Strategic Flexibility in R&D

OVERVIEW: Managers choosing which R&D projects to fund typically rely on rank-ordering heuristics when other valuation methods are not applicable. These heuristics are powerful, but they have a number of limitations, among them: they overlook the impact of each project on a portfolio of projects; they rely on incomplete selection criteria; and they ignore technical interdependencies between projects. These short-comings can result in a sub-optimal allocation of resources, both financial and human, and the exposure of the company to significant strategic risk. Strategic Flexibility is an alternative project selection method. This framework draws upon scenario-building and real options concepts to help managers formulate and implement strategy in high-commitment, high-uncertainty environments. “Jupiter Research” used this approach to review its project portfolio, achieving better outcomes than could have been obtained with typical project selection methods.