1. Timetable 16.9. Introduction, Sakari Luukkainen
Technology Marketing, Jari Haggren
Market Dynamics of Telecom Industry, Sakari Luukkainen
Standardization, Sakari Luukkainen
Case GSM, Sakari Luukkainen
Product Strategy, Eino Kivisaari
Product Strategy, Eino Kivisaari
R & D Management, Sakari Luukkainen
R & D Management, Case TeliaSonera, Jyrki Härkki
Corporate Venturing, Case Nokia, Taina Tukiainen
Technology Foresight, Sakari Luukkainen
Examination
© Sakari Luukkainen

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

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

4. 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

5. 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

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

7. 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

8. R&D process in firms Technological change Market 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

9. 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

10. Goals of Technology Policy
2001 R&D investments in Finland were 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

11. 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

12. 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

13. 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

14. 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

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

16. 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

17. 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

18. 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

19. 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
DCF #1: Use most likely values $ (15/1.12) + (10/1.122)
DCF #2: Consider market uncertainty $ (15/1.12) + (0.3*20+0.7*10)/1.122
DCF #3: Consider all uncertainties $ (15/1.12) (0.8*….)/1.122
Options Thinking Valuation $ *(15/1.12)+0.3*((0.8*60+0.2*15)/1.122))
© Sakari Luukkainen
Source: Faulkner 1996

20. Product platforms and modularity
Segment A
Product 1C
Product 1
Product 1B
Product 1A
Segment B
Product 2
Product 5
Segment C
Element A
Element B
Element C
Source: McGrath 2001
© Sakari Luukkainen

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

22. Finnish Innovation System
© Sakari Luukkainen
Source: Tekes

23. 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 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

24. Evaluation of the Financing 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