In our work with clients, we see four ways for medtech companies to overcome the hurdles of volume and diversity in order to bring discipline to their portfolio prioritization efforts. (See Exhibit 1.) Individually, each step can help, and the full package can provide a powerful boost to innovation productivity.
Step 1: Adopt a common language. In terms of units of measure and metrics, many medtech companies are inconsistent in their assessment of their R&D portfolios. For example, companies can take a business unit perspective in one area, a technology platform or project view in another, and a customer or channel view in a third. They also can apply a variety of metrics, such as customer satisfaction, financial projections, and even business intuition, making comparison difficult. This problem is particularly prevalent in companies with multiple lines of business and numerous business units—especially those companies with a history of acquisition.
Aligning decision-making criteria and allocating innovation spending across historically separate units can pose significant challenges. Medtech companies need a common language and approach (including consistent definitions for what constitutes a unit of innovation) for assessing innovation across the entire company.
In our experience, the most effective way to define the unit of innovation is to first adopt a consistent definition of the innovation platform. Three factors are critical:
- Market Focus. Innovation platforms should be based on customer needs rather than technologies, channels, or locations.
- Decision-Making Scope. The platform needs to be narrow enough in scope that its potential can be assessed realistically and sufficiently large in financial or strategic promise that it is worth a significant commitment of senior management’s time.
- Intent to Invest. Companies need to compare platforms within set investment parameters. That is, they should compare two platforms that are in an area in which the company either has an existing pipeline or sees a strategic priority in building a pipeline. But they should not conflate the two categories.
Metrics must be relevant and consistently applied. For example, it is not uncommon today for a company to have one division tracking total revenues from innovation projects while another tracks revenues from new products net of cannibalization, rendering head-to-head comparisons impossible. We recommend assessing each platform on the basis of three composite metrics: market attractiveness, the company’s current innovation position (or its ability to execute), and the health of the pipeline.
Market attractiveness comprises several factors: a platform’s market size, growth, and profitability; the “headroom” for innovation, or the unmet need and readiness of science to address the unmet need; and market conditions, including competitive, clinical, regulatory, and pricing risks.
The company’s innovation position is made up of its current market position (for example, its commercial scale), its innovation capabilities in the particular platform area, and the uniqueness of those capabilities.
Pipeline health is a composite metric that accounts for the distribution of products in the pipeline by stage of development, the pipeline’s competitive strength, and the level of the pipeline’s innovativeness (the balance between incremental and transformative innovation, for example).
The critical factors are consistent comparison across the various platforms and the creation of a common language in the organization with respect to assessment of the portfolio.
Step 2: Assess the strategic position. By comparing market attractiveness with its innovation position, a company can accurately evaluate the strategic position of each platform—on its own merits and relative to other platforms. (See Exhibit 2.) On basis of their scores, platforms will fall into one of four quadrants:
- Growth. These platforms are in highly attractive markets in which the company has a strong position. In many cases, they are the growth drivers of the future.
- Maintenance. These are in less attractive markets in which the company has a strong position. They generally form the historical business base of a company.
- Bets. These platforms are in highly attractive markets where the company has a weak (or no) position. They are new areas in which the company is trying to build scale.
- Exits and Turnarounds. These platforms are in less attractive markets where the company has a weak position. Many are mature and require tough decisions.
In addition to conducting a qualitative assessment of the portfolio’s overall shape—asking, for example, whether there are enough growth platforms—executives should focus their time on two quadrants: bet platforms and exit and turnaround platforms.
To get a big bang for its innovation buck, a company needs to identify its bet platforms—the areas in which it should double down and disproportionately fund high-potential investments while shuttering those with lower prospective financial or strategic payoffs and higher risks. It should establish clear go-no-go criteria, as well as milestones for assessing progress that will guide decision making down the road.
Such milestones can serve as red-light signals when progress falls short of expectations, helping avoid “zombie” platforms that impede the company’s performance for multiple years.
The big question for exit and turnaround platforms: What is the strategic rationale for these investments? A strong strategic rationale may lead a company to turn a struggling platform around, and the lack of strategic importance should indicate the need to develop an exit plan. In our experience, companies are often tempted to try to assess the implications of where the platform is positioned in this quadrant, while the more telling question is, What does the fact that the platform falls in this quadrant mean for its future?
Step 3: Assess the health of the pipeline. After assessing the strategic positioning, a company should consider how well its pipeline can execute strategic priorities. In this analysis, the critical platforms are growth and maintenance. (See Exhibit 3.)
- Growth Platforms with a Healthy Pipeline. The key questions are, How does the company accelerate development of these assets? Does it simply protect current funding and resourcing, or should it disproportionately fund these platforms? Are the platforms given priority for internal shared-service resources? Should they be actively managed at a senior level to ensure that any development or regulatory risks receive appropriate attention?
- Growth Platforms with a Weak Pipeline. The company should decide how to augment these platforms (with internal and external resources) to improve their long-term sustainability and positioning. Again, should the company protect current funding or disproportionately fund these platforms? Should it raise the priority on business development and external innovation efforts to fill in the pipeline gaps?
- Maintenance Platforms. It’s important to avoid the overinvestment trap. The company should ruthlessly evaluate prospective returns on these investments. At the same time, it should investigate opportunities to reduce spending and to invest through different innovation models (such as outsourced development) to lower the cost base.
Step 4: Integrate a strategic lens into budgeting. When project priorities are set using financial-return metrics without applying a strategic lens, those at the bottom of the list can be orphaned—regardless of their strategic importance—because the company runs through its R&D budget before it gets to them. The company should integrate a strategic lens into its project-level prioritization process. We suggest that a company start by assessing projects on the basis of their strategic role within the platforms—growth, bets, maintenance, or exits and turnarounds, as described above. Subsequently, it can perform a financial assessment on the projects in each strategic category. The combination of the two will result in a more robust analysis of the overall innovation portfolio and a comprehensive discussion of the company’s innovation priorities.