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Chapter 7
Choosing Innovation Projects
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3.
4.
5.
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Overview
Methods of choosing innovation projects
range from informal to highly structured,
and from entirely qualitative to strictly
quantitative.
Often firms use a combination of method
to more completely evaluate the potential
(and risk) of an innovation project.
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Drugs
Electronic components
(including semiconductors)
16%
Communication equipment
Specialized industrial
machinery
11%
Medical equipment
Household audio and video
equipment
7%
Scientific instruments
6%
5%
4%
12%
8%
6%
R&D
Expenditur
es
($billions)
R&D as
percent
of sales
1. Roche Holding
9.6
21.1
2. Pfizer
9.4
3. Novartis
R&D
Expenditur
es
($billions)
R&D as
percent of
sales
11. Intel
6.6
15.1
13.9
12. Panasonic
6.2
6.1
9.1
17.9
6.1
14.0
4. Microsoft
8.7
14.0
13. GlaxoSmith
Kline
14. Volkswagen
6.1
3.6
5. Merck
8.6
18.7
15. IBM
6.0
6.0
6. Toyota
8.5
3.9
16. Sanofi-Aventis
5.8
14.5
7. Samsung
7.9
5.9
17. Honda
5.7
5.5
8. Nokia
7.8
13.8
18. AstraZeneca
5.3
16.0
9. General Motors
7.0
5.1
5.3
13.2
6.8
11.1
20. Siemens
5.2
5.1
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Company
Theory In Action
Financing New Technology Ventures
Large firms can fund innovation internally; new startups must often obtain external financing.
In first stages of start-up and growth, entrepreneurs
may have to rely on family, friends, and credit
cards.
Start-ups might be able to obtain some funding from
government grants and loans.
If idea and management are especially promising,
entrepreneur may secure funds from angel
investors (typically seed stage and <$1 million) or
venture capitalists (multiple early stages, >$1
million).
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Weaknesses
May be deceptive; only as accurate as original estimates
of cash flows.
May fail to capture strategic importance of project
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Qualitative Methods of
Choosing Projects
Many factors in the choice of development
projects are extremely difficult (or misleading)
to quantify.
Almost all firms thus use some qualitative
methods.
Screening Questions may be used to assess different
dimensions of the project decision including:
Role of customer (market, use, compatibility and ease
of use, distribution and pricing)
Role of capabilities (existing capabilities, competitors
capabilities, future capabilities)
Project timing and cost
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Qualitative Methods of
Choosing Projects
The Aggregate Project Planning Framework
Managers map their R&D projects according to levels of
risk, resource commitment and timing of cash flows
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Qualitative Methods of
Choosing Projects
Advanced R&D Projects: develop cutting-edge
technologies; often no immediate commercial application.
Breakthrough Projects: incorporate revolutionary new
technologies into a commercial application.
Platform Projects: not revolutionary, but offer
fundamental improvements over preceding generations of
products.
Derivative Projects: incremental improvements and variety
in design features.
Derivative projects pay off the quickest, and help service
the firms short-term cash flow needs. Advanced R&D
projects take a long time to pay off (or may not pay off at
all), but can position the firm to be a technological leader.
Qualitative Methods of
Choosing Projects
Q-Sort is a simple method for ranking ideas on
different dimensions.
Ideas are put on cards.
For each dimension being considered, the cards are
stacked in order of their performance on that
dimension.
Several rounds of sorting and debate are used to
achieve consensus about the projects.
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Theory In Action
Courtyard by Marriot
Marriot used conjoint analysis to help it develop a
midprice hotel line.
First used focus groups to identify customer segments
and attributes they cared about in a hotel.
Then created potential hotel profiles that varied on
these features and asked participants to rate the
profiles.
Regression identified which features were valued
most.
Based on the results, Marriott developed Courtyard
concept: relatively small hotels with limited
amenities, small restaurants and meeting rooms,
courtyards, high security, and rates of $40-$60 a
night.
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Discussion Questions
1. What are the advantages and disadvantages of
discounted cash flow methods such as NPV and IRR?
2. For what kind of development projects might a real
options approach be appropriate? For what kind of
projects would it be inappropriate?
3. What are some of the reasons that a firm might use both
qualitative and quantitative assessments of a project?
4. Identify a particular development project you are
familiar with. What kinds of methods do you believe
were used to assess the project? What kinds of methods
do you believe should have been used to assess the
project?
5. Will different methods of evaluating a project typically
yield the same conclusions about whether to fund its
development? Why or why not?
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