OIIS Lecture 3: Choosing Innovation Project Cooperation Strategies

Why pressure on mangers to make careful choices among project?

New product development is inherently risky and expensive

How firms select/manage innovation projects

Firms use a mix of (in)formal, quantitative and qualitative methods to select/manage innovation projects

Many firms use …. to choose between valuable projects

capital rationing (fixed R&D budget and project rankings (expected value/potential))

Where could be the Development Budget be based on?

-        Industry benchmarks (average RD expenses in the sector)

-        Historical performance benchmarks

-        On a desired level of R&D intensity (def; ratio between R&D expenses and turnover)

 

Small business can’t finance their R&D internally, so what do they use for financing?

They use external additional financing sources:

1.      Government grants/loans from agencies

2.      Independent or corporate venture capitalists

Specialize in specific industries to leverage expertise. Bieden niet alleen geld, maar ook mentorschap en geloofwaardigheid.

3.      Angel investors: venture capitalists without the limited partnership structure

Why do firms use quantitively methods to evaluate projects to choose projects?

To evaluate projects based on financial numbersl, to compare projects and rank them to choose projects.

What are the most important Quantitative methods for choosing projects?

Discounted cash flow and real option analyses

Difference of Discounted cash flow and real option analyses, and what matches them?

They differ in that the real options approach facilitates the consideration of a project’s strategic importance and flexibility, while DCF focuses on financial metrics. Both allow rigorous mathematical and statistical comparisons of projects. Both Quantitative.

Limitations of Discounted cash flow and real option analyses

The accuracy is challenging because the value of a new technology is hard to establish, these methods then favor short-term low risk investments

What are two Discounted Cash Flow Methods? Elaborate them

Net Present Value (NPV) and Internal Rate of Return (IRR)

Net Present Value (NPV): what the project is worth today, compares the present value of cash inflows and outflows

Positive means the project is gaining value.

Internal Rate of Return (IRR): what rate of return does this project yield

Discounted payback period

Managers evaluate how long it takes to recover the initial investment, adjusted for the time value of money.

Beperkingen van Discounted Cash Flow

Er heerst veel uncertainty, het benadeelt lange termijn of risocovolle projecten en houdt geen rekening met strategische waarde of lerende effecten van techbologie-investeringen.

IRR (internal rate of return)

identifies the discount rate that makes the NPV of the investment 0 and is difficult to calculate when cash flows arrive in varying amounts per period because there can be multiple rates of return

Real Options thinking

Value in uncertainty, het approaches R&D as strategic options)) is the most useful when there is uncertainty and emphasises the importance firm’s investments in its own learning, development of new capabilities and the creation of opportunities are important factors in the decision-making process

Real Options Thinking is een manier van denken over investeringsbeslissingen, vooral in situaties met onzekerheid (zoals R&D, innovatie, of nieuwe markten).

In plaats van één groot besluit te nemen nu, behandelt het investeringen als opties — keuzemogelijkheden die later kunnen worden uitgeoefend als de omstandigheden gunstig zijn.

Het idee: onzekerheid ≠ risico om te vermijden, maar een bron van waarde — mits het bedrijf slim leert en flexibel blijft.

Emperical Evidence: Studies suggest that a real options approach leads to better investment decisions

 

Real Options vs Call Options: Key Differences

Costs: Call options are relatively inexpensive but real options can be very expensive (large investments before learning whether the real options is valuable)

Value dependence: Call option value is independent of the call holder’s behavior, but real option value is highly dependent on the resources a firm invests

Qualitative Methods for Choosing Projects

Qualitative evaluation approaches ((in)formal) because many of the factors important to the decision are difficult to quantify and attempts can lead to misleading results

Screening questions

Used by managers to structure technology project investment discussions.
Formalize → utilize scoring mechanism (scaled responses, weighted according to importance)

Sample Screening questions: role of customer, role of capabilities, project timing and cost, how big is the market?

Aggregate Project Planning Framework (most important instrument)

focuses a firm’s attention on the mix of development projects in its R&D portfolio to determine whether the projects are consistent with the company’s resources and strategic intent

Benefits Aggregate Project Planning Framework

The framework enables firms to determine whether its portfolio is balanced between projects with short/long-term payoff horizons

Avoids overemphasis on short-term profitability, which may compromise long-term prospects

Prevents excessive focus on long-term projects, which can strain short-term cash flow

How do managers categorize existing projects?

Based on Resources required and parts of the product line supported

Why shouldn’t a firm focus only on advanced R&D projects?

Because although advanced R&D drives long-term innovation, it often lacks short-term commercial returns.

Firms need a mix of advanced and applied R&D to stay financially sustainable while building future technological advantage.

What are Breakthrough projects in R&D?

They incorporate revolutionary new product or process design technologies into a new product.

They are focused on a specific commercial application and can transform markets or create new ones.

What are Platform projects?

They provide fundamental improvements over previous generations of products and are designed to serve a core group of customers.

They act as the foundation for a series of derivative products.

What are Derivative projects?

They involve incremental changes in existing products or processes — such as updates, cost reductions, or minor feature enhancements.

They build on existing platforms rather than creating new ones.

What is the risk of focusing only on derivative projects?

A portfolio focused solely on derivative projects may yield strong short-term returns, but it leaves the firm unprepared for major technological shifts and future market changes.

What is the Q-Sort method used for in R&D project evaluation?

A ranking technique where participants are given cards (each representing a project) and asked to order them based on how well each meets certain criteria (e.g., technical feasibility, market impact, strategic alignment).

It helps structure discussions and align managers’ views on project priorities.

How can qualitative and quantitative project assessments be combined?

Through methods like Conjoint Analysis and Data Envelopment Analysis (DEA), which translate qualitative assessments into quantitative measures, allowing fair comparison of projects evaluated differently.

What is Conjoint Analysis?

A family of statistical techniques that determines the relative importance of different product attributes by analyzing how customers make trade-offs between them.

It quantifies customer preferences for design or feature decisions.

How did Marriott use Conjoint Analysis for hotel feature prioritization?

1. Focus groups identified customer segments and valued attributes.

2. Trade-off analysis revealed customer preferences.

3. Hotel profiles were created and rated by participants.

   → Helped Marriott identify the most valued features for moderately priced hotels.

What is Data Envelopment Analysis (DEA) and how does it work?

A method using linear programming to compare projects with different criteria and measurement units.

It creates an “efficiency frontier” (the best possible performance) and measures how far each project is from that frontier, giving each an efficiency score.

Why might a firm develop technology on its own rather than with a partner?

• Has all needed resources/capabilities

• Opportunity to develop new competencies

• Knowledge transfer risk is too high

• Want to control the technology’s development path

• No suitable partner available

What are the main advantages of collaborating in innovation?

• Access to skills/resources faster than developing them internally

• Lower asset commitment and higher flexibility

• Opportunity to learn and acquire knowledge

• Ability to create shared standards (important for compatibility and commercialization)

Who can be potential partners in innovation collaborations? Types of collaborative arrangements

• Suppliers & customers

• Competitors & complementors

• Firms in different markets or product segments

• Non-profits, government agencies, or universities

In which areas can firms collaborate?

• Manufacturing

• Services

• Marketing

• Technology / R&D

What factors influence a firm’s optimal collaboration strategy?

• Barriers to imitation

• Presence of capable competitors

• Availability of complementary goods

• In-house production capabilities

• Future strategies (e.g., mergers or acquisitions)

What are Strategic Alliances, and what are their advantages?

More investment; access to capabilities, achieve innovation goals faster, at a lower cost and with less risk

To avoid the sharing of too much info with alliance members, firms need to ensure that employees understand the limit on the info & resources to be shared with the alliance

What is a Joint Venture (JV)?

A separate legal entity created by two or more firms with significant equity investment.

Used to pursue shared projects or enter new markets while sharing risk and reward.

What is Licensing, and what are its pros and cons for each side?

A contractual arrangement granting rights to use an asset or technology.

• Licensor: gains wider market reach, prevents competitors from copying, but may lose exclusivity advantage.

• Licensee: cheaper, less risky than internal development, but fewer learning opportunities.

What are the advantages and disadvantages of outsourcing in innovation?

Advantages:

• Greater flexibility (no long-term investment/labor)

• Focus on core competencies

Disadvantages:

• Loss of learning opportunities for future innovation

• High transaction costs

• Risk of knowledge appropriation by contractor

What are Collective Research Organizations (CROs)?

Trade associations, university-based research centres or private research corporations from through government or industry association initiatives

Why is partner selection and monitoring crucial in collaborations?

Because of risks like:

• Poor resource fit

• Knowledge expropriation (partner exploiting firm’s ideas)

• Managerial overload from too many collaborations

  → Firms must limit the number of partnerships, ensure alignment and trust, and set governance systems.

What factors determine the choice of a good partner?

• Resource fit: size, strength, and complementarity

• Strategic fit: aligned goals, culture, and values

• Market impact: how it affects power, rivalry, and substitutes

• Strategic intent fit: closes technology/resource gaps and supports advantage

Partner monitoring and governance importancy. 

The more resources a firm risks in collab, the more important it becomes for the collab to be governed by a clear, flexible (& legally binding) monitoring and governance agreement

What is the role of the development budget? Learning objective

Allocates limited R&D resources, prioritizes projects, and balances short- vs long-term goals.

Based on industry benchmarks, past performance, or R&D intensity.

Small firms rely on grants, venture capital, or angel investors.

Main methods to evaluate new product development (NPD) projects? Learning objective

Quantitative: NPV, IRR, DCF, Real Options, DEA, Conjoint.

Qualitative: Screening questions, Q-Sort, Aggregate Project Planning.

Mix of both = balance between financial and strategic value.

When is collaboration the optimal strategy?

When firm lacks resources or capabilities, needs complementary goods, or faces strong competitors.

Go solo if control, secrecy, or learning are crucial.

What are main types of collaboration?

• Strategic alliance: shared goals, low equity

• Joint venture: new entity, shared risk

• Licensing: rights to IP

• Outsourcing: external execution

• Collective research orgs: shared R&D efforts

How should partnerships be monitored and governed?

Ensure fit & trust, define roles, control & profit-sharing, auditing, info-sharing limits, and exit clauses.

Use clear, flexible, legally binding agreements.