Look at this risk/return graph (Risk/NPV).
Projects plotted on this graph are not necessarily better if they are at the left bottom.
Instead, risk needs to be matched by return, so if you have projects that are far away from the origin
their bubbles should be big - i.e. high risk should be compensated by high return.
Product A has a low return but high risk. In contrast, Product B is a very desirable
low risk high return project – it’s close to the origin and has a big bubble!
Now examine this resource building graph (Resource Building/NPV).
Here it is more a question of balance. Check out product C located in the middle.
Its medium score on both the resource building dimensions (tech and market) means
that this project can provide the basis for the growth of the company in new directions,
but it will be challenging to put together the required resources. Its negative profitability
(red bubble) may be acceptable if the company is keen on getting into this new area.
In contrast, Product D, located in the top right, is way out of the zone of competences of the firm and is likely to suck up a lot of time and money. In spite of its high potential profitability, this product cannot draw on any of the strengths of the company and should be avoided.
Product E is a classic incremental product. This was developed in close collaboration with existing customers. It won’t take the company in new directions, but it is reasonably profitable. This is a typical example of bread-and-butter projects that sustain the company from day to day.
Finally, look at this rank ordered list of products (By NPV).
Clearly, Product B is the most financially attractive. Product D seems to be second most attractive,
but look at how its high NPV and ROI become much lower when adjusted for the riskiness of this project!
