Innovation process Technological change Market change R&D Technology Assessment and Forecasting R&D Standardization Productization Marketing Market Assessment and Forecasting Market change © Sakari Luukkainen

R&D Intensity by Country © Sakari Luukkainen Source: Tekes, OECD

Goals of R&D Management ICT investment Production Value added GDP Innovation Sales, profit Proprietary technologies R&D investment Generic technologies Science base © Sakari Luukkainen

R&D Life Cycle € Time R&D investment Science base Generic technologies Production scale-up Proprietary © Sakari Luukkainen

R&D Life Cycle € Time Commercialization investment R&D investment Science base Generic technologies Production scale-up Proprietary © Sakari Luukkainen

R&D Life Cycle € Time Commercialization investment Sales R&D Cash flow Time Science base Generic technologies Production scale-up Proprietary Market penetration © Sakari Luukkainen

Core competencies Source Prahalad & Hamel 2001 © Sakari Luukkainen

Technology strategy process in firms Autonomous strategic action Strategic context Concept of corporate strategy Induced strategic action Structural context Source: Burgelman & Rosenbloom 2001 © Sakari Luukkainen

Technology strategy enactment in firms Induced applied research on new technologies opportunities and threats to support existing and emerging businesses standardization, alliances product development joint ventures acquisitions Autonomous science-based research internal corporate venturing external corporate venturing: VC, venturing alliances and if they fail the last change is followership by copying / contracting / licensing without timing and cost advantage © Sakari Luukkainen

Classification of R&D Type of R&D Incremental Discontinuous Fundamental Probability of technical success 40-80% 20-40% Small, difficult to assess Time to completion 0,1-2 years 2-4 years 5-10 years Competitive potential Modest, but necessary Large Large, difficult to assess Durability of competitive advantage Short, imitable by competitors Long, protectable by patents Long but risky © Sakari Luukkainen Source: adapted from Pitkänen 2000, ADL 1991

Overcommitment increase R&D cost and destroys productivity Average value added time for engineering tasks 100 % 60 % 1 2 3 4 Number of projects per engineer © Sakari Luukkainen Source: Henderson

Innovation process in firms Technological change Technology Assessment and Forecasting Diversified portofolio of Project Plans Project execution and evaluation Idea generation and screening Market Assessment and Forecasting Market change © Sakari Luukkainen

R&D Investment Profitability Evaluation Net Present Value (NPV, DCF) p S JA m H å å + p - t t ( 1 + i ) t ( 1 + i ) p ( 1 + i ) t t = m t = 1 Internal Rate of Return (RoR, IRR) © Sakari Luukkainen

RoR calculation formula m = the length of the R&D project n = the length of the product life-cycle p = m + n St = net cash flow after the market introduction RoR = rate of return Ht = annual R&D expenditure JAp = residual value © Sakari Luukkainen

Value of an option Stock Profit Options Pay-out Stock Price Option pay-out Strike price Stock Profit Options Pay-out Excess risk of stock ownership Profit / Loss form Stock sale Stock Price © Sakari Luukkainen Source: Gaynor 2003

Real options R&D valuation Initial R&D Commercialization Market R&D Outcome Decision Outcome Investment Decision +$60M Yes 0.8 -$15M 0.2 Excellent +$15M +$20M No 0.3 0.3 Yes -$15M 0.7 Yes 0.6 +$10M Good -$6M No -$15M 0.1 0.1 Yes -$15M 0.9 No -$60M Poor No Valuation Method NPV 1993 1994 1995 DCF #1: Use most likely values - $11.4 - 6 -(15/1.12) + (10/1.122) DCF #2: Consider market uncertainty - $9.0 - 6 -(15/1.12) + (0.3*20+0.7*10)/1.122 DCF #3: Consider all uncertainties - $5.4 - 6 -(15/1.12) + 0.3(0.8*….)/1.122 Options Thinking Valuation + $2.2 - 6 -0.3*(15/1.12)+0.3*((0.8*60+0.2*15)/1.122)) © Sakari Luukkainen Source: Faulkner 1996

QFD-method Source: Lowe & Ridgway, University of Sheffield © Sakari Luukkainen

Goals of Technology Policy Annaul R&D investments in Finland are about 5 billion € of which was publicly financed 28 %, major R&D performed in telecom sector Technology policy differs from the other policies, because it tryis to "increase the cake" instead of sharing it The most important reasons for too low a level of the private R&D investments are due to the high technical and commercial risks involved The government´s initiative is thus emphasized in the case of R&D underinvestment in the private sector In order to redress this kind of market failure the industrial countries have contributed to their technological infrastructure to support the long-term competitiveness of domestic companies © Sakari Luukkainen

Goals of Technology Policy Companies make their decisions of the R&D investments aiming at maximizing profits Therefore, at least in big companies, the risk is divided into the portfolios of many different R&D projects, all of which are required greater profitability than other less risky projects like the expansion of the present production facilities This all results in the companies beginning to favour R&D projects with a short time to market influence. Therefore the goal of technology policy is to maximize the influence of such R&D investments on the growth of GDP, which would not be realised without support, but would greatly benefit society © Sakari Luukkainen

Goals of Technology Policy Spillover means practically a situation where investment in the technology of an innovator also benefits other companies Economists have demonstrated that R&D performed by the original innovating company generates widespread value in the economy through spillovers The key factor in the development of the industrial structure and advancement of spillovers is the efficiency of the whole domestic value chain (cluster) Concrete technology policy occurs in the selection of publicly financed R&D projects © Sakari Luukkainen

Example value chain Firm B Supplier A Customer C Supplier D Firm E Customer F Supplier G Firm H Customer I Supply chain Core industry Services © Sakari Luukkainen

Telecommunications value chain - Telecluster Regulation, tech. policy Content providers Computer industry Network operator Service operator Consumers Mechanics producers Banking, health care, traffic… Telecom industry Business services Semiconductor producers Circuit board installation Software companies Circuit board producers © Sakari Luukkainen

R&D financing by type of project Social rate of return A D B C Social hurdle rate E Innovator Innovator rate hurdle rate of return © Sakari Luukkainen Source: Tassey 1997

R&D management by milestones Evaluation of profitability technical risk delay Decisions on continue modify kill / freeze Social rate A t1 A t21 of return A t3 A t22 Social hurdle rate Innovator Innovator rate hurdle rate of return © Sakari Luukkainen Source: Tassey 1997

Finnish Innovation System © Sakari Luukkainen Source: Tekes

Evaluation of the Innovation System R&D investments of industry has been successfull - R&D expenditures correlate highly with growth of sales of new products i.e. innovations The public support of GSM development has created a lot of direct success as well as spillovers in the telecluster The role of basic research has been low in the ICT business so far The effect of public financing has had a significant but limited effect, it works in firms that already have high R&D intensity – successful R&D requires process knowledge (Niininen 1999) © Sakari Luukkainen

Evaluation of the Innovation System Subsidized loans have better effect on productivity than direct support – easy money effect (Niininen 1999) The role of liquidity constraints was negligible in determining R&D investment – steady R&D spending (Niininen 1999) Venture capital financing has so far resulted in a very few new success stories Financing by own cashflow puts more pressures to allocate R&D according to market need © Sakari Luukkainen