November 12, 2010
Organized by Professors Paul J. H. Schoemaker and Harbir Singh
Innovation portfolios are widely used to allocate scarce resources to innovation projects, just as investors diversify their financial portfolios across classes of assets with different risk profiles. The logic of a portfolio approach is appealing because it promises to obtain the best long-run returns on innovation spending while containing risk. Unhappily the promise is seldom realized and most managers are frustrated by having too many projects that don’t satisfy strategic goals. In the aggregate they may far exceed available resources, so delays are endemic and opportunities for advantage are missed.
The first objective of our conference was to share the latest thinking and next practices from leading companies in how to create and manage innovation portfolios. How should projects be prioritized when little is known yet? How should innovation portfolios be launched and adjusted over time? What is the value of real options techniques as a way of dealing with uncertainty? Should innovation portfolios be tailored according to industry? How do pharmaceuticals versus aerospace compare in this regard, or packaged food, and why? How can uncertainty be reduced faster by using innovation tournaments? What are the benefits and pitfalls of applying the basic tenets of financial portfolio theory, such as diversification, covariance, optimal weighing and efficient frontiers, to a world of embryonic investments shrouded by deep uncertainty?
The second objective of the 2010 Fall Conference conference was to better understand resource allocation in innovation portfolios: (1) Projects may be hard to compare because they are at different stages of development and vary widely in risk level and time horizon, (2) Portfolios can span multiple organizational units and decisions to add or drop projects are often subjective or unduly political, (3) Interdependencies across projects may be overlooked or hard to estimate, (4) Input data for financial evaluations are usually incomplete and biased, (5) Aggregating projects to arrive at portfolio level metrics may distort risk or fail to reflect embedded options values, and (6) Firms are often overly risk-averse, favoring incremental innovations, even if they are large enough to undertake much bigger risk that can be absorbed through judicious diversification.
The themes and insights from this conference were of immediate value to senior managers seeking to capture the greatest economic value from their limited innovation investments.
8:00 – 8:30 am BREAKFAST
8:30 – 8:35 am – WELCOME & INTRODUCTION
Co-Director, Mack Center for Technological Innovation, The Wharton School
8:40 – 10:00 am – INTELLECTUAL FOUNDATIONS
“The Power and Limitations of Portfolio Thinking”
Paul J. H. Schoemaker
Research Director, Mack Center for Technological Innovation, The Wharton School
“The Myths of Diversification and Long-term Investment in Innovation”
CIBC Professor of Entrepreneurship and eCommerce, Operations and Information Management Department; Vice Dean for Innovation, The Wharton School
10:00 – 10:30 am – BREAK
10:30 – 12:00 pm – ALLOCATING INNOVATION RESOURCES
“Innovation Portfolios in the Pharma and Oil/Gas Industries”
Senior Vice President, Global Scientific Strategy-Portfolio Management, Merck & Co.
“The Missing Link: Connecting Innovation Portfolios to Future Scenarios”
Senior Fellow, Mack Center for Technological Innovation, The Wharton School
Bernardo S. Sichel
Partner, Decision Strategies International
12:00 – 1:00 pm – LUNCH
1:00 – 2:30 pm – ENABLING PORTFOLIO DECISIONS
“Portfolio Architecture Design for Managing Technology Options ”
Technical Fellow, Business Engineering, The Boeing Company
Professor of Operations and Information Management, The Wharton School
2:30 – 2:45 pm – BREAK
2:45 – 4:00 pm – MANAGEMENT CHALLENGES & OPPORTUNITIES
“Profiting from Others’ Innovation Portfolios”
Brian S. Silverman
J.R.S. Prichard and Ann Wilson Chair in Management, Rotman School of Management
“The Limits of Portfolio Strategies in Venture Capital Investments”
Jesse I. Treu
Partner, Domain Associates, LLC, Princeton and San Diego
4:00 pm – ADJOURN