Chapter 7 - Choosing innovation projects

Question 1

How are innovative projects selected?

Answer 1

• Firms use a mix of methods:
  
  • formal
  • informal
  • quantitative
  • qualitative
• each method has its own strengths and weaknesses

Question 2

What is capital rationing?

Answer 2

• a fixed R&D firm budget
  
  • industry or historical performance benchmark
  • varies between industries and firms in the same industry
• used with project rankings to choose between valuable projects

Question 3

Characteristics of new ventures

Answer 3

• generally rely on external financing
  
  • family, friends, and/or personal debt
• unproven technology
• unproven business concept
• unproven management team

Question 4

What are sources of financing?

Answer 4

• government grants and loans
• angel investors
  
  • projects <1 million
  • idea and management promising
• venture capitalists
  
  • projects >1 million
  • idea and management promising

Question 5

Project choice - quantitative methods

Answer 5

• discounted cash flow methods
• real options
• many factors in projects are difficult to quantify
  
  • almost all firms use some qualitative methods (in combination)

Question 6

Project choice - qualitative methods

Answer 6

• screening questions
• Aggregate Project Planning Framework
• Q-Sort

Question 7

Screening questions

Answer 7

• structure investment discussions
• organized into categories
  
  • role of customers
  • role of capabilities
  • timing and costs
• formalized with scoring mechanism, weighted according to importance

Question 8

Aggregate Project Planning Framework

Answer 8

• mix of development projects in R&D portfolio
  
  • consistent with company’s resources and strategic intent
  • determine balance between short and long-term horizons
• categorize projects into 4 categories
  
  • Advanced R&D projects, cutting-edge technologies, no immediate commercial application, long-term to pay off
  • Breakthrough projects, incorporate new technologies into commercial application
  • Platform projects, no revolutionary but fundamental improvement in previous generations
  • Derivative projects, incremental improvement, short-term to pay off

Question 9

Q-sort

Answer 9

• ranking ideas on different dimensions
• stack of cards
  
  • each for a project
  • ordered according to how well they perform according to some criteria
  • rankings used for debate

Question 10

Conjoint Analysis

Answer 10

• combination of quantitative and qualitative methods
• estimates the relative value individuals place on attributes
  
  • card with products/projects with different features and prices (to individual)
  • rate each in terms of desirability
  • assess the degree to which an attribute influences rating
  • weights to quantify trade-off between features

Question 11

Data Envelopment Analysis (DEA)

Answer 11

• combination of quantitative and qualitative methods
• linear programming to combine measures of projects into a hypothetical efficiency frontier
  
  • ranked by assessing their distance from frontier
  • results only as good as the data utilized

Question 12

How should we decide where to focus the innovation efforts?

Answer 12

• looking back at the path a technology has taken over time
  
  • reveal the high level dimensions that drive technological change
  • what could customers want next?
• marginal payoff of investing in further improvements
  
  • identify biggest payoffs
  • utility curve for each dimension, find focus for investments