Technology Trajectories and the Selection of Optimal R&D Project Sequences

Given a set of R&D projects drawing on the same underlying technology, a technology trajectory refers to the order in which projects are executed. Due to their technological interdependence, the successful execution of one project can increase a firm's technological capability, and help to efficiently and effectively develop other projects from this set. In this paper, we present a model for determining the optimal sequence for performing such projects. Based on Huchzermeier and Loch's real-option value model, we demonstrate that accounting for interproject learning and discount rates has: 1) a positive effect on the maximum option value that different project sequences can achieve; and 2) the maximum value of the technology trajectory is particularly sensitive to the selection of the first project.

[1]  Stuart A Read,et al.  Affordable loss: behavioral economic aspects of the plunge decision , 2009 .

[2]  Han T. J. Smit,et al.  A Real Options Perspective On R&D Portfolio Diversification , 2009 .

[3]  C. Loch,et al.  Project Management Under Risk : Using the Real Options Approach to Evaluate Flexibility in R & D Arnd Huchzermeier , 1999 .

[4]  Jeremy M. Eckhause,et al.  Evaluating real options for mitigating technical risk in public sector R&D acquisitions , 2009 .

[5]  R. Geske.  THE VALUATION OF COMPOUND OPTIONS , 1979 .

[6]  Alexander J. Triantis,et al.  Dynamic R&D Investment Policies , 1999 .

[7]  Edwin R. Otto.  Innovation: The Attacker's Advantage , 1986 .

[8]  Ashish Sood,et al.  Technological Evolution and Radical Innovation , 2005 .

[9]  Tyrone T. Lin,et al.  Applying real options analysis to assess cleaner energy development strategies , 2011 .

[10]  Lenos Trigeorgis,et al.  A Log-Transformed Binomial Numerical Analysis Method for Valuing Complex Multi-Option Investments , 1991, Journal of Financial and Quantitative Analysis.

[11]  Hemantha S. B. Herath,et al.  MULTI-STAGE CAPITAL INVESTMENT OPPORTUNITIES AS COMPOUND REAL Options , 2002 .

[12]  David Lei,et al.  Dynamic Core Competences through Meta-Learning and Strategic Context , 1996 .

[13]  Geoffrey A. Moore.  Crossing the chasm : marketing and selling high-tech products to mainstream customers , 1999 .

[14]  Leonardo P. Santiago.  An empirical investigation on the appropriateness of flexibility approach to the product portfolio selection , 2008, Int. J. Technol. Manag..

[15]  Chih-Chung Kuo,et al.  The Relationship Between R&D Investment and Firm Profitability Under a Three-Stage Sigmoid Curve Model: Evidence From an Emerging Economy , 2010, IEEE Transactions on Engineering Management.

[16]  L. Trigeorgis.  The Nature of Option Interactions and the Valuation of Investments with Multiple Real Options , 1993, Journal of Financial and Quantitative Analysis.

[17]  R. Voeks.  Real Options: Managerial Flexibility and Strategy in Resource Allocation , 1997 .

[18]  Mariano Nieto,et al.  Performance analysis of technology using the S curve model: the case of digital signal processing (DSP) , 1998 .

[19]  Eymen Errais,et al.  Valuing pilot projects in a learning by investing framework: An approximate dynamic programming approach , 2008, Comput. Oper. Res..

[20]  Thomas G. Bifano,et al.  Management of R&D projects under uncertainty: a multidimensional approach to managerial flexibility , 2005, IEEE Transactions on Engineering Management.

[21]  R. V. Wyk.  Innovation: The attacker's advantage : Richard N. Foster 316 pages, £14.95 (London, Macmillan, 1986) , 1987 .

[22]  Jeremy M. Eckhause,et al.  An Integer Programming Approach for Evaluating R&D Funding Decisions With Optimal Budget Allocations , 2012, IEEE Transactions on Engineering Management.

[23]  M. Tushman,et al.  Technological Discontinuities and Organizational Environments , 1986 .

[24]  Bin Jiang,et al.  Impact of Economic and Technical Uncertainties on Dynamic New Product Development , 2013, IEEE Transactions on Engineering Management.

[25]  Lorin M. Hitt,et al.  Vendor Screening in Information Technology Contracting With a Pilot Project , 2004, J. Organ. Comput. Electron. Commer..

[26]  Nicole Propst.  Real Options Managing Strategic Investment In An Uncertain World , 2016 .

[27]  Eduardo S. Schwartz,et al.  Investment Under Uncertainty. , 1994 .

[28]  Pirooz Vakili,et al.  On the Value of Flexibility in R&D Projects , 2005, Manag. Sci..

[29]  J. Baret,et al.  Electrowetting: from basics to applications , 2005 .

[30]  J. Zif,et al.  The R&D cycle: the influence of product and process R&D on short-term ROI , 1997 .

[31]  Michael Song,et al.  Marketing Under Uncertainty:The Logic of an Effectual Approach , 2009 .