There are two difficulties in evaluating the potential contributions of technological investments to firm specific intangible assets and in dealing with uncertainty which is reflected in how successful managers allocate resources to technological activities. In particular they,
1) Encourage Incrementalism – step by step modification of objectives and resources in the light of new evidence.
2) Use simple rules, models for locating resources so that implications of changes can be easily understood.
3) Make it explicit from the outset, the criteria for stopping the project or program.
4) Use sensitivity analysis to explore if the outcome of the project is robust (unchanging) to a range of different assumptions (e.g. What if the project costs twice as much and takes twice as long as the present estimates).
5) Seek the reduction of key uncertainties (technical and if possible market) before any irreversible commitment to full scale and costly commercialization.
6) Recognize that different types of R&D that should be evaluated by different criteria.
Organizing Resource allocation to Innovative activities:
In other words, the corporate R&D community recognizes that the successful allocation of resources to innovation depends less on robustness of decision making techniques than on the organizational processes in which they are embedded. According to Mitchell and Hamilton there are three (overlapping) categories of R&D that large firms must finance. Each category has different objectives and criteria for selection, the implications of which are set out in table.
This is the early stage and relatively inexpensive research for nurturing and maintaining expertise in fields that could lead to future opportunities or threats. It is often treated as a necessary overhead expense and sometimes viewed with suspicion (and even incomprehension) by senior management obsessed with short term financial returns and exploiting existing markets rather than creating new ones.
With knowledge building programs the central question for the company is What are the potential costs and risks of not mastering or entering the field? Thus, no successful large firm in manufacturing can neglect to explore the implication of development in IT, even if IT is not potential core competence. Successful firms in pharmaceuticals could avoid exploring recent developments in biotechnology. Decisions about such programs should be taken solely by R&D staff on the basis of technical judgments an especially those staff concerned with the longer term. Market analysis should not play any role. Outside financial linkages are likely to be with academic and other specialist groups and to take the form of a grant.
These activities are in between knowledge building and business investment and are an important and often neglected link between them. They involve applied R&D and feasibility demonstration in order to reduce technical uncertainties and to build in house competence, so that the company is capable of transforming technical competence into profitable investment. For this type of R&D the appropriate question is: Is the program likely to create an option for a profitable investment at a later date? Comparisons are sometimes made with financial stock options where (for a relatively small sum) a firm can purchase the option to buy a stock at a specified price, before a specified date in anticipation of increase in its value in future.
Decisions about the category of R&D program should involve divisions. R&D directors and the chief executive precisely because as their description imply these programs will help determine the strategic options open to the company at a later date. At this stage market analysis should be broad (e.g. Where could gentle engineering create new markets for vegetables in a food company? A variety of evaluation methods may be used (e.g. the product technology matrix) but they will be more judgmental than rigorously quantitative. Costs will be higher than those of knowledge building but much lower than those of full scale business investments.
Source: Managing Innovation