Internal Acquisition: R&D M anagement

1. Internal Acquisition:R&D Management Technology Management Activities and Tools

2. Contents • Why R&D? • Project types • Project portfolio • Assessment of projects • Proje0ct selection

3. Why R&D?

4. Discuss:Advantages and disadvantages of R&D

5. R&D 1000, 2005 Kaynak: DTI, 2006

6. 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

7. 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

8. 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.

9. Absorptive capacity Technical knowledge Own R&D Spillovers of competitors’ knowledge Extraindustry knowledge

10. Steps in R&D

11. Discuss:What are the decision processes involved in R&D management

12. 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

13. R&D Project types

14. Project types: 3 central ones are commercial development projects: • derivative/enhancement/hybrid • platform/next generation • unique/radical

15. Source: Adapted from Wheelwright and Clark (1992) More Less Process change New core process Nextgeneration process Addition to product family Derivaties and enhancements Breakthrough Projects New core process Platform projects Next generation process Single department upgrade Derivative projects Incremental change Research and advanced Development projects More Product change Less

16. Technology types Source: Lindsay (2000)

17. Product-process innovation Source: Utterback, 1994

18. Stage-gate tool Source: Cooper, 2008

20. Project portfolio

21. 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

22. 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

23. 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.

24. 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.

25. 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.

26. 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.

27. 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) diagrams, • traditional pie charts and histograms.

28. COMPANY PORTFOLIO MATRIX Market Dominance Low High High Problem Children Stars Market Growth Cash Cows Low Dogs

29. COMPANY’S ABSOLUTE STRENGTH Early development Well developed Highly refined Partially developed Infancy Leader Company’s Relative strenght MEDIUM HIGH LOW HIGH Industry Average LOW LOWEST LOWEST MEDIUM Follower Obsolete Mature Evolving Embryonic TECHNOLOGY MATURITY

30. 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

31. 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.

32. Linking the portfolio to the business's strategy • Strategic fit • Spending breakdown

33. Strategy -- R&D Strategic objective: • Knowledge building (fundamental, basic, exploratory research) • Strategic positioning (focused applied research) • Business investment (development and engineering) Operational strategies: • Differentiation • Cost • Focus

34. 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)

35. Assessment of projects & selection of projects

36. Some project selection techniques: 1) Intuitive individual or group evaluations and selections 2) check lists 3) merit numbers 4) benefit-cost index methods 5) risk analysis models 6) risk-return profile 7) statistical decision analysis models and mathematical programming techniques

37. 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

38. Funding R&D • R&D as a necessary cost of business • R&D as an investment

39. 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.

40. 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.