© 2005. all rights reserved.1 strategic r&d value lifecycle management doug bodner, bill rouse...

© 2005. All rights reserved. 1

Strategic R&D Value Lifecycle Management

Doug Bodner, Bill Rouse and Mike Pennock

Tennenbaum InstituteGeorgia Tech

2

Outline

• R&D value and value lifecycle• Value levers• Simulation-based approach

– Process model and results– Product model and integration

• Future work

3

R&D Value Creation

• Value is derived from financial returns of deployed products or systems.

• Value is realized downstream.

• Upstream estimates of value are uncertain/dynamic.

• Multi-stage investment structure mitigates risk via flexibility.

Stage 1

Technical failure

Not Funded

Stage 2

Stage 3

Stage 4

$

$

$

$

Value realized

4

R&D Value Lifecycle

Idea Concept Proposal Project Result

$ ?

Archive

DeployRetire

PatentMaintenanceObsolescence

ProductionLicensing

MaintenanceRevisions

DisposalOption Value

Cash Flow Value

5

R&D in a PLM/SLM Context

Adapted from: IBM PLM definition slide at PDES Inc. Board Mtg. 2003-11

Portfolio Planning

Concept Developmen

t

Design

Portfolio Planning

Product/System Design Process

R&D

R&D Process

Results

Production& Test

Sales &Distribution

Market and technology feedback and forecasting

Addressing current and future needs

6

Goals

• Identify value levers that can be manipulated to improve value creation

• Understand quantitative effects in relation to enterprise parameters

• Provide what-if analysis capability for strategic decision-making

7

Value Levers

• Enterprise operation– How to valuate R&D products– How to allocate budget among

stages/programs– Portfolio management

• Enterprise design– How many R&D stages – Outsourcing R&D– Organizational structure

8

Valuation Method

• Traditional project valuation approaches use discounted cash flow (DCF) analysis

• Real options analysis captures flexibility– Discontinue, defer,

expand, contract

• Analytic, recursive and simulation-based computationsDo nothing

– i.e., no exercise

Cost of future stage(s) – i.e., exercise price

Cash flow – i.e., asset price

Pay next stage – i.e., exercise

Pay this stage

Decision point

DCF

Real Options

9

Budget Allocation

• Can be conceptualized as line-balancing– Allocate funds to meet

expected budget requests weighted by cumulative failure rates

• Is it better to– “Balance” the

allocation– Shift funds upstream– Shift funds downstream

Stage 1

Technical failure

Not Funded

Stage 2

Stage 3

Stage 4

R&DBudget

$

$

$

$

10

Organizational Simulation• Modeling and data

gathering– Understand your

system

• Quantitative insight via controlled experiments– Attach numbers to

effects with statistics

• What-if analysis– Experiment and see

effect of changes without using the real enterprise

R&D Processes

Resources

Value

Computer Model• Dynamic behavior • Resources• Workflow• Output• People• Decisions• Uncertainty

11

R&D World

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Model Description

• R&D process model (four stages)• R&D modeled as lines that traverse

through each stage• Budget requests per stage increase by

factor of 2• Technical failure rates decrease as stages

are traversed• Estimated deployed value varies

lognormally over time• Value realized after successful deployment

13

Experimental DesignFactors– Valuation method (DCF vs. options)– Budget allocation (LB vs. UF)– Probability of initial NPV negativity (33% vs. 50%)– Volatility (20% vs. 60%)

Experiment- 10 replications- 25 years each- 5 year warm-up

Dependent Variables–Total value created (TVC)–Yield (Y) = TVC/Expenditures

Two 24 factorial experiments (one for each dependent variable).

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Results – Valuation

• Valuation using options outperforms DCF for total value created.– Especially when initial NPV negativity is

likely, and also when volatility is high.

• DCF outperforms for yield.• Options emphasize total value, while

DCF emphasizes ROI. DCF is more conservative than options

• Under DCF, lower percentages of R&D budget are expended.

15

Results – Allocation

• Shifting funds upstream outperforms line-balancing for total value created.– Especially when volatility is high and when

initial NPV negativity is likely.

• Line-balancing outperforms for yield.– Especially with low volatility.

• This effect appears due to the upside potential of market risk.

• Line-balancing is more conservative.

16

Thinking of R&D “Products”

• Different R&D product (RDP) types– Technologies, technical reports, prototype

systems or consumer products, patents

• Different status possibilities– Planned, proposed for funding, in progress,

available, retired

• Different generations• Precedence relationships• R&D value network

– Structure and dynamics

17

RDP Value Network

Deployable(Market/applicationrisk)

Technologygenerations

AvailableProposed for fundingFuture (planned/possible)

Increasing R&D stage

Precedencerelationship

RDP

Failurepossibility

18

Determining Value

$

$1

2

3

4

• V1 and V2 are functions of CA and CB

• V3 and V4 are functions of CB

A

B

• Both 1 and 2 are required for A and B• 1, 2 and 4 are required for B• 3 may not be required

V = valueC = cash flow

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Relational ModelRDP_Types

TypeDescriptionTechArea_Types

TypeDescription

Gate_Types

TypeDescription

Gates

IDType

RDPs

IDTypeTechAreaGenerationStatusCostPerYearDurationCurrentValueDeployedValueVolatilityStageProgram

Parent_Child

IDGateParentChild

Status_Types

TypeDescription

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Model Integration

Update RDP status

G ener at ion 1Value St r eam

St age1

1I nit ializat ion

Value St r eam

T r u e

F a ls e

St age 1Evaluat e NPV

B u d g e tC a s h F lo wC a s h F lo w P e r Y e a rC a s h F lo w P VD 1D 2E x e r c is e P r ic eN e t O p t io n V a lu eN P VN P V P e r P r ic eO p e r a t in g C o s tO p e r a t in g C o s t P e r Y e a rO p t io n V a lu eP u r c h a s e P r ic eS t a g eT e m pT y p eV o la t ilit y

At t r ibut es

Com put at ionNPV 1

O pt ionDispose

Dispose 2

Updat e 1Value St r eam

Com put at ionNPV 2 T r u e

F a ls e

St age 2Evaluat e NPV

St age2Updat e 2

Value St r eam

Com put at ionNPV 3 T r u e

F a ls e

St age 3Evaluat e NPV

Dispose 3

Updat e 3Value St r eam

Com put at ionNPV 4

T r u e

F a ls e

Deploym entEvaluat e

Dispose 4

Dispose 5

St age3T r u e

F a ls e

St age 3 Success

Dispose 6

G ener at ion 2Value St r eam

G ener at ion 3Value St r eam

2I nit ializat ion

Value St r eam

3I nit ializat ion

Value St r eam

T r u e

F a ls e

St age 2 Success

Dispose 7

St age 1 SuccessT r u e

F a ls e

Dispose 8

1Updat e St age

2Updat e St age

3Updat e St age

G ener at ionBudget I nit ializat ion

Budget

Cyc leBudget

Det er m iniat ionBudgetDiv is ion

Budget

O pt ionsSt age 1

G ener at ionSt age 1Allocat or Signal 1

T r u e

F a ls e

St age 1Fund Pr ojec t

Dispose 9

1Cyc le St age

Budget

G ener at ionSt age 2Allocat or

Signal 22

Cyc le St ageBudget

G ener at ionSt age 3Allocat or

Signal 33

Cyc le St ageBudget

O pt ionsSt age 2

T r u e

F a ls e

St age 2Fund Pr ojec t

Dispose 10

O pt ionsSt age 3

T r u e

F a ls e

St age 3Fund Pr ojec t

Dispose 11

G ener at ionSt age 4Allocat or

Signal 44

Cyc le St ageBudget

O pt ionsSt age 4

T r u e

F a ls e

St age 4Fund Pr ojec t

Dispose 12

Budget Cycle for Stages

Budget for Enterprise

Value Stream Creation

Stage 1 - Basic Research

Stage 2 - Exploratory Development

Stage 3 - Advanced Development

Stage 4 - Deployment

St age 1aAdjus t Value

St age 1bAdjus t Value St age 1c

Adjus t Value

4Updat e St age

St age 2aAdjus t Value

St age 2bAdjus t Value

St age 2cAdjus t Value

St age 3aAdjus t Value St age 3b

Adjus t Value

St age 3cAdjus t Value

St age 4aAdjus t Value

St age 4bAdjus t Value

T r u e

F a ls e

St age 4 Success

Dispose 13St age 4c

Adjus t Value

Deploym entUpdat e

0

0

0

0

0

0

0

0 0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0 0

0 0

0

0

0

0

0

0

0 0

0

0

0

0

0

0

R&D Process Model

Initialize process model

R&D Product Model

Query parameters for value computation

Update current value

Query parameters for stage/programsubmission

ARENA® simulation

Microsoft® Access(Read/write via ADO)

Generate new RDPs

21

Pull Dynamics

AvailableProposed for funding (could start work now)Future (prerequisites not fulfilled)

Desired RDP

22

Future Research

• Model more complex decision logic in process model

• Specify computationally efficient valuation methods for RDPs in complex value networks

• Enhance knowledge management in product model

• Enhance and validate via case studies• Explore integration with strategic design

23

Questions?

??

?

?? ?

?

?

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Further Reading

• Bodner, Rouse and Pennock, 2005, Using simulation to analyze R&D value creation, Winter Simulation Conference, submitted.

• Hansen, Weiss and Kwak, 1999, Allocating R&D resources: a quantitative aid to management insight. Research Technology Management 42: 44-50.

• Rouse and Boff, 2003, Value streams in science & technology: a case study of value creation and intelligent tutoring systems, Systems Engineering 6: 76-91.

• Rouse and Boff, 2005, Organizational simulation. New York: Wiley-Interscience.

• Trigeorgis, 1996, Real options: managerial flexibility and strategy in resource allocation. Cambridge, MA: The MIT Press.