successful innovation of technological products entails research and development and subsequent commercialization of the technical successes. The definition of a success may be complex. The risks of failure to achieve success, however success is defined, of individual research and development projects for developing innovative technological products are always significant and can be very high when truly new technology is involved. For example, projects to develop breakthrough products typically have higher levels of profit and greater initial risks compared with projects aimed at generating minor or incremental product improvements. Risks also vary depending on the industry and company. Risk of failure levels for well executed individual projects entering development may range anywhere from 10% to 95% and even higher. However, does this really mean that high risk projects should never be undertaken and can never be practically profitable? Finding the answer to that enormous question requires very careful analysis.
Research and development risk needs to be identified and managed.
Risk reduction
To improve the chances of project success one can improve the quality of the components of an R&D innovation or new product development (NPD) process. There is significant evidence that for many types of new product development project this will tend to reduce mistakes and improve efficiency of execution. One may also increase the quality and quantity of the initial technical and commercial concepts, perhaps by adopting a particular problem solving methodology or by hiring more scientists, engineers or consultants, or by hiring a uniquely qualified scientist, engineer or consultant in an attempt to obtain a uniquely competitive leadership position. Unfortunately, risk reduction sometimes means undertaking less higher risk, higher reward research. Whatever route you take to reducing risk and however good your scientists and managers are,
and in high reward research it is typically very significant. For industries based on innovation it is therefore essential to adopt a strategy whereby the overall associated financial risk is managed to acceptable levels.
Risk acceptance and management
In order to successfully manage research for profit, among other things one must have a good strategy for evaluating and dealing with the associated and unavoidable risks. One approach is to undertake numerous independent projects concurrently on the grounds that success rates must increase as the number of trials (projects) increases. This is a commonly adopted and sound statistical premise. If you do this, then the next questions are how many projects to undertake versus what level of individual project risk and what level of overall risk. To apply this principle to an array of concurrent projects of different individual risk levels you first need to identify certain broad based parameters, involving:
The detailed nature of these parameters is discussed later on this page. Identifying these estimates requires detailed knowledge or careful assessments. Certain results of subsequent analyses, such as projected profit 'histories' and lead times to profit generation may help confirm or improve these estimates. However, they are absolutely fundamental to a business. The key point is that..
A brief excursion into statistics
In order to properly appreciate risk strategy analysis it is necessary to first understand the parameters risk of failure and probability of success. These quantities are related and are subtly different. Here is an example. Let's say that the probability of eventual commercial success of any single research project aimed at creating a new technology (which would place it in the high risk project category) is realistically estimated at 1 in 16. In other words, based on previous experience or judgment, you expect that on average 1 in every 16 of these projects will not only be technically successful but will go on to be commercially successful at a level roughly commensurate with the general high expectations and promises for this project risk category. Although the 1 in 16 probability is considered realistic in this example, it has limited direct use for planning because it does not tell us which one of the 16 projects is likely to succeed. It could be the 1st or the 16th, etc. However, knowing this probability one can instead calculate the risk of failure of a number of projects, and this quantity is very useful for planning.
|
|
|
|
|
|
|
|
|
|
If, as a further consideration, each project takes 5 years of work before it is identified as either a success or a failure, then there is a 1 in 10 risk in the above example of having to wait 36 X 5 = 180 project years before experiencing a success. If you conduct 18 concurrent projects then this would translate into a 10% risk that the first success would not occur before about 10 years. If the profit generating commercial life of the results of these projects is about the same as the patent life of 20 years, then there is a continual 10% risk with this strategy that after 20 years the profits will not exceed those corresponding to the profits from two new technologies. The analysis of a risk strategy considers minimum success rates corresponding to different risk levels taken at the current time. One can thus make minimum success profit projections for different strategies at different risk levels and compare them. In contrast, as previously stated, a known probability of success, although very important is less directly useful for planning. This is because it instead indicates the long term trend, which especially for practical numbers of long, high risk projects may take several decades to become established.
Potential types of RSA applications
RSA input parameters
Assembling the RSA set of input parameters for an application is a significant and detailed design step. For new portfolio designs, certain business objectives can be specified which can then be focused in the analysis. RSA is based on the principle that different types of new product development projects fall into different risk categories and that those categories describe an industry's different needs in terms of strategic capabilities for innovation as well as product support. Having defined these categories, the basic parameters which describe typical or average projects within these different categories are then also likely to be significantly different. The required parameters for each category include the following:
Analysis results
Illustrative Examples
Three example applications of risk strategy analysis are given as basic illustrations. The examples relate to the research activities of three different fictitious companies and are in slide presentation format. Select from the following and click on the link to view the presentation. You will find a brief company profile and notes for each slide.
Innovation Systems, Inc. A new and energetic innovation based company founded and operated by talented individuals and currently enjoying the early stages of the commercial success of its first technology. Analysis indicates there is still a high overall financial risk of failure in 17 years time due to the high proportion of high risk research being conducted compared with the total number of concurrent projects. However, the analysis also shows that there is sufficient time to reduce this risk by adopting one of two options: a) increase research investment using part of the current profits in order to expand and improve the high risk research; b) modify the current strategy at the current research investment level.
Technologies Consolidated Corporation. A successful, well-managed and established innovation based company which has the opportunity to make an adjustment to its research strategy so as to enhance the high risk project content and thereby also the overall long term trends in company profitability, while also reducing the downside financial risk.
Commodities & Technology International Corporation. A very large and old established company where R&D grew up as a service to a commodities industry and which is now in recession. This company is currently analyzing its entire business activities in an effort to cut costs and boost profits. R&D, although not central to the business, is nevertheless part of this examination and the analysis indicates that the company is undertaking too much low risk research and is in serious danger of losing all profitability from research in about ten years time when a key patented product becomes obsolete. The analysis suggests a difficult alternative which may stave off this final disaster.
