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Choosing Innovation Projects (Qualitative Methods (Aggregate Project…
Choosing Innovation Projects
The Development Budget
Capital Rationing
- R&D as a percentage of previous year's sale (typically determined through industry or historical benchmark)
Financing new technology ventures
Family, Friends & Credit Cards
Government grants & loans
Angel investors (seed stage & < 1m$)
Venture Capitalists (Multiple early stages & >1m$)
Quantitative Methods
Real Options (Call)
C = Cost of R&D Programm
K = Cost of future investments required to capitalize on the R&D program
Value of stock purchased with call option = Returns to R&D investment
Limitations
: Many innovation projects do not conform to the same capital market assumptions underlying option models (e.g full investment upfront or value of stock option is shaped by firm's capabilities, complementary assets and strategies, not by market)
DCF
NPV
IRR
Strength: Concrete financial estimates & Explicitly consider timing of investment and time value of money
Weakness: Only as accurate as original estimates of cash flows & may fail to capture strategic importance of project
Qualitative Methods
Screening questions
Role of customer
Role of capabilities
Project timing & cost
Aggregate Project Planning Framework
(map levels of risk, resource commitment & timing of CFs)
Advanced R&D projects
Breakthrough projects
Platform projects
Derivative projects
Q-Sort (Dimension consideration)
Combining Quantitive & Qualitative
Conjoint analysis
Data Envelopment Analysis (DEA)