Internal Acquisition:R&D Management

Technology ManagementActivities and Tools

Contents Why R&D? Project types Project portfolio Assessment of projects Project selection

Why R&D?

Discuss:

Advantages and disadvantages of R&D

R&D 1000, 2005

Kaynak: DTI, 2006

Research and development

Making good decisions requires knowledge, and the systematic creation, retention, and application of this knowledge requires a targeted process.

2 types of knowledge: domain-specific, generalizable knowledge context-specific, system knowledge

Absorptive capacity and R&D investment (Cohen and Levinthal, 1990)

R&D must satisfy: new knowledge + absorptive capacity

3 classes of industry-level determinants of R&D intensity:

Demand Technological opportunity Appropriability

Absorptive Capacity An ability to recognize the value of

new information, assimilate it, and apply it to commercial ends.

Firms with internal R&D are better able to use externally available info.

Absorptive capacity might be a byproduct of a firm’s R&D or a firm’s manufacturing operations or directly by training.

Absorptive capacity

Own R&D Technicalknowledge

Spillovers of competitors’ knowledgeExtraindustry knowledge

Steps in R&D

Discuss:

What are the decision processes involved in R&D management

pre-project or front-end planning project execution post-project learning

1) deciding on the mix and proportion of project types, highlighting what individual projects are intended to accomplish.

2) providing and allocating resources. Compute the implied capacity utilization and make the adjustments to bring supply and demand into balance.

3) measurement & evaluation

R&D Project types

Project types:3 central ones are commercial development

projects: derivative/enhancement/hybrid platform/next generation unique/radical

Platform projects

Derivative projects

BreakthroughProjectsNew core

process

Nextgenerationprocess

Singledepartmentupgrade

Incrementalchange

New coreprocess

Next generationprocess

Addition toproduct family

Derivaties andenhancements

Process changeMore Less P

rodu

ct c

hang

eLe

ss

Mor

e

Research and advancedDevelopment projects

Source: Adapted from Wheelwright and Clark (1992)

Technology types

PRESENT

TECHNOLOGY

FUTURE

CompetitiveImpact

PotentialCompetitiveImpact

Low,but essential

High, a driverOf cost ordifferentiation

Proven andCould be high

Unproven butpromising

ENABLINGTECHNOLOGIES

CRITICALTECHNOLOGIES

PACINGTECHNOLOGIES

EMERGINGTECHNOLOGIES

CLASSIFICATION OF THE COMPETITIVE POTENTIAL FOR TECHNOLOGIES

Source: Lindsay (2000)

Product-process innovation

Source: Utterback, 1994

Stage-gate tool

Source: Cooper, 2008

Project portfolio

Objectives of portfolio management (Cooper and Edgett, 1997):(1) maximizing the value of the

portfolio (2) achieving the right balance and

mix of projects(3) linking the portfolio to the

business' strategy

Portfolio management problem: uncertain and changing information dynamic opportunities multiple goals and strategic considerations interdependence among projects multiple decision makers multiple locations The problem is one of constrained

optimization under conditions of uncertainty: a multi-project, multi-stage decision model solved by mathematical programming

Maximizing the value of the portfolio

Expected Commercial Value Decision tree analysis (future stream of

earnings, commercialization costs and development costs)

Take the ratio of what it is trying to maximize -- namely the ECV -- divided by the constraining resource, namely the capital cost per project. Projects are rank-ordered according to this ratio.

Productivity Index The Productivity Index = [ECV *P[sub ts] --

R&D]/R&D ECV is a probability-weighted stream of cash

flows from the project P[sub ts] is the probability of technical success R&D is the R&D expenditure remaining in the

project Projects are rank-ordered according to this

index in order to arrive at the preferred portfolio.

Dynamic Rank Ordered List Rank-order according to several criteria (such

as internal rate of return) concurrently Take the mean of multiple rankings

Scoring models A list of criteria is developed to rate projects Projects are then rated by evaluators on each

criterion These scores are multiplied by weightings Scores summed across all criteria to yield a

project score for each project.

Issues in maximizing:

The dependence on financial and other quantitative data.

Does not look at the balance of the portfolio All methods lack the optimal balancing and

aligning with the strategy.

Achieving the right balance and mix of projects Visual charts were favoured for displaying

balance in new-product project portfolios. These visual representations include the

portfolio maps or bubble diagrams which are an adaptation of: the four-quadrant (star, cash cow, dog,

wildcat) diagrams, traditional pie charts and histograms.

COMPANY PORTFOLIO MATRIX

Low

Low

High

High

Market Dominance

MarketGrowth

ProblemChildren

Stars

Dogs Cash Cows

MEDIUM HIGH

LOW LOWEST

LOW HIGH

LOWEST MEDIUM

Obsolete Mature Evolving Embryonic

TECHNOLOGY MATURITY

Follower

IndustryAverage

Company’sRelative strenght

Leader

InfancyEarlydevelopment

Partiallydeveloped

Welldeveloped

Highlyrefined

COMPANY’S ABSOLUTE STRENGTH

Any pair can be the X and Y-axes for a bubble plot:

Fit with business or corporate strategy. Inventive merit and strategic importance to the

business. Durability of the competitive advantage. Reward, based on financial expectations. Competitive impact of technologies (base, key,

pacing, and embryonic technologies). Probabilities of success. R&D costs to completion. Time to completion. Capital and marketing investment required. Risk / return

Issues in balancing:

They rely on substantial financial data when often these data are either unavailable or, at best, uncertain

There is the problem of information overload. These methods are not decision models. It was not clear what the "right balance" of projects

was. It wasn't clear in every case what one did with the

charts and maps.

Linking the portfolio to the business's strategy

Strategic fit Spending breakdown

Strategy -- R&DStrategic objective: Knowledge building (fundamental, basic,

exploratory research) Strategic positioning (focused applied research) Business investment (development and

engineering)Operational strategies: Differentiation Cost Focus

Two general approaches to achieving strategic alignment Building strategic criteria into project selection

tools Top-down strategy models:

Strategic Buckets Model StratPlan or Strategic Check (such as scoring

model or financial criteria)

Assessment of projects & selection of projects

Some project selection techniques:

1) Intuitive individual or group evaluations and selections

2) check lists3) merit numbers4) benefit-cost index methods5) risk analysis models6) risk-return profile7) statistical decision analysis models and

mathematical programming techniques

Limitations of selection techniques:

Guestimates low participation of the management snapshot view of projects unavailability of resources and a project

champion wish to maintain the status quo unwillingness until common acceptance of

technologies political considerations discouraged team members due to delays of

long approval times

Funding R&D

R&D as a necessary cost of business R&D as an investment

Post-project tasks: learning learning from experience means learning

from development projects. BUT, organizational learning is not a natural

outcome of development projects. 2 problems in general: 1) the performance that matters is often a result

of complex interactions within the overall development system.

2) incentives in the organization favor pressing forward to the next project not recording.

Two most common problems firms have in R&D Management:

Undertaking many more projects than can be completed with the available resources

Assigning critical resources to work on several projects concurrently.

Because of a lack of discipline and management’s unwillingness to make hard choices.