Have you placed your bets on the winners?

If you are the one making the decision which R&D projects to fund, the question is whether to focus on just a few selected projects or spread your resources on a broad range of projects. A new study published in the Strategic Management Journal provides guidance on how to maximize your success. Analyzing the data of more than 1,400 firms, the authors Ronald Klingebiel and Christian Rammer reveal two key lessons:

1. Spread your budget broadly. Companies who spread their financial resources across as many projects as possible develop more successful innovations. The reason is that funding a large variety of projects (even with thin resources per project) increases the likelihood that you put at least some of your money on winners. Take Sony for example. Its R&D department is reported to have pursued between 20 and 30 projects in the area of videotape recorder technology, well knowing that only some of them would make it to the market.

2. Cancel failing projects. Spreading your budget broadly does not mean to fund failures once you have identified them. Successful companies do not hesitate to cancel projects during the development process. This is known as efficient failure.

To sum up, when your next R&D budgeting cycle is near, keep in mind a “T” shape: for a start, spread your budget widely, but as soon as you can accurately separate the wheat from the chaff, focus on the most promising projects.

Original research article: Klingebiel, R., and C. Rammer (2014), “Resource innovation portfolio management,” Strategic Management Journal 35:246-268