EVALUATING RADICAL INNOVATION PORTFOLIOS Here’s a process for removing some of the uncertainty surrounding breakthrough innovation projects in large companies. Albert S. Paulson, Gina Colarelli O’Connor and Daniel Robeson OVERVIEW: Radical innovation in large firms is a risky endeavor, exacerbated by high levels of uncertainty and long cycle times. Moreover, management lacks evaluation tools that are appropriate for the degree of ambiguity of the information available from these types of projects. Add to this the difficulties of managing in the context of the large firm where many processes are tuned toward repetition and continuous improvement, and it becomes clear that commercialization of radical innova- tion (RI) is a difficult proposition at best. Portfolio managers will almost invariably build a team, learn appropriate processes, clarify their mandate within the company, generate initial projects, and begin to enrich their portfolios, only to have their efforts cancelled out due to an unsatisfactory financial return. The “what have you done for me lately?” question plagues these groups, and ends up costing the company investment of resources in opportunities that are never leveraged. Having an evaluation tool to assess the relative values of projects within the context of the entire radical innova- tion portfolio, and to track changes in the relative value of the portfolio over time, can help RI portfolio managers articulate their contribution to the company’s growth strategy and can aid in innovation strategy development. KEY CONCEPTS: radical innovation, portfolio evalu- ation, real options. It is truly amazing to observe the growth in management sophistication regarding breakthrough or radical innova- tion (RI) over the past ten years. Firms that once experi- enced RI only by happenstance, through the perseverance of strong champions protected from orga- nizational rules by their patrons in senior management, have now developed management systems for encourag- ing RI. These groups oversee portfolios of potential radical innovations, and are increasingly faced with portfolio-level issues of diversification, pacing, balance, and valuation. What was once considered the exception has become the new frontier of management attention. Indeed, empirical research has established that large firms that successfully engage in radical innovation com- Albert Paulson is the Frank and Lillian Gilbreth Chaired Professor in the Technologies of Management at Rens- selaer Polytechnic Institute, Troy, New York. His teaching and research interests center on innovation, risk management, financial engineering, large-scale modeling, investment, and statistics. He has published over 100 articles, monographs and books, and has consulted nationally and internationally for corpora- tions and governments. He received his Ph.D. and M.S. in statistics from Virginia Polytechnic Institute and B.A. from Kings College. paulsonas@capital.net. Gina Colarelli O’Connor is associate professor and academic director of the Radical Innovation Research Program and associate director of the Severino Center for Technological Entrepreneurship at Rensselaer Poly- technic Institute’s Lally School of Management and Technology. Previously she worked for McDonnell Douglas and Monsanto Chemical. Her teaching and research focus on how large established firms link advanced technology development to market opportuni- ties, and how they create new markets. She has published more than 25 articles in refereed journals and is co-author of Radical Innovation: How Mature Firms Can Outsmart Upstarts (Harvard Business School Press, 2000). She received her Ph.D. in marketing and corporate strategy from New York University. oconng@rpi.edu. Daniel Robeson is a doctoral candidate in management at Rensselaer Polytechnic Institute’s Lally School. He has had extensive business experience at Morgan Stanley Dean Witter, American National Can, and Eastman Kodak. His research interests focus on radical innovation at the large established firm. He has published in the Journal of Engineering and Technology Management. He holds an M.B.A. in management and technology from RPI. dcrobeson@aol.com. September—October 2007 17 0895-6308/07/$5.00 © 2007 Industrial Research Institute, Inc.