Managing Uncertainty During R&D Projects: A Case Study

Abstract

OVERVIEW:Firms make significant investments in R&D projects, yet the economic return is often difficult to predict because of significant technological and commercial uncertainty. We present an innovative and practical method for managing R&D projects, and we discuss its application to a large R&D investment by Philips Lighting. The method, which we call the project portfolio option-value (PPO) method, provides an innovative way to represent, discuss, and value uncertainty in R&D projects. The PPO method is not about “perfect” or “complete” valuation models, but rather about providing a comprehensive but not-too-detailed view of major challenges and key criteria for success. The method is designed for a complex setting in which many uncertainties exist about technology and the market; in which the order in which uncertainties are resolved and decisions will be made cannot be specified in advance; in which interdependencies exist among R&D projects; and where transparency is vital.

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