Allocating Resources for Innovation

Given their mathematical skills one might have expected R&D managers to be enthusiastic users of quantitative methods for allocating resources to innovative activities. The evidence suggests otherwise, practicing R&D managers have been sceptical for a long time. An exhaustive report by practicing European managers on R&D project evaluation classifies and assesses more than 100 methods of evaluation and presents 21 case studies on their use. However, it concludes that no method can guarantee success, that no single approach to pre-evaluation meets all circumstances and that whichever method is used the most important outcome of a properly structured evaluation is imposed communication. These conclusions reflect three of the characteristic corporate investments in innovation activities:
1) They are uncertain so that success cannot be assured.
2) They involve different stages that have different outputs that require different methods of evaluation
3) Many of the variables in an evaluation cannot be reduced to reliable set of figures once plugged into a formula but depends on expert judgments. Hence the importance of communication especially between the corporate functions concerned with R&D and related innovative activities on the one hand, and with the allocation of financial resources on the other.
A Chief executive officer’s completely perfect and absolutely quantitative method of measuring his R&D programs.
In multiple projects by words it can’t be pronounced or weighed published papers to the nearest half an ounce.
A CEO says,
I add a year-end bonus for research that’s really pure.
(And of it’s also useful your job will be secure).
I integrate your patent rate upon a monthly basis
Compute just what your place in the race to conquer space is –
Your scientific stature assay upon some scales.
Whose final calibration is the Company net to sales
And thus I create numbers where there were none before:
I have lots of facts and figures – and formulae galore —
And these quantitative studies make the whole thing crystal clear .
Our research should cost exactly what we’ve budgeted this year
Given the comprehensive involved, the outcomes of investment in innovation are uncertain, so that the forecasts (of costs, prices, sale volume etc.) that underlie project and program evaluations can be unreliable. According to Joseph Bower, management finds it easier appraising investment proposals to make more accurate forecasts of reductions in production cost than of expansion in sales, whilst their ability to forecast the financial consequences of new product introductions is very limited indeed. This last conclusion is confirmed by the study by Edwin Mansfield and his colleagues of project selection in large US firms. By accompanying project forecasts with outcomes, it  showed that managers find it difficult to pick technological and commercial winners:
1) Probability of technical success of projects (Pt) = 0.80
2) Subsequent probability of commercials success (Pc) = 0.20
3) Combined probability for all stages : 0.8 x 0.2 = 0.16
He also found that managers and R&D workers cannot predict accurately the development costs, time periods, markets and profits of R&D projects.  Average cost was greatly underestimated by 140- 280 % in incremental product improvements and by 350 – 600% in major new products Other studies have found that:
About half business R&D expenditures are on failed R&D projects. The higher rate of success in expenditure than in projects reflects the weeding out of unsuccessful projects at their early stages and before large scale commercial commitments are made to them.
R&D scientists and engineers are often deliberately over optimistic in their estimates in order to give the illusion of a high rate of return to top accountants and managers.
Source: Managing Innovation

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