What Were They Thinking Of?

Volume 3 Letter 5

Lafarge, the large French building products manufacturer had a winner on its hands. In the mid 1980’s the company thought it had developed a new method of producing gypsum used in the making of paint and paper. The R&D group thought it could replace expensive ground up minerals with crystals. Adding crystals as paper filler would not only be cheaper but would also improve the texture and appearance of the paper.(1)

Excitement within company ran high – the market was huge – $40 million per year was one guess. For a company that had mostly grown through acquisitions this was a chance to prove the value of R&D and grow the company organically.

Not only was Lafarge excited but they enlisted the assistance of a major customer to fund additional R&D and testing. New product applications were found in plastics and other manufacturing related areas – the enthusiasm was now infectious and spreading faster than SARS.

One might wonder if the French scientists were drinking wine from the wrong vat. Online tests revealed significant product problems. The major one being that it clogged up existing paper making equipment.

Undaunted, and with some marginally successful trials now behind them, enthusiasm within Lafarge continued to grow. Additional funding needed to ramp up production was granted if the product could meet certain conditions. New market projections for this product (likely made by the team asking for the funding) were now estimated at close to $200 million dollars per year. It was at this point that reality started to collide with enthusiasm.

Results of testing with the major customer proved to be disappointing but despite this Lafarge released the funds to ramp up production. The research team toasted their R&D success as construction started on the new production facility.

In the 1990’s the plant still sat idle unable to produce a commercially viable product. The major customer had resigned from further testing and the R&D team was in disarray.

About the same time the product champion was replaced (for heath reasons) and the new champion formed a task force to assess the viability of the product. Turns out the only market study ever done was in the early stages of development. The review concluded that the product wouldn’t be profitable and estimated that another 5 million dollars would be needed to see if the product was viable at all. The new product champion recommended dumping the project. Incredibly, most team members agreed with the assessment but rejected the recommendation – Lafarge continued to pour money into the project.

It would take another two years before the project was finally killed. In 1992 the empty plant was sold and the project finally stopped. A seven year, 30 million dollar R&D project finally got the bullet.

This story isn’t unique to Lafarge or to big companies – many of you reading this likely know of projects that continued (or continue) on despite poor results. The question is why?

A colleague, instructing on new product development, presented research where participants in the study made the decision to invest in a new technology. Later in the study the participants were presented with evidence clearly demonstrating that it would be financially beneficial to ‘cash out’. Most participants chose to hold rather than cash out. Emotion, it seems, often overrules good judgment.

In the business community there is a widespread belief in the ultimate success of new projects. The greatest danger to good judgment is the collective belief within a company or business unit that the existence of problems is a sign of failure. The result of such a belief system is that R&D people hedge their bets on “safe” (career preserving) projects or herd together (as in Lafarge’s case) toward projects with political capital. However, good R&D is not the avoidance of risk but rather the intelligent management of risk – there is a big difference between the two!

Both R&D and product launch teams need to put in place objective management tools using specific evaluation criteria. Tools like “Risk Management” and “Portfolio Analysis”* can help bring an objective perspective to what can sometimes be an emotional debate. This objective view quickly exposes ‘politically sponsored’ projects for what they are and places the spotlight on projects that have the highest potential of bringing value to the company. In Lafarge’s case these tools would not have prevented the discovery of crystals as a substitute for Gypsum but certainly would have pointed to abandoning the project long before 30 million was invested.

Objective management tools bring good projects to the forefront rather than just the ‘safe projects’ and they expose politically sponsored project for what they are. Without objective tools like risk management and portfolio analysis in place R&D is reduced to nothing more than guess work, gut feel and intuition. Project enthusiasm can overwhelm hard facts and belief systems can grow to fairy tale proportions (the Lafarge projected market for crystals grew from $40 million to $200 million with no concrete evidence – pun not intended). Establishing an effective product development and product launch strategy and using objective management tools can assist in decision making so no one will ask “What were they thinking?”

When establishing an R&D strategy:

– Establish clear criteria at the outset for both killing a project and taking it to the next level.
– Use tools like risk analysis and portfolio analysis to bring objectivity to the decision making process.
– Appoint both a product champion and an exit champion to review projects (this can not be the same person and the exit champion can not be emotionally involved with the project.
– Uncouple career advancement from a project’s success. Research itself is unpredictable – reward the management of the research process and the mitigation of risk not the outcome of specific projects.

* Risk Analysis and Portfolio Management are effective weapons that managers can use to bring an objective perspective to strategic business decisions. IIBD will be offering these tools in the 3d Toolkit and teaching how to use them effectively in our New Products Course” starting in the fall of 2003. For more info on these tools contact us at info@iibd.com)

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[1] For the full story See “Why Bad Projects are So Hard to Kill” Isabelle Royer HBR Feb 2003 pp 48 – 56

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