TVP – Metric 4 Distribution of Technology Investment

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1. Metric Definition

How well an R&D portfolio is protecting the technology investment and technical position of the company.  It forces consideration of how the technical assets should be prioritized and distributed, providing input for structuring and modifying the R&D investment portfolio.

2. Advantages and Limitations

The portfolio of an R&D organization may not be protecting the strategic interests of the company for any number of reasons such as skill set mismatches, slow response to changes in the company’s mission and markets, or a rapidly changing competitive environment. There can be an over-emphasis on certain business units and products. This metric allows the management to examine how well the R&D effort is protecting and expanding the technical position of the company in areas of greatest importance.

3. How to Use the Metric

This metric is applied by first determining how the technology investment should be distributed. As an example, consider a company with several business units. The R&D portfolio may be distributed among these business units according to a number of models. 

Six possible distribution models are listed below:

1. The revenue that each business generates.
2. The opportunity market share (potential market growth). [1]
3. The impact that technology can make in the different business units.
4. The competitive impact of technology (base, key, pacing and emerging). [2, 4]
5. The profitability that each business demonstrates.
6. Some combination of the above distribution models.

The technological basis of competition [1]; ,or how technology provides a sustainable competitive advantage for a particular product form or market is an important consideration. Analysis of the company’s technology investment should also take into account the distribution according to four technology categories: base, key pacing, and emerging 4].

Base technologies are essential to the business, but because of their maturity are widely exploited and therefore do not provide competitive impact.  Key technologies are highly differentiating for company’s current products and provide immediate advantage. Pacing technologies are new technologies that are likely to offer future competitive leverage.  Emerging technologies are those in very early development, but which show potential for eventually altering the basis of competition. Each of the four technology classes must be maintained in order protect a company’s competitive position, but the distribution of resources among them should vary based on the company’s business plans.

Once a distribution model has been agreed upon, the R&D portfolio is measured against it. The distribution may be defined in terms of the number of R&D projects in each segment, head count devoted to each segment, or expected cumulative value of projects in each segment. Corrections are made when necessary to move the investment allocation toward the desired state.  The appropriateness of the targeted distribution model should also be re-evaluated at some regular intervals basis based on changes in strategy, markets or competitive activities.

4. Options

This metric may be viewed both prospectively and retrospectively.  In the retrospective view the current R&D portfolio projects are categorized according to the corporate investments or markets they are intended to protect or create, or the competitive impact that they offer. The metric can be applied to an entire corporate R&D portfolio or any subset thereof.  When the projects are appropriately weighted to reflect their size and cost the distribution of the effort supporting each of the categories may be determined. This current state is compared with the desired distribution to allow quantification of the fraction or percentage of overall R&D effort that is properly allocated (or misallocated).

The prospective view for this metric involves consideration of how a proposed project shifts the distribution of technology investment toward or away from the desired state.

5. Champions and Contacts

6. References

Competing for the Future, G. Hamel and C.K. Prahalad, Harvard Business School Press, Boston, MA (1994); ISBN 0-87584-416-2
Roussel, P. A., Saad, K. N., and Erickson, T. J. 1991. Third Generation R&D, Harvard Business School Press, ISBN 0-87584-252-6.
Curtis, C. C. 1994. Non-Financial Performance Measures in New Product Development, J. of Cost Management, 8(3), pp. 18-26. (This article addresses the distribution in terms of major projects, minor projects and extensions, and relates these to financial measurements.)
Little, A.D. 1981. The Strategic Management of Technology, Cambridge, MA.
Kerssence-van Donglen, I.C. and J. Bilderbeek. 1991. Feedforward and Feedback Control Metrics, Research-Technology Management, 29(1).