Management of
Technology
(OM476)
Project Selection
March 20, 2006
S. Fisher
Agenda

Methods for choosing R&D projects
 Financial
 Economic
 Strategic
 Customer-based
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?
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
NPV Example
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?
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

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?
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
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?
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.
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.
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
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
Example Efficiency Frontier
Source: http://people.brunel.ac.uk/~mastjjb/jeb/or/dea.html
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.
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?

For next class

Enterprise case discussion
 Team
6 presenting
 Team 2 review/questions
 All others – exec summary

On Monday, March 27 – Eli Lilly case