Making real options work for practitioners: a generic model for valuing R&D projects

We propose a generic valuation framework for the appraisal of R&D projects based on real option theory. The added value of this approach is the presentation of a model that was implemented in a manner that allows corporate decision makers to use real options in an intuitive and standardized way. The project valuation procedure is separated into three main phases: project modeling, data and input collection, and result generation and analysis. The project model represents the structure of the real world R&D project with its investments, expected results, and decisions that need to be taken conditionally on the outcomes of research activities. The project model is represented in the form of a decision tree, where different research results or taken decisions lead to new branches. In this way, every possible situation the project can pass through can be represented. Uncertainties are separated into market uncertainties (e.g., market prices) and project specific, private uncertainties (e.g. uncertainty of research results). For both uncertainties, event trees are constructed which are then combined and merged with the above mentioned decision tree in order to represent the value evolution of the R&D project under given decisions and uncertainties. For every possible state of the project the real option value is calculated. By creating multidimensional trees, a multitude of decision steps and various kinds of real options (e.g., continue, expansion, switch, abandonment) can be modeled. The calculation complexity for the decision trees is given. From the tree structure we can calculate the real option value of starting an R&D project, i.e., the value of undertaking the first investment and thus acquiring the subsequent decision opportunities given by the completion of the first research effort. Furthermore, the optimal exercise strategy is derived from the decision tree. The exercise strategy gives the manager the possibility to have an a priori overview of where an R&D project may lead to, which decisions need to be taken in which circumstances, and when the project needs to be stopped in order not to generate losses. In an in‐depth case study we use an illustrative R&D project to set up and discuss the three phases of project modeling in the real options framework: building the multidimensional decision tree, input generation, and calculation of the real option value as well as the optimal strategy for the R&D project.     

An Empirical Investigation of the Antecedents and Outcomes of NPD Portfolio Success

Managing new product development (NPD) portfolios is difficult and little is known about how successful NPD portfolio management can improve overall firm performance. Despite regular calls in the literature for more research on NPD portfolio management, what successful NPD portfolio management means and how firms can achieve it remains unclear. For this reason, this paper combines theory and previous empirical findings to build a model of the antecedents and outcomes of NPD portfolio success. We generate and test 12 hypotheses with empirical data from 189 paired dyads in Dutch firms. Our results show that all three dimensions of NPD portfolio decision‐making effectiveness (i.e., portfolio mindset, focus, and agility) are associated with achieving the three dimensions of NPD portfolio success (i.e., strategic alignment, maximal NPD portfolio value, and portfolio balance), which in turn influences market performance. While a portfolio mindset and agility are related to all three dimensions of NPD portfolio success, focus is related only to strategic alignment and maximal value. No one dimension of NPD portfolio decision‐making effectiveness or portfolio success is sufficient to achieve overall market performance. We also found several unexpected findings with important implications. For example, portfolio balance, one recommended measure of portfolio success, has no direct link to market performance, but operates through the other two dimensions of NPD portfolio success, i.e., strategic alignment and maximal portfolio value. We conclude our paper with implications for further theory development and testing on successful NPD portfolio decision‐making, and with implications for managerial practice.     

The impact of decoupled payments on farm choices: Conceptual and methodological challenges

In this paper we review the methodological framework for analysing decoupled payments in models of agricultural production. Market and technological uncertainty, farm efficiency, credit constraints, farm household choices involving extra-agricultural decisions, policy uncertainty and long-run impact of decoupling on investment and land values are the relevant issues that should be pursued by methodological and empirical analysis. Future research should refine the analysis of decoupled payments, mainly trying to provide results that can be useful for policy simulation, to bridge the gap between analysis at the individual level and sector policy models.     

What do they know? The effects of outside director acquisition experience on firm acquisition performance

This article contributes to the literature on board effectiveness by being perhaps the first to systematically examine how the nature of outside directors' prior experience, and resulting expertise, will influence the performance of a focal firm's strategic initiatives. Our theoretical model is grounded in the psychological literature on expertise and its role in group decision making effectiveness. We focus on outside director expertise in acquisition decision making, and its implications for the performance of the acquisitions of a focal firm. Our conceptual framework indicates that directors will develop expertise in making particular kinds of acquisition decisions (e.g., related or unrelated acquisitions or acquisitions in specific industries or product markets) through their past experiences at other firms with decisions about those specific types of acquisitions, and we predict that this experience and expertise will have positive effects on the performance of a focal firm's acquisitions. We extend our theoretical model to consider the conditions under which relevant director experience will prove most beneficial. Our model predicts that outside director acquisition expertise will deliver the greatest benefits when the focal firm's board is independent from management. We find empirical support for all of our hypotheses. In considering how and when director experience and resulting expertise may influence the performance of corporate acquisitions, our theory and results help to highlight a potential second main focus for research on the long‐standing question of what factors render boards of directors effective. Copyright © 2008 John Wiley & Sons, Ltd.     

Networks and the Decision to Persist with Underperforming R&D Projects

Drawing on aspiration level theory and the networks literature, this paper develops a model toward decision makers' persistence with underperforming R&D projects based on the perceived properties of their personal network. The assumption is that positive feedback from network partners motivates persistence, and that this effect is multiplied when the decision makers' network is larger and denser, when network ties are predominantly strong, and when communication frequency within the network is high. The model is tested by a field experiment and conjoint methodology. Analysis of 1632 persistence decisions nested within 51 scientists responsible for R&D projects reveals that more positive feedback enhances persistence of underperforming R&D projects, and that this effect becomes stronger with increasing network size, network density, and communication frequency. These findings extend the project management literature by focusing on the social environment of the decision maker as one so far neglected factor in empirical studies on persistence decisions. Moreover, this study is among the first to investigate contingency relationships between feedback received from network partners and network structure. Finally, while most studies have emphasized that individuals and organizations can profit from their engagements in social networks, this paper suggests a potential dark side of networks by showing that networks can encourage decision makers to persist with their investment in an underperforming—and potentially failing—project. These results can help project managers involved in networking activities to better understand the effects of these activities on their decision policies, and thus draw better and more accurate decisions. Second, this study provides insights into how organizational strategy with respect to dissemination of R&D results and involvement of the organization's R&D managers in the scientific community influences the persistence of underperforming R&D projects, and thereby the organization's R&D expenditures. This can assist top managers to design financial controls and allocate financial resources to managers of underperforming R&D projects in line with the organization's networking strategy.     

Exploring Portfolio Decision‐Making Processes*

Portfolio management is the set of activities that allows a firm to select, develop, and commercialize a pipeline of new products aligned with the firm's strategy that will enable it to continue to grow profitably over the long term. To appropriately manage the firm's new product portfolio, decisions must be made about which projects to fund, to what levels, at what point in time. Previous research has investigated portfolio management decisions as individually discrete decisions. Significant streams of research have investigated both project selection and project termination decisions. This research project shows, however, that portfolio decision making may be better understood if it is considered as an integrated system of processes that considers these decisions simultaneously, along with other decisions such as those to continue a project with reduced funding. Using in‐depth data from four diverse case studies, we use a grounded theory approach to develop a general model of how firms make new product portfolio decisions. According to the findings from these cases, effective portfolio decision‐making processes produce a portfolio mindset, focus effort on the right projects, and allow agile decision making across the portfolio's set of projects. Effective portfolio decision making is the result of the interaction between three types of decision‐making processes that managers use in making decisions: evidence‐, power‐, and opinion‐based. Being able to use each of these types of processes to make decisions depends upon having the data inputs that they require. Three domain‐based decision input‐generating processes (i.e., cross‐functional collaboration, practices of critical thinking, and practices of market immersion) are associated with making evidence‐based portfolio decisions. In addition, organizational politics produces the inputs that are associated with power‐based portfolio decision making, while managerial intuition is associated with opinion‐based portfolio decision making. Firm cultural factors, including trust, collective ambition, and leadership style, are associated with how these evidence‐, power‐ and opinion‐based processes are combined into an overall portfolio decision making process, and whether the firm's processes are more rational and objectively made, or more politically and intuitively made. The article presents propositions for how the decision‐making processes interact in their associations with decision‐making effectiveness.     

Mapping value in business markets: An integrative framework

The value concept is key to understanding purchasing and marketing decisions in business markets. Despite its importance, a lack of clarity surrounding the conceptualization of value in business-to-business markets persists. This paper develops an integrative framework that identifies the various conceptualizations of value and maps the most often cited value papers published in IMM on this framework. The integrative framework makes distinctions between the value beneficiary (i.e., collective and individual value perceptions), the underlying value perspective (i.e., customers' and suppliers' value perceptions), and the reference object of value (i.e., transactional value based on expectations or experiences, and value of relationships). Positioning the IMM citation classics papers on this integrative framework allows us to identify core areas and promising research avenues for this key concept. In particular, we identify a need to further explore individual actors' value perceptions and the usage processes that lead to experienced value in use in business markets.     

Testing theories of regulatory behavior

Many decisions by regulators have been analyzed over the last two decades in an effort to test regulatory behavioral theories. As a result, the interest group theory of behavior has gained a considerable following and the public interest theory has been largely dismissed. However, many of these tests are inadequate; with the regulatory decisions analyzed, both the interest group and public interest theories lead to the same predictions. To properly distinguish between these theories, a set of necessary conditions that a regulatory decision must satisfy is developed. Based on these conditions and the extant empirical literature, public interest concerns of regulators cannot be dismissed, and a more general theory of regulatory behavior is suggested.     

Diversification of cable television firms into broadband products

This research provides a new perspective to investigate the broadband diffusion in eight states of the U.S. by studying the two-stage entry decisions, namely, upgrading and subsequent product decisions, by the cable television system operators, one of the early dominant players in the broadband market, and examines the role of competition, market characteristics and firm heterogeneity in the cable company's decisions in a dynamic setting. Comparing the empirical results of the decision models of both stages can give new insights into the dynamics of broadband diffusion. The empirical results show that the subsequent product decision is affected more by the demand determinants, while the upgrading decision is affected more by the cost determinants. The results also indicate that policies which aim to reduce the entry cost such as a low city fee can largely encourage firms to upgrade the network, while subsequent policies that help boost the demand can help firms diversify into new digital services early. The effectiveness of competition policy in the broadband diffusion is confirmed in both stages. Strategic responses by cable firms to the presence of RBOCs are more noticeable in the second-staged product decision than in the first-staged upgrading decision.     

Explicating Hearing the Voice of the Customer as a Manifestation of Customer Focus and Assessing its Consequences

It is often asserted that hearing the voice of the customer (VOC) can generate meaningful product and process innovation. Minimal empirical attention has, however, been devoted to evaluating this claim. The paucity of academic research exists, in part, due to the lack of an underlying conceptual foundation for the VOC concept. An opportunity thereby exists to impart theory, and evaluate whether hearing the VOC can indeed lead to favorable consequences. This research construes customer focus as a market‐sensing capability which manifests itself in the key organizational processes (i.e., intelligence generation and continual performance assessment) and values (i.e., a customer orientation serves as the guiding principle) that allow the VOC to be heard throughout the organization. Those manifestations are hypothesized to impact positions (i.e., relative [task‐related] performance) and outcomes (i.e., customer loyalty). The results based on data obtained from a cross‐sectional survey research design fielded in a supplier‐business customer context provide empirical support for the favorable consequences of being customer‐focused, and support the need to consider moderating variables. This paper advances theory by (1) answering the call to examine the capabilities that underlie a customer‐focused organization; (2) establishing empirical support for the (a) linkage between hearing the VOC and acting on that information, (b) elusive relationship between acting on the VOC and future buyer intentions, and (c) sources→positions→outcomes model as a path to achieving competitive advantage; (3) demonstrating that being customer‐focused does not have a direct effect on customer loyalty, thereby revealing a result different than that obtained in the consumer empowerment literature; and (4) demonstrating the importance of key moderators, namely (a) that relative (operational) performance has a strong positive effect on loyalty in relationships characterized by lower switching costs, and (b) that the effect of customer focus may lessen over time, implying that core capabilities may evolve into core rigidities. Additionally, this research contributes to business practice by providing managers with an understanding of how to hear the VOC throughout the firm (i.e., how to become a customer‐focused organization), and offering guidance on how to manage buyer–seller relationships.     

Religiosity,spirituality and ethical decision-making: Perspectives from executives in Indian multinational enterprises

Through a semi-structured interview with 40 senior executives from Indian multinational enterprises (MNEs), we use virtue ethics theory to examine the types of virtues that are promulgated by religiosity and spirituality in shaping ethical behavior. The responses were coded in NVivo and the themes and concepts were organized into four categories (e.g., environmental context, individual religious virtues, individual non-religious spiritual virtues, and organizational ethical virtues). These categories contributed to ethical decision-making. The findings suggest that it is critical to understand ethical decision-making by identifying virtues that are important in religious, spiritual, and humanistic contexts in countries such as India, which are religiously and spiritually diverse. The study findings assist in the development of a framework of ethical decision-making that can be used for further empirical testing across both non-Western and Western contexts in multi-faith populations. Several theoretical, practical, and methodological contributions are presented along with suggestions for future research.     

Innovation Performance in New Product Development Teams in China's Technology Ventures: The Role of Behavioral Integration Dimensions and Collective Efficacy

In emerging markets, technology ventures increasingly rely on new product development (NPD) teams to generate creative ideas and to mold these innovative ideas into streams of new products or services. However, little is known about how behavioral integration (a behavioral team process) and collective efficacy (a motivational team process) jointly facilitate or inhibit team innovation performance in emerging markets—especially in China, the world's largest emerging‐market setting with collectivist and high power distance cultures. Drawing on social cognitive theory and behavioral integration research, this article elucidates the relationships between behavioral integration dimensions (i.e., collaborative behavior, information exchange, and joint decision‐making) and innovation performance and also examines how collective efficacy moderates these relationships in China's NPD teams. Results from a sample of 96 NPD teams in China's technology ventures reveal that information exchange is positively associated with innovation performance. Collaborative behavior positively but marginally influences innovation performance, whereas joint decision‐making does not relate to innovation performance. Moreover, collective efficacy demonstrates an important moderating role. Specifically, both collaborative behavior and joint decision‐making are more positively associated with innovation performance when collective efficacy is higher. In contrast, information exchange is less positively associated with innovation performance when collective efficacy is higher. This study makes important theoretical contributions to the literature on team innovation and behavioral integration in emerging markets by offering a better understanding of how behavioral and motivational team processes jointly shape innovation performance in China's NPD teams. This study also extends social cognitive theory by identifying collective efficacy as a boundary condition for the overall effectiveness of behavioral integration dimensions. In particular, this study highlights the condition under which behavioral integration dimensions facilitate or inhibit NPD team innovation performance in China.     

Passion for Work,Nonwork‐Related Excitement,and Innovation Managers’ Decision to Exploit New Product Opportunities

This article investigates the role of affect in innovation managers’ decision to exploit new product opportunities—a decision central to the innovation process. The model proposes that different types of passion can trigger managers’ exploitation decisions but that this effect is contingent on experiencing excitement from events outside their work environment. A field experiment with 90 owner–managers of young firms located in an innovation context (business incubators) shows that passion for work and nonwork‐related excitement levels interdependently impact innovation managers’ decision to exploit new product opportunities. Specifically, harmonious passion has a general positive effect on managers’ propensity to exploit. In contrast, the effect of obsessive passion is more complex and contingent on the additional excitement managers experience such that the positive relationship between obsessive passion and the decision to exploit is more positive with higher levels of excitement. These findings extend the product innovation management literature by acknowledging that decision‐makers’ affective experiences influence innovation decisions and provide a first step toward understanding the role of affect and passion in the product innovation context. Second, the finding that obsessive passion and nonwork‐related excitement interact in explaining opportunity exploitation decisions highlights the need to incorporate contingency relationships in models of innovation decision‐making. Third, in drawing on a field experiment and the experimental manipulation of managerial affect during the decision‐making task, this article answers a recent call in the project management literature to pursue less common methodological approaches and develop “broader theoretical schema” in order to enhance our understanding of innovation management. Finally, this study also has implications for practitioners because it can help innovation managers understand their own decision policies. To the extent that innovation managers are able to regulate their affective experiences, this improved understanding might prevent them from premature and faulty decision‐making.     

Information Distribution,Utilization, and Decisions by New Product Development Teams

Typically, organizations use new product development processes composed of activities followed by decision points, where projects are continued or abandoned. A decision maker likely possesses some common information also held by other decision makers and some unique information (that only she/he possesses). If a team relies mainly on overlapping, or common, information, decisions may suffer, but if they share and utilize information originally possessed by a subset of individual members, better decisions can be made. In this paper, the authors designed and conducted four studies to examine the effects of information distribution and utilization on new product team decision‐making. In study 1, the findings show that team members tend to use information possessed by everyone (i.e., common information) but neglect critical information possessed only by one of them (i.e., unique information). This common information bias results in suboptimal new product continuation decisions. In study 2, the interplay between the common information bias and team commitment to the NPD project favored by unique information is examined. The results show that although commitment influences new product development team decisions, the common information bias is stronger. Study 3 was conducted to rule out an alternative explanation for the effect of information distribution—the perception of information importance. In study 4, the focal hypotheses were re‐tested using a different sample to add confidence in the findings.     

Situational and institutional determinants of firms' R&D search intensity

Our theory extends the situational considerations explaining firm R&D search intensity beyond the behavioral theory of the firm by including shifts in the focus of attention among bankruptcy, aspirations, and slack. We also allow that search can reflect institutionalized investment patterns within firms and industries. We find stable firm‐specific R&D investment patterns (i.e., institutionalized search) and variations in R&D intensity depending on firms' situations—including performance relative to aspirations, proximity to bankruptcy, and slack. Our empirical results evidence shifts in the focus of attention relevant to explaining R&D search intensity for subsamples of firms in different situations. Copyright © 2007 John Wiley & Sons, Ltd.     

Consequences of New Product Development Speed: A Meta‐Analysis

Five meta‐analyses previously have been published on the topic of new product development involving the concept of new product development speed. Three of these studies have investigated antecedents to new product development success, of which just one was new product development speed. The other two studies used new product development speed as the dependent variable, and analyzed antecedents to achieving speed. This article extends previous empirical generalizations in this domain by using a meta‐analytic methodology to understand the link between new product development speed and new product success at a more granular level. Specifically, it considers the relationship with different dimensions of success as measured overall or compositely, operationally (i.e., the process measures of decreasing development costs and proficiently managing market entry timing and the product measures of technical product performance and product competitive advantage), and relative to external success outcomes (i.e., customer based and financial success). While the results indicate that, in general, new product development speed is associated with improving success outcomes, those relationships may diminish or even disappear depending upon a number of methodological design decisions and research contexts. A subsequent meta‐analysis of the antecedents of development speed provides a more holistic picture of development speed. These results are broadly consistent with those produced by another recent meta‐analytic investigation of the issue. Together, these findings have important implications for academics pursuing further research in this domain, as well as for managers considering implementing a program to increase new product development speed.     

How Formal Control Influences Decision‐Making Clarity and Innovation Performance

Implementing formal planning instruments such as the stage‐and‐gate‐type system (SGS) and project management (PM) have long been seen as the key to new product development (NPD) success. They create the structure needed for managing NPD activities, supporting coordination among functional groups, reducing uncertainty and error, and assuring time and cost efficiency. But recent research presents ambiguous results, suggesting that SGS and PM as formal controls can also have a negative effect. Integrating ideas from three literatures—i.e., NPD management, organization control theory, and technical control theory—the present study assesses NPD programs in terms of three perspectives: (1) the formal control mechanisms used for managing NPD programs—specifically SGS, which is mainly seen as a higher organizational level approach used for guiding and implementing a portfolio of NPD projects, and PM, which is a precise formal control mechanism relevant for managing specific problems at a single project level; (2) the immediate outcome of the application of formal controls, i.e. decision‐making clarity (DMC); and (3) degree of NPD innovativeness, a key contingency hypothesized to impact the efficacy of formal controls. For the empirical analysis, data are collected through a survey of 162 corporate NPD programs (Austria and Denmark, manufactured goods and services) where a total of 1274 respondents provide information relevant to their position. Hierarchical regression analysis is used to test the relationships. Results indicate that the performance effect of NPD formal control is fully mediated by DMC. Further, of the six hypothesized outcome relationships, four are fully supported. Both SGS and PM are effective systems for managing NPD when degree of innovativeness is not taken into account. PM, however, loses its efficacy at higher degrees of NPD program innovativeness while SGS continues to work at achieving positive DMC at the radical end of the innovativeness spectrum. Analysis of interaction effects indicates that for more innovative NPD programs, best results are achieved when companies implement an interactive system of both SGS and PM, where the two systems complement each other.     

Antecedents of Team Intuition and Its Impact on the Success of New Product Development Projects

Research on new product development (NPD) team decision making has identified a number of cognitive mechanisms (e.g., team intelligence, teamwork quality, and charged behavior) that appear to guide NPD teams toward effective decisions. Despite an extensive body of literature on these aspects of NPD team decisions, team intuition has yet to be investigated in the context of NPD teams. Intuition is regarded as a form of information processing that differs from cognitive processes, and is associated with gut feelings, hunches, and mystical insights. Past research on intuition suggests that many managers and teams embrace intuition as an effective approach in response to situations in a turbulent environment where decisions need to be made immediately. Past research also revealed various benefits of intuition in decision making. These are: to speed up decision‐making process, to improve decision outcomes such as higher product quality, and to solve less structured problems (e.g., new product planning). This research examines the impact of team‐related antecedents (e.g., team member experience) and decision‐specific antecedents (e.g., decision importance) on intuition in NPD teams. The moderating impact of environmental turbulence between antecedent variables and intuition, as well as between intuition and team performance, is investigated. To test hypotheses, data were collected from 155 NPD projects in Turkey. The results showed that past team member experience, transactive memory systems (TMS), team empowerment, decision importance, and decision motives are significantly related to team intuition. The results also revealed that team intuition is significantly related to product success and speed‐to‐market, with both high and low levels of market turbulence. The findings of this study present some interesting practical implications to managers in order to improve intuitive skills of NPD teams. First, managers should make sure that team members have the relevant expertise to facilitate effective intuition. Second, managers should encourage and enhance TMS for effective intuition. If team members are not able to gain timely and unhindered access to others who have the needed experience and knowledge, past team member experience becomes idle in order to make effective intuitive judgments. Third, managers concerned with achieving successfully developed products and helping teams to make immediate but accurate decisions during NPD process should assign more power to team members so that they can rely on their intuitive skills.     

The Impact of the Corporate Mind‐set on New Product Launch Strategy and Market Performance

In the last decade, there has been an increasing interest in the link between new product launch strategy and market performance. So far, new product launch research has focused on this performance relationship without giving much attention to background factors that can facilitate or inhibit successful launch strategies. However, investigating such antecedents that set the framework in which different strategic launch decisions enable or prevent the market performance of new products is useful for enhancing the current state of knowledge. Drawing on the concept of a firm's orientation, the present study discusses the influence of the corporate mind‐set on new product launch strategy and market performance. It is hypothesized that the capability to successfully launch new products is based on the interplay between a firm's mind‐set (i.e., an analytical, risk‐taking, and aggressive posture) and its strategic launch decisions on setting launch objectives, selecting target markets, and positioning the new product. A research model with mediating effects is proposed, where the corporate mind‐set determines the launch strategy decisions, which in turn impact market performance. The model is tested with data on 113 industrial new products launched in business‐to‐business markets in Germany using a multiple informant approach. The results support the mediated model as the dimensions of the corporate mind‐set have a significant impact on most strategic launch decisions, which in turn significantly contribute to market performance. It is found that while an analytical posture relates to all three strategic launch decisions, risk taking and an aggressive posture have a significant impact on two, respectively one, launch strategy elements. These findings confirm the importance of investigating antecedents for a successful new product launch, as the corporate mind‐set serves as a background resource that sets the framework for successful new product launch decisions. In the final section implications for research and managerial practice as well as limitations of this research are provided.