1. Firms have to choose which innovation projects to fund given that resources are limited and most projects fail. Quantitative methods like net present value (NPV) and internal rate of return (IRR) are commonly used but have limitations since cash flow estimates are unreliable. 2. Methods that combine qualitative and quantitative assessments are better able to account for long-term strategic implications. Firms may use screening questions, project mapping, Q-sort, conjoint analysis, or data envelopment analysis. 3. The chapter discusses quantitative methods like NPV and IRR, qualitative screening approaches, and techniques that blend qualitative and quantitative factors like project impacts, technical feasibility, and customer desirability to evaluate potential innovation projects.

1. CHAPTER 8
IS STRATEGY
AHMAD JAINI
INFORMATION SYSTEM
E-mail: ahmadjainisif@gmail.com

2. Choosing Innovation Projects
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3. Overview
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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
that combine quantitative and qualitative techniques.

4. QUANTITATIVE METHODS FOR CHOOSING PROJECTS
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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

5. DISADVANTAGES OF QUANTITATIVE METHODS
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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.

6. COMBINING QUANTITATIVE AND QUALITATIVE
INFORMATION
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1. 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

7. Summary of Chapter
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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

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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.

9. Thanks For Attention
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