1. Management of Technology (OM476) Project Selection March 20, 2006 S. Fisher

2. Agenda Methods for choosing R&D projects  Financial  Economic  Strategic  Customer-based

3. In-class writing Which product development project(s) should Microsoft focus on, and why?  Improving security across the board  Next version of Windows (Vista)  Developing next version of Office  New search engine  New version of Xbox  New games for Xbox  Windows mobile software (for cell phones, PDAs)  Another project?

4. Net Present Value Will this project make money? Is it worth the investment?  Discounting future cash flows to account for risk and time value of money NPV = Present value of cash inflow – Present value of cash outflows If NPV > 0, project is predicted to have positive value Can compute multiple NPV scenarios based on various levels of risk, discount rates  IRR is the discount rate that results in NPV = 0

5. NPV Example

6. Real Options Investment in R&D = purchase of real call option on the technology Options include  Right to commercialize technology  Right to acquire partner Differences in key assumptions between stock market and R&D applications?

7. More Qualitative Analysis of Costs and Benefits Screening questions (some quantitative data in these questions)  Role of customer  Role of capabilities (e.g., maintaining knowledge stocks)  Project timing and cost Mapping R&D portfolio Q-sort

8. Some screening questions for the Microsoft projects How many customers would the upgrades affect? What is the size of the installed base? Are there alternatives to which customers could switch? Does the project leverage the firm’s core competencies? Will the project help the firm build new capabilities that will allow it to achieve its strategic intent?

9. Portfolio Management Alignment with business strategy Balance in project types  Long term and short term  High risk and low risk  Radical and incremental Project stages, product lifecycles

10. Balancing Across Business Segments Allows the company to balance risk Look at product portfolios for  W.L. Gore  3M How does a company like Boeing balance its risk?

11. Project Selection at Gore Project champion recruits other employees to work on a project – “If you can’t find enough people to work on it, maybe it’s not really a good idea.” Real, Win, Worth exercise  Is the opportunity real? Will someone buy this?  Can we win? What do the economics look like?  Is it unique and valuable? Can we have a sustained advantage? Source: Harrington, A. (2003). Who’s afraid of a new product? Fortune, 148(10), p. 189.

12. Google’s Project List Used to maintain a prioritized list of Top 100 projects When the list grew to 270 projects, they stopped using the list Google’s decision making guidelines include  “Don’t be evil” – beneficial social impact  Fearlessness – “launch early and often” What allows Google such freedom in NPD? Source: Elgin, B. (October 3, 2005). Managing Google’s Idea Factory. Business Week.

13. Conjoint Analysis Estimating value placed on certain attributes of a choice  Collect data about preferences using interviews, surveys, etc.  Estimate relative importance using regression-based techniques Could be used at the project level or the product feature level

14. Data Envelopment Analysis Typically used in operations research, hence the focus on efficiency Allows firms to compare across different types of measures Can use it to find the best linear combination of project attributes and compare all other projects to this efficiency frontier  An efficient NPD project would maximize returns based on minimal inputs

15. Example Efficiency Frontier Source: http://people.brunel.ac.uk/~mastjjb/jeb/or/dea.html

16. Common Errors in Project Selection Picking too many projects  Lack of focus  Leads to insufficient resources (money, staff) for any one project Picking too many low risk projects  Mediocre, small projects are low risk, low return Source: Cooper and Edgett ( 2003). Overcoming the crunch in resources for new product development. Research Technology Management, 46(3), 48-58.

17. Back to Microsoft… “Winning the web” seen as their biggest strategic challenge Over 80% of revenues come from “old” products (Windows, Office) Xbox and Windows Mobile are still losing money Does this change your initial answer at all?

18. For next class Enterprise case discussion  Team 6 presenting  Team 2 review/questions  All others – exec summary On Monday, March 27 – Eli Lilly case