Portfolio management of new products and the impact of manager's heuristic during the development process

The R&D portfolio selection is one of the drivers of the medium and long term success of most companies. Several papers have already discussed the factors that influence the project selection and budget allocation, and also how the projects should be managed in order to achieve better results. However, considering the complexity of the problem and the lack of a prevalent approach to it, many managers still rely on heuristics to support their decision process. The present paper aims to discuss the impact of heuristics used by decision-makers during the process of forming an R&D portfolio. We consider simple ad hoc rules such as higher probability of development success, higher commercial return, and lower risk, which are commonly used by managers to select and allocate resources on projects during the development process. We take into account the fact that the development and commercialization phases are distinct and, therefore, should be managed appropriately as far as budget implications and information availability are concerned. We illustrate our approach with numerical examples for each of the three heuristics and compare it with the value of a company's optimal portfolio. We conclude by discussing managerial implications of opting for these heuristics criteria.