last month E. 1. Mropa pictured development as a game and illustrated the approaches to it by card game analogies. Carl Pacific0 continues the poker analogy this month in trying to answer the most difficult questo quit. Mr. Pacifico's light approach i s tion of management-when deliberate and does not reflect on the seriousness or importance ob the subject. In the two articles following this are case histories of projects that failed-and which management had the courage to abandon.
CARL PACIFIC0
ui OME of the factors in desrelopment, when presented bluntly are so difficult for many people to grasp that analogy is necessary. The ideas here may not be nen- t'o men experienced in development, but may seem rather complex to the newcomer. Let me introduce you to another version of dealer's choice poker. This one is a little wilder, a little more complicated than most, but I think you will find it interesting. In this version a player can start wit'h as Inany cards as he wishes, but he must pay for each of them. At regular intervals he must pay again for each card he wants to keep, but may purchase additional cards a t any time. Since there is no regular order of play, any player may exchange present cards a t any t'inie as well as obtain new ones. The pot to be won does not consist of the fees paid but is an indefinite amount of money placed in a closed container. The players are never told the exact amount in the pot, but they are allowed to guess a t its value by estimating the bulk, feeling the weight, and so on. To make it more interesting, the pot may, and usually does, vary constantly and erratically. It map get bigger during the hand or it may practically disappear. Although a player can drop out oE t,he hand a t any time, it does not mean he is permanentla- out of the game. He merely takes the cards he wants from those available t o him and looks around the room for another groul' in which he thinks his chances \vith his cards are better. Thus, players are constantly leaving and entering the hand a t all stages. There is no official end of the game. ST-henevera player thinks he has a good chance t o n i n he begins to expose some of his cards. When the cards exposed are strong enough, the player reaches for t,he pot, Of course, other players may be exposing. cards, and they may turn over ones to show a superior hand. One interesting wrinkle of the game is that, if t\vo or more players have approximately equal hands, they share the pot in the ratio of the strength of their cards. Even then the hand is not over. At regular intervals a new pot appears, each roughly the sanie size as the previous one. As new players can share in the pot any time they build up their hands sufficiently, each of t,he prescnt \Tiliners must constantly spend additional money to improve his hand in order to increase, or a t least maintain, his share of the pot. These rules may seen1 rather complicated a t first, but the game is really a lot of fun after you've played a few hands. Let's examine some of the factors to be considered. Perhaps most important of all, the players must learn to make a correct estimate of the size of t,he pot. From his past experience, the player must estimate also the strength of the hand required to win a pot of this size. Then he must estimate the probable cost of obtaining the proper additional cards he needs to bnild his hand
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American Aicolac Corp., Baltimore,
Md.
to the required strength. And thcse analyses must be repeated over and over again as the game progresses. It is very helpful for the player to know his competitors and how they behave. Do they expose their best cards first to drive others out? Are they, in turn, easily frightened? Are they experienced in this game? Just how much money can they afford for new cards? Of course, money alone should not be overemphasized. It permits a player to have more ca.rds, but it does not affect the player's ability to select the proper cards. Besides, the possession of money may obscure the need to select and arrange t,he cards wisely. By now everyone knows the name of the game-Product Development, which in some areas is called Product Planning or Market Development. It is not necessary to review all the similarities between the imaginary game and the serious husiiiess, but a few key points do need to be made. The original cards each player holds are obviously t h c basic company position-its personnel, its rcsesrch studies, its manufacturing processes, its marketing position, and so on. If the combination looks promising for this particular hand, the player nmy purchase a card, in t'he form of market research, to estimate the size of the pot. At this point each player musl make the decision of whether or not to continue. The decision is ,rliEcult, because it must be based not on facts but on est'imates and probabilities. Nevertheless, the difficulty should not be overemphasized. An executive Tvho can make the proper decision v-hen all the facts a,re available t o him is barely conipetent. Surely the man who cannot do this is not worthy of bcing c.alled an executive. The outstanding executive is accuston!ed to giving approximate weights to probabilities and intangibles i n order to arrive a t the proper decisions. Cnfortunately there is a quicksand quality about prob:ibilities that can attract the unwvary t o destruction. I n-on't try to explore the understanding of probabilities in detail, \):it will try to make my present point by returning to the malogy. No matter how poor the original cards are, there is always sonic probability that they can be improved enough to win. ~ c v e r t h e l e s s , in the long rnn this practice is unsound. There are fciv things more rewarding financially than playing poker with a I~;>LIIwho on the first hand d r a m t.wo cards to fill in a straight. His iiidgment is warped for the rest of the evening. A good poker player usually drops out if his open and concealed cards arc n o t better than anything exposed by competitors. If the cards do appear promising, there is stili a decision to be made on how much of an investment is justified. Having an estimate of the potential market', an estimate of t.he cost of the plant required can be made easily. Estimates also can bc made for the probable profit from such a plant. This potential
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CHEMICAL DEVELOPMENT profit then can be compared with total probable developmental costs, including research, engineering, and marketing costs, which are symbolized by the additional cards we draw in our little game. If it is found that the total cost in prospect is more than the company can afford, the decision is easy and the player drops out. A less clear-cut situation exists when the probable profit appears to represent a smaller return on the estimated investment than the company normally expects. The decision is complicated by the fact that these estimates are based on other estimates which are based on guesses. A suitable technique is to express each estimate as a range, of which t h e extremes are at least 9570 certain, T h a t is, we can say t h a t the market is certainly (95%) between 3 million and 6 million pounds per year, and that the cost of research will be between $90,000 and $400,000. When the estimates are handled in this way, the final numbers may stretch a long way. Even so, they are useful. They may show immediately that continuing to play is almost hopeless. Moreover, with each additional card drawn the estimate is being refined. As soon as it is obvious that the chances of winning multiplied by the size of the pot are less than the cost of playing, it is time to get out of the hand. Of course the analysis can be favorable as well as unfavorable. When a good poker player has a more-than-even chance of winning, he exploits it to build the pot to the maximum. The same is true in product development. Time, rather than the size of the pot, is the variable here. With the estimates already available it is possible to calculate the value to the company of reaching the goal earlier, say by a year. This helps determine how much of an expenditure in a crash program is justified. Of course, this simple formula will not miraculously solve the problem, There are still important decisions to be made, a t least one of which must be based on judgment. For example, no matter how good the chances are of winning, there is no use playing if the required investment simply cannot be afforded. This statement is obvious to anyone, but it might not be so obvious that it is merely one extreme of a range of choice. These extremes can be designated as “maximizing the gains’’ and “minimizing the losses.” This is another subject we cannot explore here, but I will give an example or two to help clarify it. Suppose you have a 50% chance to draw the winning card. The pot in prospect is five times your investment, but the investment is everything you have. Would you risk it? You might in a poker game, but would you do i t if you directed a small company? On the other hand would you invest most of your assets for a few per cent of profit even if the chances of success are 99 to l ? I n short, every decision must consider whether the policy is to take any risk t o make the maximum profit, to minimize the chances of any loss, or to take a position somewhere in-between. The in-between position is usually chosen, of course, but each company must decide just where in-between. Rechecking the relative position in the game regularly is a necessity. All of the major components of this system are variables. The desirability of continuing play thus can change rapidly. For those of us who are naturally cautious, the spirit of the decision a t each point might be stated as “I’ll look at one more card.” Although we must not lose sight of our ultimate objective, neither must we be trapped into making a firm decision too early in the hand. I n the later stages of the game, play becomes more expensive. A market survey is relatively cheap. We spend a moderate amount of money when we draw the open card that represents research samples. The investment is usually more substantial when \\e draw for the pilot plant. We have to be very sure when we invest the money for the commercial plant. It isn’t the fellow who drops out early that gets hurt in poker. His losses are small. It’s the fellow who stays to the end and loses t h a t gets hurt. It’s important to remember that there is always another hand-but only for those who have money left t o play it. Simple as it sounds, this is the key to decision. April 1956
There will always be another project for a company with the assets t o tackle it. There is one more point on this. Decisions to continue early in the project are usually made on a reasonably rational basis, but a new factor enters in these later stages. This factor is emotion. However rational we would like to be, projects are still directed by human beings and their personalities cannot be ignored. Some person is directing the project. Some person recommended it originally. Some person championed it and pushed it through-almost always against some opposition. No one likes to admit failure. Even worse, no one wants to be contaminated with the responsibility for a failure, although his association with the project may have been remote. Tough as it may be to do, however, emotion must be separated out and weighed as an independent factor. It’s like staying in a poker hand because Shorty is raising the pot and you hate Shorty. When the hands are compared, your emotion is not included in the weighing. If Shorty has the best cards he wins, even if everybody hates him. Now let me make the key point toward which I’ve been working. Have you ever reflected that if we deal out all the cards evenly, as is done sometimes in show-down poker, over a sufficient period of time each man would win the same number of times? We all know from experience, though, that breaking even isn’t the usual case in poker. Over a period of time some men win more often than they lose and vice versa. Nevertheless my first statement is obviously true, and if a record is kept, I feel sure i t will show that in any poker game played long enough, each man wins approximately the same number of hands. Where is the difference then in winnings? Well, some of it comes in that the better player manages to build up the size of the pots which he has a good chance of winning. More important, honever, is the simple fact that when his probabilities of winning are poor, he drops out and so minimizes his losses. This situation is duplirated in product development. We are constantly, actually each day, faced with the decision of whether or not to continue each project. M y point is that discontinuing projects isn’t negative; it doesn’t reflect a lack of courage, skill, or confidence. On the contrary, it is both positive and courageous. With the present high level of performance in the chemical industry, any competitor not well-suited to the conditions of the project will surely fail. Discontinuing projects must, therefore, be viewed in the larger context-that of finding the projects where the assets available to the company are most likely to succeed. Success is defined here as providing the greatest return t o the company. The less satisfactory projects must be discontinued to free assets for more profitable investment. I won’t explore all the facets of the poker analogy with you but will leave i t with the statement t h a t it was most helpful to me in clarifying my own thinking on discontinuing projects. Exactly the same reasoning applies in considering further work with a product in any given application. Although a new product has found a worth-while market in one application, it may be under evaluation for several other uses. Each of these must be analyzed t o determine how much effort, if any, is justified. The poker analogy is perfectly sound as far as it goes, but like most analogies i t doesn’t go far enough. There are some additional factors to be considered. Company prestige may be one of them, Another, possibly more important factor, is the customers or prospects who have a financial interest in the continuation of the project. The effect on these companies, as in turn they affect future operations of your own company, must also be weighed in the decision. If the project must be dropped, some provision must be made to minimize the disadvantages to these prospects. There is also the possible morale problem among individuals concerned with the project which must be considered. Most companies, however, have so many worth-while projects that it should not be too difficult to shift their interest from one project
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to another, It must be pointed out again that discontinuing a project is not negative and it does not necessarily reflect on the personal ability of men handling the project. A clear-cut decision is certainly a positive action; it is aimless drifting that is negative. Nor has the project necessarily been a “failure.” Look at i t this way. The company has taken a look a t the feasibility of a n investment. If a clean, crisp job has established a t minimum cost that this is not a suitable project, far from being a failure, the work has been a definite success. Viewed in this way, morale should not be an important factor influencing the decision on continuing or dropping the project. T o sum up, it is important that each project be viewed ae only one among many. There is nothing sacred about any of them, and none should be permitted to become anybody’s pet, or like most pets, it may degenerate to a spoiled brat. Estimates must be made on the size of the market, the chances of obtaining it, and the probable costs of getting it. I n the early stages of the project, the data on which these estimates are based may be scanty so that the minimum and maximum values for each estimate usually cover a broad, but not infinite range,
The problem is further complicated because all these estimates may be constantly changing. The company invests its money in a series of steps. It must be clearly understood that each investment in the early stages of the project has only one purpose-that of clarifying the estimates to determine if further investment is justified. Eventually the point is reached when a decision must be made to drop out or make a major investment. The decision must be based both on calculations of success and the degree of safety desired. Each project must be compared with every other possible project to select only the most promising ones. There are always new possibilities opening up. Less promising projects must be abandoned t o conserve the company’s assets for those projects where the company is best qualified. Whether it is the first analysis or a checkup after selling a product successfully for 10 years, any time the future return isn’t worth the cost of getting it multiplied by the chances of future success, management must screw up its courage-and quit. RECEIVED for review November 4, 1955.
ACCEPTEDJanuary 3, 1Q5f.Z.
Allyl StarchDevelopmental That Expired I
F, I N industrial research, the economic factors involved
could be forgotten, a great majority of the problems could be solved at the technical level. However, despite this ability to solve the technical problems, research is still a speculative endeavor and probably a substantial majority of projects are doomed to failure. Fortunately, the ones that are successful usually pay for the over-all effort and return a profit besides. This high mortality rate underscores the fact that the successful translation of research projects into profitable commercial businesses is one of industry’s most difficult problems today. With this observation, let us look a t a project which we a t General Mills undertook with enthusiasm, but which, for several reasons, did not mature. In the early forties, the company was substantially a flour milling and food processing company. Investigation of means for using products and by-products as a springboard for diversification was started. One of these springboards was starch. Flour, as you know, is composed largely of starch and protein. I n the early 1940’s we already had made a modest entry into a phase of the chemical business by setting up to fractionate flour into starch and protein components. Starch, with its high degree of functionality and with its many points for effecting chemical reactions, tickles the imagination of the chemist. Before long, we were embarked on a program aimed a t preparing and studying the utility of wheat starch derivatives. While the starch derivative work was in progress, L. T. Smith of the Eastern Regional Research Laboratories reported on the preparation and properties of allyl starch a t the April 1944 ACS meeting in Cleveland. Here was a product which seemed to go along nicely with our avowed objective of finding new uses for starch and starch derivatives. Accordingly, our staff got together with personnel from the Eastern Regional Laboratory, and, by June of 1944, we were
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seriously considering this project. By early 1946, we had conducted a fair amount of preliminary work on the preparation of allyl starch, using wheat starch and allyl chloride. Up to this time, the work had been largely of a scouting nature; now some serious decisions were necessary Should General Mills be interested in this new product? On the plus side of the ledger we had the following points: The bulk of the product was starch-a product in which we had great interest. Also, we had a captive supply of starch and could charge it into the process free of sales and related costs. By 1946 we were well on the way to becoming a supplier of raw materials and intermediates to the protective coating industries. We already mere selling refined soybean oils to alkyd producers. Our fatty acid plant was on the boards, and we endeavored to major in the type of fatty acids R hich the protective coating industry needed. This attracted us t o allyl starch, since it appeared to be a protective coatings raw material. Allyl starch demonstrated properties which were truly amazing. As a film, it mas extremely decorative with very high gloss. I t s resistance to strong solvents, such as acetone and esters, was superb. It appeared t o have all of the virtues of shellac and none of its defects. Shellac rnjoj-s approximately a 50,000,000-pound-per-year market, with the price varying from 50 t o GO cents per pound. Here we had a product in the 50- to 60cents-per-pound range which was superior t o shellac in virtually every regard. Furthermore, our initial examination of the properties indicated that it should have applications in fields which were foreign t o shellac. Certainly, on paper, the market seemed large. There were also points on the deficit side of the ledger We were aware of the poor water resistance of allyl starch. This we hoped t o overcome by adequate applications studies. We also knew that allyl starch would be difficult to manufacture-just how difficult we had yet t o find out! Another factor, not truly evaluated, was the shellac shortage, which artificially stimulated the interest in substitutes and replacements.
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