The Saga of the Solar Teapot - Go or No Go?
(continued from the 2010 January issue)

By Don Creswell, Co-Founder SmartOrg Inc.

Summary: this is the story of a radical new product idea: a solar teapot. Given limited resources and uncertainty, is this a product the company should fund? The “Saga of the Solar Teapot” is a simplified example of how companies use Value-based Management to address this challenge. In last month’s issue, we watched as the innovation and marketing teams fought for their innovation while the CFO questioned whether the product would be a worthwhile investment. When we left them, an initial evaluation revealed that though the teapot seemed to have potential, there were questions about the ability to achieve technical success and, given success, if it made sense to invest in development and given the product’s contribution to portfolio value.

A tornado chart revealed three critical areas that needed to be addressed if the expected value of the teapot were to be improved:

1. There is a variance of around $68 million given the uncertainty around NP Peak (Market) Share. Challenge: find ways to drive share toward the upside; Price? Channels? Advertising? Features?

2. There is a variance of around $60 million given the uncertainty around NP (Profit) Margin. Challenge: how to improve expected profit margin; Cost? Price? Features?

3. Market Size: there is a variance of around $50 million in NPV given the uncertainty around market size. Challenge: get a better handle on market size.

Armed with this knowledge the team determined they needed additional resources to refine their initial findings. For example, more research was needed to validate the market. This was deemed to be especially important because NP Peak Share and to a large extent, NP margin, directly relate to size of the market. Market share and margin could potentially be improved by resolving technical issues that related to customer acceptance, such as the ability to store energy if sunlight were not available.

The product manager requested additional resources (money and people) to support research, raising questions about availability of resources given the need to support other projects in the portfolio pipeline. Fortunately, having done a thorough analysis of the potential value of the teapot, the team provided a defensible request to management for increased budget.

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Editor’s note: resource optimization displays enable management to determine availability of people and skill sets. By identifying the expected economic value of each project, resources can be assigned to the most promising projects, an important step in optimizing portfolio value.

Value Maps (reference: January 2010 ValuePoint) clearly reveal the business model structure, enabling quality conversations among team members and management resulting in faster, better, more effective decisions.

Templates enable dynamic interaction with the model so “what if” comparisons can be developed and discussed during real-time meetings.

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Let’s return to the Solar Teapot product team one quarter later. Have the investments in market research and additional R&D paid off? Should the company give the green light to the teapot?
The team updates each template with revised data and meets with management to present results. They summarize their findings via three charts:

The Tornado Chart compares the initial evaluation (orange) with the current evaluation (blue), revealing that by improving information and knowledge,

The orange bars show the impact of uncertainty based on the initial plan; the blue bars show results based on the updated information. Baseline NPV (the vertical lines) has increased from just under $50 million to nearly $200 million.

Commercial Value relative to other projects in the portfolio has increased to where the teapot is potentially the second highest value project.

Risk vs. Reward has significantly improved, moving the teapot from a “white elephant” to a “pearl” (orange trajectory); 60% probability of technical success with an expected commercial value of $198 million.

The team has done its job and management gives the green light to proceed with development with the admonition, “go ahead … but update your model at each stage/phase gate to see if we stay on the value track.”

The Saga of the Solar Teapot is based on real-world examples of how value-based management helps companies create exceptional value from their investments in R&D and product development.

To learn how value-based management process and software can help your company make faster, better, cheaper decisions that drive value, contact SmartOrg by e-mail (info@smartorg.com), visit our web site (www.smartorg.com) or request a free one-hour web briefing by calling +1 650.470.0188.

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Screenshots are from SmartOrg Portfolio Navigator™ value-based management software.

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DON’T MISS OUR 24 FEBRUARY WEBINAR FEATURING HP AND HOW VALUE-BASED DECISION ANALYSIS HELPED CREATE “LIGHT SCRIBE” AN INNOVATIVE NEW PRODUCT. For details visit www.smartorg.com.

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If your company is challenged to improve the return on investment in projects and product development, let us show you how you can raise your chances for success through value-based management process and software. To schedule a free, private web briefing contact mgurman@smartorg.com.