DOD’s programs for acquiring major weapon systems have taken longer, cost more, and delivered fewer quantities and capabilities than planned. We have documented these problems for decades. Most recently, we reported that 27 major weapon programs we have assessed since they began product development have experienced cost increases of nearly 34 percent over their original research, development, test, and evaluation (RDT&E) estimates, and increases of almost 24 percent in acquisition cycle time (see table 1). When cost and schedule problems occur in one program, DOD often attempts to pay for the poorly performing program by taking funds from others. Doing so has destabilized other programs and reduced the overall buying power of the defense dollar as DOD and the military services are forced to cut back on planned quantities or capabilities to stay within budget limitations. The F-22A Raptor program is a case in point: As costs escalated in the program, the number of aircraft the Air Force planned to buy was drastically reduced from 648 to 183. Similarly, as the Joint Tactical Radio System (JTRS) encountered development problems, the number of requirements was reduced or deferred by about one-third. As a result, several programs that were dependent on JTRS also had to make adjustments and go forward with alternative, less capable solutions. DOD’s approach to managing weapon system investments ultimately results in less funding being available for other competing needs in DOD as well as other federal priorities, as the expenditure of tax dollars within DOD reduces the amount of funding available for those priorities. Taking into account the differences between commercial product development and weapons acquisitions, we have recommended that DOD adopt a knowledge-based, incremental approach to developing and producing weapon systems. This type of an approach requires program officials to demonstrate that critical technologies are mature, product designs are stable, and production processes are in control at key junctures in the acquisition process. DOD has three major processes involved in making weapon system investment decisions. These processes, depicted in figure 1, are the Joint Capabilities Integration and Development System (JCIDS), for identifying warfighting needs; the Planning, Programming, Budgeting and Execution (PPBE) system, for allocating resources; and the Defense Acquisition System (DAS), for managing product development and procurement. Much of our prior work has focused on identifying commercial best practices that could be used to improve the Defense Acquisition System— from the point just before product development starts onward. In this report, however, we look at earlier stages in DOD’s investment process— from the point where gaps in warfighting capability are assessed in JCIDS through the point where alternative solutions to resolve those gaps are analyzed under the DAS (see fig. 1). To ensure they achieve a balanced mix of executable development programs, the successful commercial companies we reviewed use a disciplined and integrated approach to prioritize market needs and allocate resources. This approach, known as portfolio management, requires companies to view each of their investments from an enterprise level as contributing to the collective whole, rather than as independent and unrelated. With this enterprise viewpoint, companies can effectively (1) identify and prioritize market opportunities and (2) apply available resources to potential products to select the best mix of products to exploit the highest priority—or most promising—opportunities. Ultimately, each of the companies we reviewed seeks to achieve a balanced portfolio that maximizes the return on investments and moves the company toward achieving its strategic goals and objectives. This type of approach depends on strong governance with committed leadership, clearly aligned responsibility, and effective accountability at all levels of the organization. As depicted in figure 2, a portfolio management approach begins with an enterprise-level identification and definition of market opportunities and then the prioritization of those opportunities within resource constraints. Once opportunities have been prioritized, companies draft initial business cases for alternative product ideas that could be developed to exploit each of the highest priority opportunities. Each alternative product proposal— represented by a black dot—enters a gated review process. At each review gate, product proposals are assessed against corporate resources, established criteria, competing products, and the goals and objectives of the company as a whole. As alternatives pass through each review gate, the number is expected to decrease, until only those alternatives with the greatest potential to succeed make it into the product portfolio. To make informed decisions about what market opportunities to target, the companies we reviewed first establish a strategy that lays out the overall goals, objectives, and direction for the company. As part of their strategy, companies identify enterprise-level sales and profit targets, strategic business areas they want to focus on, the extent to which current products and new development efforts will support their growth objectives, and how they will allocate resources across business units and functional areas. This strategy provides a framework for the companies’ investment decisions. Within this framework, companies conduct a series of market analyses to develop a comprehensive understanding of the market environment, including product trends, technology trends, and customer needs. IBM for example, follows a structured market planning process to identify, prioritize, and target attractive market segments. The first phase of this process, called Market Definition, focuses on understanding the marketplace, including identifying potential customers and their needs. During this phase, IBM examines the marketplace and technology environments and identifies attractive market segments that contain potential market opportunities—where customer wants or needs exist. Each segment is categorized into one of four areas based on needs of the customers and the company’s product offerings (see fig. 3): “strike zone,” “traditional,” “pushing the envelope,” and “white space.” The strike zone represents IBM’s core business—market segments where IBM has an established customer base that it is successfully serving with existing product offerings. In contrast, white space represents market segments of new customers with wants and needs that are new and different for IBM. White space opportunities often require discovery and innovation. The traditional and pushing the envelope areas fall between the strike zone and white space. Traditional opportunities exist when new customers could be attracted to an existing market—one IBM is already active in—by modifying or enhancing existing products or services. Pushing the envelope opportunities exist where the needs of current customer groups move them into a new market segment. These attractive market segments are prioritized during the next phase of IBM’s process, known as the Capability Assessment phase. During this phase each segment’s overall attractiveness and potential profitability are assessed, along with IBM’s available resources—like capital, cash, and current products—and its competitive position within each segment. This analysis leads to the selection of targeted market segments. Motorola emphasizes the importance of targeting the right market segments at the enterprise level to ensure that a balanced mix of project and resource investments is maintained. Officials noted that excessively focusing on segments that require new and innovative products can result in long cycle times, wasted money, and lost opportunities elsewhere. Likewise, critical opportunities can be lost when too much emphasis is placed on simply continuing to invest in old markets with old products. According to the officials we spoke with, the current investment mix for Motorola’s Government and Enterprise Mobility Solutions business unit is roughly 70-20-10, where 70 percent of its projects and resources are dedicated to maintaining its core business, while 20 percent are invested in pursuing new markets with existing products or introducing new or enhanced products into existing markets, and the remaining 10 percent are dedicated to discovering new markets and new products. As part of their market analyses, companies increasingly refine their understanding of who their customers are and what they need. For several of the companies we met with, determining the needs of their customers is complex because they have multiple groups of customers to consider. For example, Eli Lilly has four customer groups with diverse needs: patients, doctors, insurance companies, and government regulators. This complexity is compounded when considering that success in a worldwide market is critically dependent on a company’s ability to operate within different governmental systems, laws, and regulations; and regional markets. Several of the companies we reviewed use a variety of methods— including interviews, surveys, focus groups, and concept tests—to actively engage their customers and help determine what they need. Some companies also observe customer behaviors to identify unstated wants and needs that if met—assuming corporate knowledge and resources allow—could actually exceed customer expectations. While companies actively seek customer input to identify products that show the most promise and satisfy customer needs, customers generally do not identify specific products to be developed. Once companies have identified and prioritized their market opportunities, they follow a disciplined process to assess the costs, benefits, and risks of potential product alternatives and allocate resources to achieve a balanced portfolio that spreads risk across products, aligns with the company’s strategic goals and objectives, and maximizes the company’s return on investment. At an early stage, each alternative product is expected to be accompanied by an initial business case that contains knowledge-based information on strategic relevance and estimates of cost, technology maturity, and the cycle time for getting the product from concept to market. To ensure comparability across alternatives, companies require initial business case information to be developed in a transparent manner, to use specific standards, and to report estimates within certain levels of confidence or allowable deviations. Each of the companies we reviewed also stressed the importance of having multiple management review points, or gates, at early phases to assess and prioritize alternative products. As products move through review gates, from ideas, to more concrete concepts, to the start of development where a final business case is made, companies expect uncertainties—which are typically inherent in the early phases—to be addressed and estimates to become more precise. Consequently, the number of viable alternatives tends to decrease at each review gate as those with the lowest potential for success and least value are terminated or deferred, while those that are poised to succeed and providing the best value are approved to proceed (illustrated in fig. 2). Companies emphasized that making tough go/no-go decisions is critical to keeping a balanced portfolio.