TMitTI 1
Timetable
16.9. Introduction, Sakari Luukkainen
23.9. Technology Marketing, Jari Haggren
30.9. Market Dynamics of Telecom Industry, Sakari Luukkainen
7.10. Standardization, Sakari Luukkainen
14.10. Case GSM, Sakari Luukkainen
21.10. Product Strategy, Eino Kivisaari
28.10. Product Strategy, Eino Kivisaari
4.11. R & D Management, Sakari Luukkainen
11.11. R & D Management, Case TeliaSonera, Jyrki Härkki
18.11. Corporate Venturing, Case Nokia, Taina Tukiainen
25.11 Technology Foresight, Sakari Luukkainen
9.12. Examination
© Sakari Luukkainen
TMitTI 2
R&D Life Cycle
€
R&D
investment
Time
Science
base
Proprietary
Generic
technologies technologies
© Sakari Luukkainen
Production
scale-up
TMitTI 3
R&D Life Cycle
€
R&D
investment
Commercialization
investment
Time
Science
base
Proprietary
Generic
technologies technologies
© Sakari Luukkainen
Production
scale-up
TMitTI 4
R&D Life Cycle
€
Commercialization
investment
R&D
investment
Cash flow
Science
base
Proprietary
Generic
technologies technologies
© Sakari Luukkainen
Sales
Time
Production
scale-up
Market
penetration
TMitTI 5
Classification of R&D
Type of R&D
Probability of technical
success
Incremental Discontinuous Fundamental
40-80%
20-40%
Small, difficult
to assess
Time to completion
0,1-2 years
2-4 years
5-10 years
Competitive potential
Modest, but
necessary
Large
Large, difficult
to assess
Durability of
competitive advantage
Short,
imitable by
competitors
Long,
protectable by
patents
Long but risky
© Sakari Luukkainen
Source: adapted from Pitkänen 2000, ADL 1991
TMitTI 6
Technology strategy process in firms
Autonomous
strategic
action
Strategic
context
Concept of
corporate
strategy
Induced
strategic
action
Structural
context
© Sakari Luukkainen
Source: Burgelman & Rosenbloom
Overcommitment increase R&D cost
and destroys productivity
TMitTI 7
Average
value added
time for
engineering
tasks 100 %
60 %
1
2
3
© Sakari Luukkainen
4
Number of projects
per engineer
Source: Henderson
TMitTI 8
R&D process in firms
Technological change
Technology
Assessment
and
Forecasting
Idea generation
and screening
Diversified
portofolio of
Project Plans
Project
execution and
evaluation
Market
Assessment
and
Forecasting
Market change
© Sakari Luukkainen
TMitTI 9
Goals of R&D Management
Production
ICT
investment
Innovation
Proprietary
technologies
Value added
Sales, profit
R&D
investment
Generic
technologies
Science base
© Sakari Luukkainen
GDP
TMitTI 10
Goals of Technology Policy
•
2001 R&D investments in Finland were 5 billion € of which was
publicly financed 28 %, major R&D performed in telecom sector
•
Technology policy differs from the other policies, because it tryis to
"increase the cake" instead of sharing it
•
The most important reasons for too low a level of the private R&D
investments are due to the high technical and commercial risks
involved
•
The government´s initiative is thus emphasized in the case of
R&D underinvestment in the private sector
•
In order to redress this kind of market failure the industrial
countries have contributed to their technological infrastructure to
support the long-term competitiveness of domestic companies
© Sakari Luukkainen
TMitTI 11
Goals of Technology Policy
• Companies make their decisions of the R&D investments
aiming at maximizing profits
• Therefore, at least in big companies, the risk is divided into
the portfolios of many different R&D projects, all of which
are required greater profitability than other less risky
projects like the expansion of the present production
facilities
• This all results in the companies beginning to favour R&D
projects with a short time to market influence.
• Therefore the goal of technology policy is to maximize the
influence of such R&D investments on the growth of GDP,
which would not be realised without support, but would
greatly benefit society
© Sakari Luukkainen
TMitTI 12
Goals of Technology Policy
• Spillover means practically a situation where investment in
the technology of an innovator also benefits other companies
• Economists have demonstrated that R&D performed by the
original innovating company generates widespread value in
the economy through spillovers
• The key factor in the development of the industrial structure
and advancement of spillovers is the efficiency of the whole
domestic value chain (cluster)
• Concrete technology policy occurs in the selection of
publicly financed R&D projects
© Sakari Luukkainen
TMitTI 13
R&D Investment Profitability Evaluation
Net Present Value (NPV, DCF)
p
JAp
St
 ( 1  i )t  ( 1  i )
t m
m
p
-
t 1
Ht
( 1 i )t
Internal Rate of Return (RoR, IRR)
p
m
JAp
Ht
St



t
p
t
(
1

RoR
)
(
1

RoR
)
(
1

RoR
)
t m
t 1
© Sakari Luukkainen
TMitTI 14
RoR calculation formula
p
m
JAp
Ht
St



t
p
t
(
1

RoR
)
(
1

RoR
)
(
1

RoR
)
t m
t 1
m = the length of the R&D project
n = the length of the product life-cycle
p=m+n
St = net cash flow after the market introduction
RoR = rate of return
Ht = annual R&D expenditure
JAp = residual value
© Sakari Luukkainen
TMitTI 15
Example value chain
Supplier A
Firm B
Customer C
Supplier D
Firm E
Customer F
Supplier G
Firm H
Customer I
Supply chain
Core industry
© Sakari Luukkainen
Services
TMitTI 16
R&D financing by type of project
Social rate
of return
A
D
B
Social
hurdle rate
C
E
Innovator
hurdle rate
© Sakari Luukkainen
Innovator rate
of return
Source: Tassey 1997
TMitTI 17
R&D management by milestones
Social rate
of return
At1
At21
A t3
Social
hurdle rate
At22
Innovator
hurdle rate
© Sakari Luukkainen
Evaluation of
- profitability
- technical risk
- delay
Decisions on
- continue
- modify
- kill / freeze
Innovator rate
of return
Source: Tassey 1997
TMitTI 18
Stock Profit Options Pay-out
Value of an option
Option pay-out
Strike price
Excess risk of
stock ownership
Profit / Loss form
Stock sale
Stock Price
© Sakari Luukkainen
Source: Gaynor 2003
TMitTI 19
Real options R&D valuation
Initial
R&D
Investment
Decision
R&D
Commercialization
Outcome
Decision
Excellent
Yes
-$6M
Yes
0.6
Good
0.1
No
Valuation Method
DCF #1: Use most likely values
DCF #2: Consider market uncertainty
DCF #3: Consider all uncertainties
Options Thinking Valuation
Yes
0.8
-$15M
0.2
No
0.3
Market
Outcome
+$60M
-$15M
+$20M
0.3
0.7
Poor
NPV
- $11.4
- $9.0
- $5.4
+ $2.2
© Sakari Luukkainen
+$10M
-$15M
No
Yes
+$15M
0.1
-$15M
0.9
No
1993
1994
-$60M
1995
- 6 -(15/1.12) + (10/1.122)
- 6 -(15/1.12) + (0.3*20+0.7*10)/1.122
- 6 -(15/1.12) + 0.3(0.8*….)/1.122
- 6 -0.3*(15/1.12)+0.3*((0.8*60+0.2*15)/1.122))
Source: Faulkner 1996
TMitTI 20
Product platforms and modularity
Product 3
Segment A
Product 1
Product 1B
Product 1C
Product 1A
Product 2
Segment B
Product 5
Segment C
Element A
Element B
Element C
Source: McGrath 2001
© Sakari Luukkainen
TMitTI 21
R&D Intensity by Country
© Sakari Luukkainen
Source: Tekes, OECD
TMitTI 22
Finnish Innovation System
© Sakari Luukkainen
Source: Tekes
TMitTI 23
Evaluation of the Innovation System
• R&D investments of industry has been successfull - R&D
expenditures correlate highly with growth of sales of new
products i.e. innovations
• The support of GSM development has created a lot of direct
success as well as spillovers in the telecluster
• The role of basic research has been low in the ICT business
so far
• The effect of public financing has had a significant but
limited effect, it works in firms that already have high R&D
intensity – successful R&D requires process knowledge
(Niininen 1999)
© Sakari Luukkainen
TMitTI 24
Evaluation of the Financing System
• Subsidized loans have better effect on
productivity than direct support – easy money
effect (Niininen 1999)
• The role of liquidity constraints was negligible in
determining R&D investment – steady R&D
spending (Niininen 1999)
• Venture capital financing has so far resulted in a
very few new success stories
• Financing by own cashflow puts more pressures
to allocate R&D according to market need
© Sakari Luukkainen