- Choose project valuation tools that are appropriate for the types of project: using subjective measures such as scoring when uncertainty is high, but emphasizing financial measures more as commercialization approaches.
- Keep valuation tools simple and transparent so that the decision process remains open to review, and leaves scope for management judgement.
- Treat numerical measures of risk with caution; they are always very approximate.
- Avoid point forecasts; try and understand the range of possibilities open to each project.
- Ensure that the portfolio is balanced in terms of time and strategy.
- Give close attention to the management process, ensuring that the valuation process is objective and that unsuccessful innovators are rewarded for their efforts.
Selecting and managing the portfolio of innovation projects are difficult but vital parts of managing innovation. Failure to make good and timely decisions is bad for efficiency in the short term, and for profit, or even survival, in the long term. In this chapter we have reviewed a variety of techniques to help managers select the innovation projects to pursue:
- Financial methods of varying degrees of sophistication take centre stage, but they must be backed up by more subjective methods that allow strategic and other factors to be included in the analysis.
- Particular care is necessary in valuing risky projects. It is a mistake to use single estimates of value such as the mean. The range of possible outcomes must always be considered.
- Scoring systems are particularly helpful in the early stages of projects when financial information may not be reliable.
- The portfolio of projects selected must not only represent the best possible use of resources, but must also be balanced in terms of risk, timing and strategic impact.
- No one set of tools suits all situations; the choice depends on the information available, the type and complexity of the projects involved and how close they are to commercialization.
1. Bernstein, P. L., Against the Gods: The Remarkable Story of Risk (New York: John Wiley, 1998). [An excellent and readable account of the history and ideas of risk and risk management.]
2. Boer, F. P., ‘Financial Management of R&D’, Research-Technology Management, Vol. 44, No. 4 (July 2002), pp. 23–34. [Good survey of the available methods for valuing innovation projects.]
3. Sharpe, P. and Keelin, T., ‘How SmithKline Beecham Makes Better Resource Allocation Decisions’, Harvard Business Review (March–April 1998) pp. 3–10. [Best practice for a disciplined and inclusive management process.]
4. Cooper, R. G., Edgett, S. J. and Kleinschmidt, E. J., Portfolio Management for New Projects (Cambridge, MA: Perseus Books, 2nd Edition, 2001). [A complete and authoritative review of portfolio management practices.]
- To be familiar with the major financial and non-financial tools for valuing projects and designing a portfolio.
- To be aware of the assumptions underlying these and when they may, or may not, apply in innovation projects.
- To understand that risk is not a separate dimension but a measure of the range of possible outcomes of a project.
- To gain some experience in designing selection methods.