Do Managers’ Heuristics Affect R&D Performance Volatility? A Simulation Informed by the Pharmaceutical Industry
Executive Summary — Can the R&D process be managed to provide more certainty and success? The authors explore R&D performance volatility using the pharmaceutical industry as the model. The study looks at two types of heuristics that are commonly used to manage R&D project portfolios: (1) which products to start, and whether to continue or kill a product in development; (2) how resources should be allocated at each phase of development. By changing the heuristics used to make decisions at each stage of development, managers can decrease the amount of uncertainty and failure in the R&D process. Key concepts include:
- Pay attention to R&D portfolio management, not just portfolio selection.
- Don't delay in killing bad projects.
R&D performance volatility plays a critical role in various industries. Prior work in the innovation and product development literature has examined the factors influencing various dimensions of R&D performance. However, still little is known about the volatility of R&D output over time at the firm level. In this paper, we use a simulation model to explore such phenomenon, with a specific focus on the pharmaceutical industry. We argue that the fluctuations in R&D performance over time, while rooted in the uncertainty characterizing the development process, can be exacerbated by the heuristics decision makers use in managing the firm's R&D project portfolio. In particular, we focus on the impact on volatility of two types of heuristics: resource allocation and project termination strategies. Implications for both research and management practice are discussed.