Chapter 7 Choosing Innovation Projects Flashcards
how can we know what customers will want, or competitors will do, in the future?
The future of a technology, however, is not as unknowable as it might seem. If you can get the big picture of the dimensions along which a technology is improving, and where the big payoffs are still yet to be reaped, you can gain insight into where the next big breakthroughs are likely to, or should, be. This can help managers understand where to focus their R&D efforts, and to anticipate the moves
of competitors.
How to get a big picture of technology evolution in an area and to prioritize innovation investments?
step 1: identify the dimensions
step 2: Where are we on the utility curve for each dimension?
step 3: where should we invest our money and efort?
How to identify the dimensions that a technology has progressed?
One of the best ways to identify these dimensions is to trace the technology’s path to date, and for each major change in the technology’s form, identify the dimensions that were affected. The further back in time you can go, to the most primitive way of fulfilling the need the technology meets, the easier it will be to
see the high-level dimensions along which the technology has changed.
Look for each major inflection point. Try to identify the three to five most important high-level
dimensions along which the technology has evolved. Getting to a high level of a dimension is important because it helps you to see the big picture rather than being caught up in the details.
Why does determining where we are on the utility curve help us?
For each dimension, we now want to determine the shape of the utility curve— the plot of the value customers derive from a technology according to its performance on a given dimension—and where we currently are on the curve. This
will help reveal where the most opportunity for improvement lies.
What kind of matrix to make when assessing which technology development investments are likely to yield a lot of revenue?
First, list the performance dimensions you’ve identified as most important to customers. Then, score each dimension on a scale of 1 to 5 in three areas: importance to customers (1 means “not important” and 5 means “very important”); room for improvement (i.e., how far we are from the utility curve flattening out, where 1 means “minor opportunity for improvement” and 5 means “large opportunity for improvement”); and ease of improvement (1 means “very
difficult” and 5 means “very easy”).
How to shift the organization’s focal point?
This exercise can help managers broaden their perspective on their industry, and shift their focus from “this is what we do” to “this is where our market is (or should be) heading.” It can also help overcome the bias and inertia that tend to lock an organization’s focus on technology dimensions that are less important to consumers than they once were.q
What is capital rationing?
The allocation of a finite quantity of resources over different possible
uses.
What is difficult with developing innovative and products and services?
Developing innovative new products and services is expensive and time-consuming. It is also extremely risky—most studies have indicated that the vast majority of development projects fail. Firms have to make difficult choices about which projects are worth the investment, and then they have to make sure those projects are pursued with a rigorous
and well-thought-out development process.
What is R&D intensity?
R&D expenditures as a percentage of sales
How is the rank ordering used in capital rationing, established?
The rank ordering used in capital rationing may be established by any number of methods, including quantitative methods, such as discounted cash flow analysis or options analysis, or qualitative methods, such as screening questions and portfolio mapping, or a combination of multiple methods. Knowing the requirements, strengths, and weaknesses of each method helps managers make sound decisions about which valua-
tion techniques to employ.
What convert the quantitative methods of analyzing new projects?
Quantitative methods of analyzing new projects usually entail converting projects into some estimate of future cash returns from a project. Quantitative methods enable managers to use rigorous mathematical and statistical comparisons of projects, though the quality of the comparison is ultimately a function of the quality of the original
estimates.
What are the most commonly used quantitative methods?
- discounted cash flow
- real options
What are discounted cash flows?
Discount ed cash flows are quantitative methods for assessing whether the anticipated
future benefits are large enough to justify expenditure, given the risks. Discounted cash flow methods take into account the payback period, risk, and time value of
money.
What are the 2 most commonly used forms of discounted cash flow analysis for evaluating investment decisions?
- NPV (net present value)
- IRR (internal rate of return)
What is NPV and IRR?
net present value (NPV) The discounted cash inflows of a project minus the discounted cash
outflows.
internal rate of return (IRR) The rate of return yielded by a project, normally calculated as the discount rate that makes the net present value of an investment
equal zero.
How to calculate the NPV?
To calculate the NPV of a project, managers first estimate the costs of the project and the cash flows the project will yield (often under a number of different “what if” scenarios). Costs and cash flows that occur in the future must be discounted back to the current period to account for risk and the time value of money. The present value of cash inflows can then be compared to the present value of cash outflows:
NPV
= Present value of cash inflow − Present value of cash outflows
