W3: Christensen, Kaufman & Shih (2008): Innovation Killers: How Financial Tools Destroy Your Capacity to Do New Things

Question 1

Discounted Cash Flow (DCF)

Answer 1

Assumes that a rational investor would be indifferent to having a dollar today or a dollar plus interest or return in a few years

Question 2

NPV

Answer 2

As an analytical tool is a root cause for underinvestment in innovation and success in companies. It is used to quantify and simplify future cash streams into a single number for comparison, but there are better ways to translate the value of future investments that can be understood by all members of a management team

Question 3

Terminal value numbers

Answer 3

Based on estimates for preceding years. They tend to amplify errors contained in early-year assumptions

Question 4

Evaluating a future course of action

Answer 4

Managers should consider only the future or marginal cash outlays that are required for an innovation investment, subtract those outlays from the marginal cash that is likely to flow in, and discount the resulting new flow to the present

Question 5

Earnings per share (EPS)

Answer 5

Allows for easy comparison across companies and because EPS growth is an important driver of near-term share price improvement, managers are biased against investments that will compromise near-term EPS. Also, CEOs and corporate managers are concerned with their reputations. They know others’ perceptions of their success is tied in those numbers, leading to a self-reinforcing cycle of obsession

Question 6

Principle-agent theory

Answer 6

Misapplied because principals (shareholders) do not have incentives to watch out for long-term health of the company. Tying executive compensation to stock prices does not affect the intensity or energy with which executives perform. It does affect the direction of efforts toward short-term activities. For agents, they believe executives work hard because they love what they do. The real problem nowadays is the agent-agent problem

Question 7

Agent-agent problem

Answer 7

Situation in which the desires and goals of the agent for the share owners compete with the desires and goals of the agents running the company

Question 8

Discovery-driven planning

Answer 8

Essentially reverses the sequence of some of the steps in the stage-gate process. It is an alternative to stage-gate process with the potential to greatly improve the success rate

Question 9

Assumption checklist

Answer 9

Used in discovery-driven planning. A list with all the things that need to be proven true for the project to succeed. When a project enters a new stage, the assumptions checklist is used as the basis of the project plan for that stage. It is a plan to learn, to test as quickly and at as low a cost as possible whether the assumptions upon which success is predicated are actually valid