Managing Uncertainty During R&D Projects: A Case Study

OVERVIEW: Firms make significant investments in R&D projects, yet the economic return is often difficult to predict because of significant technological and commercial uncertainty. We present an innovative and practical method for managing R&D projects, and we discuss its application to a large R&D investment by Philips Lighting. The method, which we call the project portfolio option-value (PPO) method, provides an innovative way to represent, discuss, and value uncertainty in R&D projects. The PPO method is not about “perfect” or “complete” valuation models, but rather about providing a comprehensive but not-too-detailed view of major challenges and key criteria for success. The method is designed for a complex setting in which many uncertainties exist about technology and the market; in which the order in which uncertainties are resolved and decisions will be made cannot be specified in advance; in which interdependencies exist among R&D projects; and where transparency is vital.

[1]  Hans Georg Gemünden,et al.  NPD Planning Activities and Innovation Performance: The Mediating Role of Process Management and the Moderating Effect of Product Innovativeness , 2007 .

[2]  Gina Colarelli O'Connor,et al.  Evaluating Radical Innovation Portfolios , 2007 .

[3]  Scott Mathews.  Valuing Risky Projects with Real Options , 2009 .

[4]  Stefan Schneider,et al.  Improving the business impact of foresight , 2008, Technol. Anal. Strateg. Manag..

[5]  Fotios C. Harmantzis,et al.  Valuing Hosted VoIP services in the enterprise market: case application using real options , 2010, Int. J. Technol. Manag..

[6]  Christoph H. Loch,et al.  Special Issue on Design and Development: Project Management Under Risk: Using the Real Options Approach to Evaluate Flexibility in R...D , 2001, Manag. Sci..

[7]  Florian Herzog,et al.  Making Real Options Work for Practitioners: A Generic Model for Valuing R&D Projects , 2007 .

[8]  Joana G. Geraldi,et al.  What complexity assessments can tell us about projects: dialogue between conception and perception , 2009, Technol. Anal. Strateg. Manag..

[9]  Chen-Fu Chien,et al.  A Portfolio-Evaluation Framework for Selecting R&D Projects , 2002 .

[10]  Alan R. Fusfeld,et al.  Resolving Uncertainty in R&D Portfolios , 2000 .

[11]  F. Black,et al.  The Pricing of Options and Corporate Liabilities , 1973, Journal of Political Economy.

[12]  Adrien Presley,et al.  R&D project selection using the analytic network process , 2002, IEEE Trans. Engineering Management.

[13]  A. E. Gear,et al.  A Probabilistic Objective Function for R & D Portfolio Selection , 1971 .

[14]  Ralph E. Steuer,et al.  Multiple criteria decision making combined with finance: A categorized bibliographic study , 2003, Eur. J. Oper. Res..

[15]  B. Verworn.  A structural equation model of the impact of the “fuzzy front end” on the success of new product development , 2009 .

[16]  Michael E. Raynor,et al.  Strategic Flexibility in R&D , 2004 .

[17]  Riccardo Vecchiato,et al.  Foresight in corporate organisations , 2010, Technol. Anal. Strateg. Manag..

[18]  C. Herstatt,et al.  Planning and Uncertainty in New Product Development , 2008 .

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

[20]  Roel Leus,et al.  R&D project scheduling when activities may fail , 2007 .

[21]  Anastasios A. Economides,et al.  A Decision Analysis Framework for Prioritizing a Portfolio of ICT Infrastructure Projects , 2008, IEEE Transactions on Engineering Management.

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

[23]  Michel Benaroch,et al.  Option-based management of technology investment risk , 2001, IEEE Trans. Engineering Management.

[24]  Onno Lint,et al.  An Option Approach to the New Product Development Process: a case study at Philips Electronics , 2001 .

[25]  E. Pennings,et al.  R&D as an option on market introduction , 1998 .

[26]  Lieh-Ming Luo,et al.  Evaluating R&D Projects with Hedging Behavior , 2008 .