1. Firms must make difficult choices about which innovation projects to invest in given that most projects fail and development is expensive, time-consuming, and risky. 2. The chapter explores quantitative and qualitative methods used to evaluate projects, ranging from informal to highly structured approaches. Quantitative methods include discounted cash flow analysis like net present value (NPV) and internal rate of return (IRR). 3. While quantitative methods provide concrete financial estimates, the estimates rely on assumptions and tend to undervalue long-term or risky projects. Qualitative methods provide non-financial perspectives useful for assessing strategic fit and potential. The most effective evaluations often combine quantitative and qualitative techniques.

1. Oleh:
M.RIZAL
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Choosing Innovation
Projects

2. * Developing innovative new products and services is expensive and
time-consuming. It is also extremely risky—most studies have
indicated that the vast majority of development projects fail.
Firms have to make difficult choices about which projects are
worth the investment, and then they have to make sure those
projects are pursued
with a rigorous and well-thought-out development process. In this
chapter, we will explore the various methods used to evaluate and
choose innovation projects. The methods range from informal to
highly structured, and from entirely qualitative to strictly
quantitative. We will start by considering the role of capital
rationing in the R&D investment decision, and then we will cover
various methods used to evaluate projects including strictly
quantitative methods, qualitative methods, and approaches
thatcombine quantitative and qualitative techniques.
*OVERVIEW

3. *
*QUANTITATIVE METHODS FOR
CHOOSING PROJECTS
1. Discounted Cash Flow Methods
Many firms use some form of discounted cash flow analysis to evaluate projects.
Discounted cash flows are quantitative methods for assessing whether the
anticipated
future benefits are large enough to justify expenditure, given the risks.
Discounted cash flow methods take into account the payback period, risk, and
time value of money
2. Net Present Value (NPV)
the cash flows the project will yield (often under a number of different “what if”
scenarios). Costs and cash flows that occur in the future must be discounted
back to the current period to account for risk and the time value of money.
3. Internal Rate of Return (IRR)
The internal rate of return of a project is the discount rate that makes the net
present value of the investment zero
4. Real Options
When a firm develops new core technologies, it is simultaneously investing in its
own learning and in the development of new capabilities

4. Quantitative methods for analyzing potential innovation
projects can provide concrete financial estimates that
facilitate strategic planning and trade-off decisions. They can
explicitly consider the timing of investment and cash flows
and the time value of money and risk.
They can make the returns of the project seem unambiguous,
and managers may find them very reassuring. However, this
minimization of ambiguity may be deceptive; discounted
cash flow estimates are only as accurate as the original
estimates of the profits from the technology, and in many
situations, it is extremely difficult to anticipate the returns of
the technology.
*DISADVANTAGES OF
QUANTITATIVE METHODS

5. *
Conjoint Analysis
is a family of techniques (including discrete choice, choice
modeling, hierarchical choice, trade-off matrices, and pairwise
comparisons) used to estimate the specific value individuals place
on some attribute of a choice, such as the relative value of features
of a product or the relative importance of different outcomes of a
development Project
2. Data Envelopment Analysis
is a method of assessing a potential project (or other decision) using
multiple criteria that may have different kinds of measurement
units.23 For instance, for a particular set of potential projects, a
firm might have cash flow estimates, a ranking of the project’s fit
with existing competencies,
a ranking of the project’s potential for building desired future
competencies, a score for its technical feasibility, and a score for its
customer desirability
*COMBINING QUANTITATIVE AND
QUALITATIVE INFORMATION

6. *
1. Firms often use a combination of quantitative and qualitative methods to evaluate
which projects should be funded. Though some methods assume that all valuable
projects will be funded, resources are typically constrained and firms must use
capital rationing.
2. The most commonly used quantitative methods of evaluating projects are discounted
cash flow methods such as net present value (NPV) or internal rate of return (IRR).
While both methods enable the firm to create concrete estimates of
returns of a project and account for the time value of money, the results are only as good
as the cash flow estimates used in the analysis (which are often unreliable). Both
methods also tend to heavily discount long-term or risky projects, and can
undervalue projects that have strategic implications that are not well reflected by cash
flow estimates.
3. Some firms now use a real options approach to assessing projects. Real options better
account for the long-run strategic implications of a project. Unfortunately, many new
product development investment decisions do not conform to the
assumptions inherent in an options valuation approach
*Summary of Chapter

7. *
4. One commonly used qualitative method of assessing development projects is to
subject the project to a series of screening questions that consider the project from
multiple angles. These questions may be used merely to structure the discussion of a
project or to create rating scales that are then utilized in an approach that combines
qualitative and quantitative assessment.
5. A company’s portfolio of projects typically includes projects of different types
(e.g., advanced R&D, breakthrough, platform, and derivative projects) that have
different resource requirements and different rates of return. Companies can use a
project map to assess what their balance of projects is (or should be) and allocate
resources accordingly.
6. Q-sort is a qualitative method of assessing projects whereby individuals rank
each project under consideration according to a series of criteria. Q-sort is most
commonly used to provide a format for discussion and debate.
7. Conjoint analysis is a method of converting qualitative assessments of a choice
into quantitative weights of the different criteria underlying the choice. It is most
often used for assessing how customers value different product attributes.
8. Data envelopment analysis (DEA) is another method that combines qualitative
and quantitative measures. DEA enables projects that have multiple criteria in
different measurement units to be ranked by comparing them to a hypothetical
efficiency frontier.
*Summary of Chapter

8. *THANK YOU