Academic journal article Research-Technology Management

Crafting Research and Development Project Portfolios

Academic journal article Research-Technology Management

Crafting Research and Development Project Portfolios

Article excerpt

Readers of Research * Technology Management are by now familiar with the argument that highly uncertain technology projects are better assessed by using options logic than by more conventional approaches, such as deriving their net present value (1,2,3). R&D projects can be viewed as the technological analogy of a financial options contract if they meet certain conditions. Provided that they represent a limited downside investment that gives a company a privileged position to create a commercial product at some point in the future, projects can have substantial potential value under uncertainty. This is so even if it isn't quite clear what that future asset is going to deliver in terms of profits or revenues at the time of the original investment.

Because so much of the value of highly uncertain projects lies in the future, it is hard to know when, or whether, they are going to pay off. This creates enormous stresses in the resource allocation process for most companies. Given finite resources, how can R&D managers choose between projects that have a near-term and quantifiable outcome and projects whose returns are hard to estimate and far-off in time? Particularly when resources are stretched thin, it is common for companies to focus too much on extending their existing technological bases, thus under-investing in the future.

It is also not unusual for all projects to be treated as though they were substantially the same, even when they have different levels and types of uncertainty and serve different strategic purposes. Such useful tools as stage-gate management processes don't really help resolve the fundamental question of what the whole portfolio of projects should look like for a given company.

Market and Technological Uncertainty

An important distinction that is seldom explicitly made with respect to R&D options is that their purpose and nature are not the same. Some options are taken out to preserve a company's opportunity to compete in some future and still unclear technological arena. Because these essentially position the company to make further moves, we call them positioning options. They are quite different from options in which one invests in order to learn about the market by probing or offering prototypes to potential early adopters (4). We call such options scouting options, because they help a company scout out potential opportunities. A final category of options are highly uncertain on both market and technological dimensions, but have the potential to open entirely new classes of opportunity for the firm. We call these options stepping-stone options because they represent steps toward a highly uncertain future. As their name suggests, when properly managed, they are contained investments that systematically build both market insight and technical competence to move a company forward without exposure to potentially catastrophic downside risks.

In highly unpredictable situations, smart companies have learned that the best way to make sure they are able to respond effectively to future challenges is to deploy patterns of options. Rather than making a single big bet on one means of access to an attractive opportunity, they have found that it makes more sense to fund a number of small ventures intended to capture market opportunity in different ways. Thus, established firms such as Intel and Microsoft might take multiple equity positions in startups pursuing similar solutions, research consortia supported by multiple firms might explore various alternative solutions, and joint ventures entered into by a wide variety of players might employ technology-sharing arrangements. Just as you might think of your company as a portfolio of businesses, there is a lot to be said for thinking of the initiatives you are pursuing within a given business as a portfolio of options.

This brings us to a point of departure for making the assessment of what your own R&D portfolio should look like. …

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