Finance

After you? Setting priorities in technology trajectories

June 11, 2013

What projects to do first? In many research-oriented companies this is a question research managers struggle with. Declining budgets and more pressure to deliver positive results in terms of sellable research, products, and/or services, make the choice which project to do first, a strategically crucial one.

Together with Ed Nijssen, a professor of marketing at Eindhoven University of Technology, and Ties van Bommel from Philips Lighting, Ronald Mahieu, a professor of Finance and Innovation at TIAS School for Business and Society, has developed a method that allows R&D managers to optimally structure a sequence of related projects. The research has been summarized in the paper “Technology Trajectories and the Selection of Optimal R&D Project Sequences”.

Given a set of early-stage or pre-development projects related to a common underlying technology, a technology trajectory needs to be determined that sets 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. Building further on some specific real option valuation models, that were introduced in the academic literature some years ago, the authors modeled the managerial flexibility inherent in the technology trajectory.
Less risky project first

The main results that were found can be summarized as follows. Ronald Mahieu: “Consistent with the concept of affordable loss given a budget constraint we found that it makes sense to select and perform a less risky project first, before taking on a more technologically challenging and high-return project. During the execution of the first project the firm will obtain knowledge that it can use to improve the success in the next, more difficult project.”

Important in the framework of this paper is the concept of affordable loss, which concerns investing in an opportunity without jeopardizing a firm’s or technology trajectory’s continuity. By factoring-in both the risk of project failure and running out of resources, a technology manager can ensure a firm’s future despite short term loss. Using this approach a firm is more likely to be able to develop its new technological competences and establish and sustain its competitive advantage in the marketplace via a stream of new product applications. Given the large amounts spent on R&D, more informed choices on which projects to prioritize, deliver faster times-to-market at lower cost.

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