MGT 610

Management of Innovation

and Technology

Choosing Innovation Projects

Choosing Innovation Projects

Based on Schilling (2013)

Today We Will

• Focus on how to choose between

innovation projects

• Will go through quantitative techniques

• Will go through qualitative techniques

Why do innovation projects fail?

• Expensive

• Time – consuming

• Extremely risky

• Can organizations fund every project

proposal?

• Capital Rationing

The Development Budget

• Usually a fixed amount

• A certain percentage of previous year’s

sales

• The budget is influenced by the industry

precedents and historical precedents

The Development Budget

http://www.strategyand.pwc.com/innovation1000

Quantitative Methods for

Choosing Projects Discounted Cash Flow Method

• Net Present Value (NPV)

• Internal Rate of Return (IRR)

• NPV = Present value of cash inflow –

Present value of cash outflows

• Perpetuity present value

• Annuity present value

NPV problems

1. You have an opportunity to invest in a

software development project today (t = 0)

for Tk. 100000. You are confident that you

can sell the software for Tk. 200000 after 5

years (t = 5). Suppose you can earn 9% a

year by investing money in the bank.

– Using the NPV formula, should you invest in

the project or in the bank?

NPV problems

2. You have an opportunity to invest in a product

development project today for Tk. 300,000. You

are expecting annual earnings of 70000 beginning

next year which will continue for 8 years. The

discount rate is 6% per year. Should you invest in

the project according to the NPV rule?

3. Consider the previous question. When will you

reach the breakeven point that is at what time you

will recover your initial investment?

NPV Problems

4. In this problem you will learn about

marginal decision making.

• SPZ Inc. has unlimited funds to invest in

different R & D projects. The financial

advisor has identified the following seven

projects as investment opportunities.

NPV Problems

Project Initial Investment NPV

A Tk. 10 lac Tk. 20 lac

B Tk. 4 lac Tk. 14 lac

C Tk. 3 lac Tk. 12 lac

D Tk. 1 lac Tk. 6 lac

E Tk. 2 lac Tk. 5 lac

F Tk. 2 lac Tk. 3 lac

G Tk. 1 lac Tk. 0.5 lac

NPV Problems

(a) Given that you have unlimited funds, which

project you should invest in?

(a) Suddenly, you find out that you do not have

unlimited fund. You have only 10 lac to invest

and now you cannot afford a high profile

financial advisor. You hire an MBA from IUBB

who tells you that since you have only 10 lac to

invest you should invest in feasible project with

the highest NPV. Is he correct? (Hint: Look at

the NPV per Tk. invested)

Qualitative Methods for

Choosing Projects Screening Questions

Role of Customers

• Market, Use, Compatibility and Ease of use, Distribution and

Pricing

Role of Capabilities

• Existing Capabilities, Competitors’ capabilities, Future

Capabilities

Project Timing and Cost

Aggregate Project Planning Framework (Project Map)

Aggregate Project Planning Framework

(Project Map)

• Breakthrough projects involve development of

products that incorporate revolutionary new product and

process technologies.

• Platform projects typically offer fundamental

improvements in the cost, quality, and performance of a

technology over preceding generations.

• Derivative projects involve incremental changes in

products and/or processes.

.

Aggregate Project Planning Framework

(Project Map)

• Platform project is designed to serve a core group of

consumers, whereas derivative projects represent

modifications of the basic platform design to appeal to

different niches within that core group

• A firm that invests heavily in derivative projects that may

be immediately commercialized with little risk may

appear to have good returns on its R&D investment in

the short run, but then be unable to compete when the

market shifts to a newer technology.

Aggregate Project Planning Framework

(Project Map)

• On the other hand, a firm that invests heavily in

advanced R&D or breakthrough projects may be on the

leading edge of technology, but run into cash flow

problems from a lack of revenues generated from

recently commercialized platform or derivative projects.

• Project mapping helps the firm to have a balanced

outlook

• Firms usually use a combination of both quantitative and

qualitative analysis