A Theoretical Framework for Managing the Npd Portfolio: When and How to Use Strategic Buckets

Developing the “right” new products is critical to firm success and is often cited as a key competitive dimension. This paper addresses the link between new product development (NPD) portfolio strategy and firm performance. To do so, we first characterize resource allocation and NPD portfolio strategy in a general theoretical framework. We then proceed to use our framework to analyze a popular practice in NPD portfolio management: the use of strategic buckets for managing the NPD portfolio. Strategic buckets encourage the division of the overall NPD resource budget into smaller, more focused budgets. Our results indicate that the “optimal” strategic bucket size depends on environmental complexity (defined as the number of unknown interdependencies among technology and market parameters that determine product performance). As complexity increases, portfolios that include a greater number of revolutionary programs perform better. We also explore conditions that create a need to balance the NPD portfolio: competition intensity (the probability of firm extinction) and environmental instability (the probability of changes to the underlying performance functions) prompt for a balanced portfolio. We conclude by presenting specific methods that can aid strategic level decision-making in NPD portfolio management.