Architecting a Valuation System for R&D Investments
by
Mitzi Ann M. Mori
B.S. Computer Science and Engineering, California State University, Long Beach, 1988
Jacqueline Y. Tyson
M.S. Electrical Engineering, Penn State University, 1993
B.S. Electrical Engineering, North Carolina A&T State University, 1990
SUBMITTED TO THE SYSTEM DESIGN AND MANAGEMENT PROGRAM IN PARTIAL
FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF
MASTER OF SCIENCE IN ENGINEERING AND MANAGEMENT
AT THE
MASSACHUSETTS INSTITUTE OF TECHNOLOGY
FEBRUARY 2002
2001 Mitzi Ann M. Mod and Jacqueline Y. Tyson. All rights reserved.
The authors hereby grant to MIT permission to reproduce and to distribute publicly, paper and electronic copies
of this thesis document in whole or in part.
Signature of Author
2
MitziAnnM.Mon
System Design and Management Program
Signature of Author
Jacc elined. Tyson
System Design and Management Program
Certified by
Janice A. Klein
Thesis Supervisor
Senior Lecturer, School Of Management
Certified by
James M. Utterback
Thesis Supervisor
David J. McGrath jr. Professor of M/nagement and Innovation, School Of Management
Corporate Sponsor
Tom A. Kavassalis
Manager of Strategy & Planning, XIG, Xerox Corporation
Accepted by
GM LFIV Ko
Steven D. Eppinger
Co-Director, LFM/SDM
or of Management Sience and Engineering Systems
Accepted by
TNSTITUTE
MASSACHUSES
OTECHNOLOGY
OF
-
JUL 1 8 20O2
LIBRARIES
C
Co-Director, LFMISDM
Professor of Aeronautics & Astronautics and Engineering System
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2
Architecting a Valuation System for R&D Investments
by
Mitzi Ann M. Mori
Jacqueline Y. Tyson
Submitted to the System Design and Management Program
in Partial Fulfillment of the Requirements for the
Degree of Master of Science in Engineering and Management
at the Massachusetts Institute of Technology, January 2002
Abstract
In an era of intense competition and limited resources, companies continually make critical
investment decisions with the expectation these decisions will pay off sometime in the
future. One investment area in most companies involves technology. So, given current
budget constraints and limited human resources, what technologies should be invested in?
The VERDI framework has the potential to provide a standard process to assess early-stage
technologies. Value does not always equate to monetary worth. The meaning of value
changes just as a technology transforms and progresses through its maturity cycle.
Companies need to recognize that they attain more than just a monetary return on
technology investments.
This thesis provides the background information on the composition of a firm; an explanation
of the technology maturity cycle; foundations in technology strategy; explanation of
commonly practiced methods for valuing technology and the basis for understanding the
importance of intangible assets and their role in valuing early-stage technology. The thesis
consists of six sections, Section 1, introduction to the problem and composition of the firm;
Section 2, a literature overview, containing the bulk of the background material; Section 3,
the valuation methods that have been practiced or are in practice at Xerox, including
introduction to resource-based view; Section 4, the VERDI framework, explanation of the
adaptation of RBV to the framework; Section 5, the proposed application of the framework at
Xerox, VERDIX, including details on committee make up, infrastructure, and a detailed
example; and Section 6, the summary, including next steps and further research.
3
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4
Acknowledgements
We would like to thank our thesis advisors, Janice Klein and James M. Utterback for
their guidance, helpful comments, and supportive attitude during the thesis process.
Our gratitude is extended to our corporate advisor, Tom Kavassalis whose
knowledge, experience and insights were invaluable to us during the writing of this
thesis. A special thank you to the SDM staff, our SDM colleagues, and our
company, Xerox Corporation, especially our respective local management for
supporting us throughout the two-year program. In addition, we extend heartfelt
thanks to our families and friends for their undying support, encouragement,
understanding and patience.
Mitzi Ann and Jacqueline
There are some very extraordinary people I would like to express my gratitude
toward who encouraged and supported me throughout the SDM experience. The
first is my husband and friend, Craig Goldenson, who has been a source of
continuous support and positive energy these past two years; my parents, Mitsuru
and Carol Ann Mori, for their unending encouragement and for providing a strong
foundation on which I have been able to build upon to better myself; Mike G. Salfity,
my mentor and friend, who believed in my abilities and encouraged me to apply for
the SDM program. And to my thesis partner Jacqueline, to whom I am indebted to,
for her dedication, team spirit and hard work during these past two semesters as we
have worked and at times struggled on thesis, but I am most grateful for her
enduring friendship and sense of humor.
Mitzi Ann
I would like to thank my parents, Colleen and James Tyson, who have always
encouraged me in all of my endeavors. I appreciate your love and support. Thank
you, Joel A. Kubby, for being interested in my continued development and
encouraging me to apply to the SDM program. And to Mitzi Ann, my thesis partner,
for her commitment, thoughtful insights, and tireless efforts during the summer and
fall sessions on our thesis. I am grateful for your friendship. "Trust in the LORD with
all thine heart; and lean not unto thine own understanding. In all thy ways
acknowledge him, and he shall direct thy paths" (Proverbs 3:5-6 KJV). Thank you
God for directing my path.
Jacqueline
5
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6
Table of Contents
A b strac t ......................................................................................................................
3
Acknowledgem ents ...............................................................................................
5
Table of Contents...................................................................................................
7
L ist of F ig u re s ...........................................................................................................
11
L ist
13
............................................................................................................
Section 1: Introduction...........................................................................................
15
Ov e rv ie w ...............................................................................................................
15
Com pany Overview ......................................................................................
18
Com pany Values, M ission and Vision Statements........................................
18
Thesis Outline ...................................................................................................
20
Section 2: Literature Overview .............................................................................
23
The Charter of
..........................................................................................
Marketing and Finance in Support of R&D.....................................................
23
24
The Im portance of Valuing Early Stage R&D Technology ................................
27
Technology Maturity Cycle ...........................................................................
27
Technology Strategy ....................................................................................
28
Dom inant Designs.........................................................................................
30
Technology S-Curves....................................................................................
31
Technological Discontinuities.......................................................................
32
R&D Project Portfolio .........................................................................................
34
Patent Portfolio .................................................................................................
36
Current Methods Used in Valuation ..................................................................
39
Return on Investm ents.......................................................................................40
Net Present
ue ........................................................................................
40
Internal Rate of Return..................................................................................
41
Expected Com m ercial Value.........................................................................
42
Options / Real i
44
n ..................................................................................
Sum m ary........................................................................................................
Intangibles .......................................................................................................
W hat is an Intangible Asset?.......................................
7
. ... ... .. ... ... .. ... ... .. ... ... .. . .
46
49
49
Im portance of Intangible Assets.....................................................................
50
Types of Intangibles.........................................................................................
52
Intellectual Capital.........................................................................................
52
Hum an Capital .............................................................................................
54
Structural Capital...........................................................................................
55
Value Extraction................................................................................................
55
W ays of Valuing Technology ...........................................................................
59
Maxim izing Value from Patent Portfolio .......................................................
59
Recognizing a Radical Innovation................................................................
62
Sum m ary......................................................................................................
64
C on c lu s io n ............................................................................................................
Section 3: The Xerox R&T Valuation Process.....................................................
66
69
O rganizational Structure ..................................................................................
69
Process Context ...............................................................................................
70
Valuation Process..............................................................................................
71
Resource-Based View .......................................................................................
75
Foundation of the VERDI Framework..............................................................
76
Section 4: VERDI Fram ework .............................................................................
77
The Filtering Process.......................................................................................
79
VERDI Methodology .........................................................................................
81
Governance ......................................................................................................
82
Required Inform ation .........................................................................................
85
Adaptation of the RBV Method for Technology Assessment ............................
87
Definitions ......................................................................................................
87
Technology Stage.............................................................................................
90
Technology Assessm ent...................................................................................
91
Section 5: Proposal for VERDIX............................................................................
95
O ve rv ie w ...............................................................................................................
95
Xerox's Values .............................................................................................
95
Xerox's Vision and Mission Statements .......................................................
96
Mem bership......................................................................................................
97
Accountability ...................................................................................................
99
8
M e e tin g s ............................................................................................................. 1 0 1
Supporting IT Infrastructure ................................................................................ 103
Valuation Process ............................................................................................... 106
S c o rin g ............................................................................................................... 1 09
Assessment Questionnaire ................................................................................. 110
In im ita b ility ...................................................................................................... 1 1 0
D u ra b ility ......................................................................................................... 1 14
A p p ro p ria b ility ................................................................................................. 1 15
E xte n s ib ility ..................................................................................................... 1 16
Competitiveness .............................................................................................. 116
Market Attractiveness ...................................................................................... 118
Assessment Outcome ......................................................................................... 120
Illustration using tone r/man ufactu ring process A ................................................ 121
In im ita b ility ...................................................................................................... 1 2 1
D u ra b ility ......................................................................................................... 12 5
A p p ro p ria b ility ................................................................................................. 12 6
E xte n s ib ility ..................................................................................................... 12 6
Competitiveness .............................................................................................. 127
Market Attractiveness ...................................................................................... 129
Recommendations .......................................................................................... 131
Section 6: Summary ............................................................................................... 137
F utu re W o rk ........................................................................................................ 14 0
B ib liog ra p h y ........................................................................................................... 14 1
R e fe re n c e s ......................................................................................................... 14 3
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10
List of Figures
Figure 1: Generic Company Structure..................................................................
18
Figure 2: Marketing Support................................................................................
25
Figure 3: Elements of a successful strategy .........................................................
29
Figure 4: Technology "S-Curve"........................................................................... 32
Figure 5: Popularity of Project Selection & Portfolio Methods ..............................
35
Figure 6: Value Hierarchy....................................................................................
36
Figure 7: Corporate Value Model .........................................................................
39
Figure 8: Determining the Expected Commercial Value....................................... 42
Figure 9: Solution Methods and Option Calculators ............................................
45
Figure 10: Financial methods comparison............................................................
47
Figure 11: Relationship of Intangibles ..................................................................
51
Figure 12: Intellectual Capital of the Firm............................................................
53
Figure 13: Human Capital and Intellectual Assets...............................................
54
Figure 14: ICM Preferences by Company Type ..................................................
56
Figure 15: Sources of Valuation and Conversion Mechanisms............................ 56
Figure 16: A Model of an IC Company ................................................................
58
Figure 17: Corporate Decision Model for Investing in Intellectual Property.......... 60
Figure 18: 2x2 Patent Map..................................................................................
60
Figure 19: Patent Funnel Map.............................................................................
61
Figure 20: Patent Value Model.............................................................................
62
Figure 21: A Radical Innovation Hub..................................................................
63
Figure 22: Xerox Corporation - Organizational Structure .....................................
69
Figure 23: R&T spending distribution ..................................................................
71
Figure 24: Portfolio Balance ...............................................................................
73
Figure 25: Example of a bubble chart...................................................................
74
Figure 26: Embryonic to Growth inside R&D Lab.................................................
77
Figure 27: Filtering of an Idea .............................................................................
79
Figure 28: VERDI Methodology...........................................................................
81
Figure 29: Example of Committee .......................................................................
83
Figure 30: Resource Assessment ........................................................................
94
11
Figure 31: Example of the VERDIX committee membership.................................97
Figure 32: askOnce T M Interface ............................................................................. 104
Figure 33: S um m ary M atrix ....................................................................................
120
Figure 34: Toner/manufacturing process A Summary Matrix.................................131
Figure 35: Inimitability Assessment ........................................................................
133
Figure 36: Competitiveness Assessment ...............................................................
133
Figure 37: Market Attractiveness Assessment .......................................................
134
Figure 38: VERDIX Assessment ............................................................................
134
Figure 39: Example outcomes................................................................................135
12
List of Tables
Table 1: Characteristics of R&D as a function of technological maturity .............. 27
Table 2: Significant Characteristics of the phases of innovation ..........................
30
Table 3: Value Hierarchy Levels ..........................................................................
37
Table 4: Knowledge Workers, 1900-1999 ...........................................................
50
Table 5: Types of Knowledge .............................................................................
53
Table 6: Management for Value Extraction .........................................................
55
Table 7: Technology Proposal................................................................................107
13
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14
Section 1: Introduction
Overview
From the time we are children we are taught the importance of saving for the
future. Many of us have vivid memories from the day we opened our first interest
bearing savings account and were awarded the responsibility for its
maintenance. We remember the excitement of watching it grow over the years,
and at that time we may not have fully appreciated the idea of compounding
interest, but we understood money put into savings today grew into future
earnings tomorrow.
Not much has changed since then; today investments are
made in the hopes of attaining greater value in the future.
Often, as illustrated in the previous example, returns on investments are valued
or measured in terms of the money earned or gained. However, other forms of
value exist for investments, for instance donating one's time to a volunteer
project, where the reward is not necessarily monetary, but instead is the sense of
accomplishment or providing service. The art world holds many examples where
both non-monetary and monetary value is received. For instance, the painter
takes a blank canvas and applies paint to create a scene or a portrait, producing
a completed painting, which can be sold at an art gallery. To the patron who
buys the painting they purchase it for the "emotional value", for the love of the
painting, and though they may understand that in the future the painting may be
worth more (may appreciate in value), it is not the driver behind making the
purchase. In this instance the art is valued both in terms of non-monetary and
monetary terms.
In one specific area, marble sculpting, the artist views the raw material both as
what it is and as a potential for "what it could be". To many of us, we would just
see a slab of marble, but for the artist they can see its future, they see the
possibility of what they could create from it. In many instances this scenario
parallels early-stage technologies. In this instance, the company would be the
15
artist, and the early-stage technology, the slab of marble. Like the artist, the
company has the required skills and tools to develop the early-stage technology
into its final form. Sculpting is similar to technology in that the final form is not
fully presented at the onset of the process, it is slowly revealed over time as the
sculpture evolves from its rough shape to a more refined and completed figure.
Technology like art is transformed over time.
In for-profit companies, investments and their returns are measured in monetary
terms, including R&D investments. Because monetary returns are important the
value of R&D investments are primarily based on financial models.
R&D
investments usually consist of projects in various stages of progress. Some of
these projects are actually technologies, which are under development. Like a
project, a technology develops and matures over time. During this maturity
process more information and data is available, reducing the uncertainty
surrounding it. As more information is known, this progression permits for more
accurate predictions to be made for its application and potential market
appreciation, which allows for the use of financial methods in establishing its
value. Much research has been conducted in the area of valuing technology
during this latter stage of maturity and after its commercial application.
Technology matures and the valuation process associated with each of the
maturity levels is different. This is a key correlation many firms consider, but do
not adequately account for. The time span between when an investment in a
technology is made, to when a monetary return may be realized is not a standard
fixed amount of time. Like the technologies themselves, the time frame will vary
from one to another, and the rate in which they pass through each maturity stage
will differ as well. Sufficient consideration of the dynamic nature of this process
is needed in order for the firm to be able to create a process to value the
technology in each of its stages.
16
Our interest is in valuing technology before it's been commercialized, and even
before it has reached a mature state. Because technology changes over time, in
the early stages very little is known about it, including its possible applications,
which means there is a lot of uncertainty surrounding it. Since little information is
known, the use of financial methods alone is inadequate to assess the value of
early stage technology. The thesis explores work performed in the area of R&D
valuation and examines the effect of technology maturity on these methods. It
examines how value changes as the technology changes over time.
The thesis is meant to offer engineers, scientists and managers who are
interested in valuing R&D activities in the early-stages with an understanding and
a framework to assist them. Enough background has been supplied making this
work comprehendible for managers without a technical background. Additionally,
this is suitable material for an entry-level engineer or scientist with no exposure
to common business practices.
To provide some general information, we start with the overview of a firm.
17
Company Overview
In setting the background for the research work conducted in this area, it is first
important to provide a brief overview of company structure, its vision, mission
and strategies. Figure 1 illustrates a company structure that is functionally
organized. At the top of the company is the corporate office; at the next level are
the major business units (BU) and other business groups that provide support.
Corporate
R&D
Marketing
Sls
Finan ce
Manufacturing
BU 1
..-.
BU n
Figure 1: Generic Company Structure
Company Values, Mission and Vision Statements
The values of a firm are the beliefs held collectively by the employees who make
up the company. The vision and mission statements are based on the values of
the company. The purpose of the vision statement is to establish an
understanding of the future of the company, the "where" and "what" the company
wants to be in the future. The intent of the mission statement is to explain at a
high level, what steps are necessary for the company to achieve its vision.
The mission statement defines what the company will do, and allows for each
organization within the company to create their own mission statement to aid the
firm in achieving its vision.
The strategies of the company are put into place to support the mission
statement of the company. The business strategy is broadly stated allowing the
individual organizations that make up the firm to create the specific strategies to
support their mission statement and help achieve the corporate vision.
18
The technology strategy complements the business strategy and provides
direction to the technical communities within R&D. The patent and project
portfolio strategies and their management are part of the technology strategy.
The technology strategy helps each group in the R&D organization to align their
objectives to the organization's mission to aid the company in meeting its
mission, and ultimately to achieve its vision.
19
Thesis Outline
Section 2, contains the literature overview that covers important areas needed to
provide the background information on understanding the valuation practices
currently used. It provides an understanding of the charter of R&D, technology
maturity, marketing and finance. Financial models are introduced, briefly
described, and their advantages and disadvantages listed. This section
introduces intangible assets and their importance in the valuation process. Lastly
it concludes with our findings that a new framework needs to be established to
value early stage technology.
Section 3 details the methods and practices used at Xerox Corporation. This
section includes current practices as well as methods that have been tried in the
past. It provides an explanation of the current practices, why they are used and
the deficiencies of each. Introduces the resource-based view perspective (RBV)
and proposes how this method will be used in the new framework created to
assess early-stage technology.
Section 4 provides the new framework, VERDI (Valuing Early-stage R&D
Investments). Details how RBV was adapted to assess early-stage technologies.
The framework is defined in its entirety, including the infrastructure required, the
committee and the governing regulations. This section ties together the concepts
introduced in Section 2.
Section 5 is an example application of the VERDI framework, a proposal for use
at Xerox Corporation. It details the extent of how the framework needs to be
customized for a company, like Xerox, to adopt and use it. The customized
framework, VERDIX (\aluing Early-stage R&D Investments at Xerox) is
presented in detail. Included is the composition of the committee, the process by
which they will conduct themselves and the assessment criteria used. The
section concludes with scoring the assessment and making recommendations.
While a proposal for application of the framework is outlined, it has not been
tested on valuing early-stage technology.
20
Section 6 is the summary that recaps the intent of the thesis. It includes what
specific application the authors would have liked to perform, and the next steps
that should be taken to prove the framework can assess early-stage
technologies. Also it provides a suggestion for further research that could
perform a side-by-side comparison of the various assessment techniques
discussed in the thesis.
21
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22
Section 2: Literature Overview
The Charter of R&D
The introduction briefly outlined the structure of a corporation, its foundation,
vision, mission, and strategies. For the purpose of this work, it is necessary to
elaborate on how the corporate strategy impacts the charter of the R&D
organization, which is to identify and develop technologies to support current and
future products, and/or create the potential for external opportunities.
The R&D organization defines the technology strategy ensuring proper alignment
to the overall business strategy. Contained within the technology strategy are
the IP (intellectual property, i.e., patents, trademarks, etc.) and R&D project
portfolio strategies. So, the project and patent portfolios are governed by the
overall technology strategy.
All strategic decisions are made in the hopes of improving the future of the
company, but the decisions involving R&D "are difficult because they are usually
-
made in the face of many uncertainties
.
The time between the decision point and the point at which the cash
register starts ringing is typically long and filled with unknowns;
.
The R&D process is inherently uncertain (without uncertainty there would
be no R&D); no one knows whether and when R&D will succeed, nor the
level of that success;
.
The markets to be served are most uncertain at the time R&D projects are
commissioned; and
Successful R&D often takes a company into unfamiliar areas requiring
partnerships, alliances or acquisitions, and new ways of doing business."
(Matheson, 1998, p.8)
Keep in mind the R&D organization does not work in a vacuum.
To be effective
it requires information and input from corporate, marketing and finance.
23
Corporate establishes direction; marketing provides information on customer
needs, market trends, competition, and etc.; and finance, provides the tools
which underpin the assessment within both the R&D project and patent portfolio
processes. More specifically, the portfolio decision-making processes synthesize
this information to enable the company to strive toward its overall mission.
Marketing and Finance in Support of R&D
One primary support function in the company is the marketing group. Their job is
to identify and understand customer needs and to provide this information to the
company, enabling it to profitably produce products and services to meet these
needs, to retain current customers, in addition to attracting new customers.
(Ariely, 2000; Kotler, 1999, p.3)
In order to identify and understand these needs, the marketing group must obtain
information on the customers. The marketing group amasses a large amount of
data to help them understand customers' wants and needs. There are three
main types of data collection, internal, intelligence, and market research data.
Internal data comes from within the company; data is usually housed in the
internal databases maintained by the various organizations of the company.
Intelligence data contains publicly available information on competition and
market trends, the process of collecting and analyzing this data is marketing
intelligence. Finally, market research is a formalized study to gather specific data
for a certain market situation. (Kotler, 1999, p.100-101) Since the market place
is dynamic, this data collection is an on-going activity.
Marketing can be defined as "the process by which decisions are made in a
totally interrelated changing business environment on all the activities that
facilitate exchange in order that the targeted group of customers is satisfied and
the defined objectives accomplished." (Hisrich, 2000, p.3) The relationship of
marketing to other groups in the company is best illustrated in the Figure 2.
24
R&D
Purchasing
Manufacturing
Finance
Managment
ManamentMarketing
Accounting
Figure 2: Marketing Support
Source: (Kotler, p.65)
Another support function in the company is the finance group. "Finance is the
application of a number of financial and economic principles to maximize the
wealth or overall value of a business" (Gropelli and Nikbakht, 2000, p. 3). Their
job is to manage the cash within the company as well as track its assets. The
finance group supports the business operations and yearly budgeting activities of
each organization. This allows each organization to understand its current level
of spending at anytime during the year. In addition, they look for opportunities to
increase capital and for the best opportunity to invest capital to increase value.
So, how is value assessed?
The word valuation traditionally means the monetary worth of an item a company
has rights to or owns. Financial (economic) methods are a means of quantifying
this monetary value. This includes the valuation of physical assets as part of the
annual reporting process, and the use of Generally Accepted Accounting
Principles (GAAP) to ensure uniform reporting.
We have shared how the organization must interact to achieve its desired
objective, but it is just one part of a bigger picture. More importantly, intellectual
capital (i.e. human capital, intellectual assets) is the foundation of an
organization's ability to capitalize on the knowledge needed to create value for
the firm. Not enough emphasis is placed on the importance of these intangible
25
assets. Our work will address how intangible assets factor into valuing early
stage R&D investments. We begin by addressing why it is so important to value
early stage R&D investments.
26
The Importance of Valuing Early Stage R&D Technology
In order to understand the importance of valuing early stage R&D technology, it
is essential to understand that technology changes with time. We start by
defining the technology maturity cycle.
Technology Maturity Cycle
In order to discuss the technology maturity cycle, a definition of technology is
needed. Roussel, et al "view technology as the application of scientific and
engineering knowledge to achieve a practical result" (Roussel, et al, 1991, p. 13).
The phrase, "achieving a practical result" implies technology moves through a
cycle (process), and ultimately it approaches a limit at some point in time.
Table 1: Characteristics of R&D as a function of technological maturity
Adapted from Source: (Roussel, 1984, p. 30), Research Management
-
Table 1 represents characteristics of R&D as a function of technology maturity.
For our purposes, we define the technology maturity cycle using three stages
(1) embryonic, (2) growth, and (3) mature. In the embryonic stage, the attributes
of the idea/technology are documented and studied to determine its viability
before further development can occur. If it passes the first phase, it enters the
growth stage. In this phase, further studies are conducted to prove the
technology is reliably repeatable and all its characteristics fully studied and
understood. Having passed the second phase, it enters the mature stage, where
it is tested to determine where it will be most useful. Upon successful completion
27
of the third phase, the technology is mature enough to leave the confines of R&D
and enter the product development organization'.
Progressing technology through these three stages is the primary output of an
R&D organization. The ability to successfully compete requires innovations be
incorporated into new products/services produced by the business units (BU's) of
the firm for delivery to the marketplace. Technology maturity is an element of
something much broader, innovation. Innovation is described as "a connected
process in which many and sufficient creative acts, from research through
service, couple together in an integrated way for a common goal" (Morton, 1971,
p. 3). Implied in this process is timeliness. If a product fails to reach the market
in the predicted time or is pre-empted by competition, the expected growth may
not be sufficient to warrant the investment. While the company expects its
innovations will be included in new products/services, the reality is some are not.
Regardless of inclusion, the innovation process has positive results in
organizational learning and may provide other benefits such as patents or the
potential for licensing. So, how is this value (benefit) determined?
Technology Strategy
Investing in early stage R&D has the potential to create significant long-term
value for the company. If successful commercialization takes place within the
"right" market window, the firm has the potential to reap the benefits (early
profits) of being the first-mover. "In some industries, a first mover may be in a
position to enjoy temporarily high profits from its position. It may be able to
contract with buyers at high prices during early scarcity of a new item, for
example, or sell to buyers who value the new technology very highly." (Porter,
1985, p. 188)
1 In this definition, the R&D organization matures the technology to a point where it can be developed into a
product. The development (commercialization) usually occurs in a business unit, and not in the research
organization.
28
Given monetary gains are essential for companies to survive, a strategy which
enables them to achieve this objective is needed. So, what are the elements of
an effective strategy? "Effective strategies rest on three foundations: 1) value
I-----------------
I
I
,What technologies I 'Ho
should we invest |
in?
II
I
------------
'
-
-
creation, 2) organizational capability, and 3) competitive understanding" as
shown in Figure 3 (Henderson, 2001, Lecture 1).
Mark s
v will we deliveri
|val ue across the
Ival ie chain?
ation
'--
T
----------
Organizational Competitive
Understanding
Capability
------------ I-
iwshall we
pture the
'va lue we create?
IHc
:How shall we
,support innovation |ca
'across the firm?
I
I-----
I
I.
-- -- -- -- ----
--
Figure 3: Elements of a successful strategy
Adapted from Source: (Henderson, 2001, Lecture 1)
Value creation requires a decision on what technologies the company should
invest in. This decision can be tied to managing the innovation process within
the company and begins with an assessment of the technology (dominant
designs, S-curve, etc.), and the nature of the market (Moore and Christensen)
(Lim, 2001). The tools are used to 1) assess where the technology is with
respect to the competition, and 2) investment in incremental technology alone will
not maintain a company's competitive edge.
29
Dominant Designs
In Utterback's work, he defines three phases fluid, transitional, and specific of
industrial innovation (Utterback, 1996, p. 92). Table 2 provides significant
characteristics in the three phases of industrial innovation.
Innovation
Sources of innovation
Products
Production Processes
R&D
Equipment
Plant
Fluid hase
Frequent major product
changes
Transitional phase
Major process changes
required by rising demand
Industry pioneers; product
users
Diverse designs, often
customized
Manufacturers; users
Flexible and inefficient,
major changes easily
accommodated
Focus unspecified because
of high degree of technical
uncertainty
General-purpose, requiring
skilled labor
At least one product design,
stable enough to have
significant production volume
Becoming more rigid, with
changes occurring in major
steps
Focus on specific product
features once dominant design
emerges
Some sub-processes
automated, creating islands of
automation
Small-scale, located near
user of source of
General-purpose with
specialized sections
Low
Few, but growing in
numbers with widely
fluctuating market shares
Functional product
performance
Informal and
entrepreneurial
To imitators, and patent
challenges; to successful
product breakthroughs
Moderate
Many, but declining in
numbers after emergence of
dominant design
Product variation, fitness for
use
Through project and task
groups
To more efficient and higherquality producers
Specific phase
Incremental for product and with
cumulative improvements in
productivity and quality
Often suppliers
Mostly undifferentiated,
standard products
Efficient, capital intensive, and
rigid; cost of change high
Focus on incremental product
technologies; emphasis on
process technology
Special-purpose, mostly
automatic, with labor focused on
tending and monitoring
equipment
Large-scale, highly specific to
particular products
innovation
Cost of process change
Competitors
Basis of competition
Organizational control
Vulnerabilities of
industry leaders
High
Few, classic oligopoly with
stable market shares
Price
Structure, rules, and goals
To technological innovations
that present superior product
substitutes
Table 2: Significant Characteristics of the phases of innovation
Source: (Utterback, 1996 p. 94-95)
Taking a closer look at R&D, the following characteristics exist:
" "Fluid - focus unspecified because of high degree of uncertainty
* Transitional - focus on specific product features once dominant design
emerges
* Specific - focus on incremental product technologies; emphasis on process
technology" (Utterback, 1996, p. 94-95)
Successful integration of early stage technology can provide the impetus for a
dominant design. "A dominant design in a product class is, by definition, the one
30
that wins the allegiance of the marketplace, the one that competitors and
innovators must adhere to if they hope to command significant market following.
The dominant design usually takes the form of a new product (or set of features)
synthesized from individual technological innovations introduced independently in
product variants" (Utterback, 1996, p. 24).
Typically, before a dominant design many competitors are in the market space.
However, once a dominant design emerges, a number of competitors exit the
market. This can amount to significant market advantage to those firms still
remaining. So, the dominant design perspective is helpful in assessing the
technology, and in comparing where the technology is compared to incremental
and non-incremental technology. Also, it gives a visual representation as to
which phase in the industrial innovation process the company resides.
Technology S-Curves
Another mechanism to assess the stages of technology is the technology Scurve. Foster's S-Curve is a mechanism that can be used to determine the
technological position of a firm relative to its position in the industry. While
knowing the exact position is difficult, one can use this to help forecast where the
firm should be to remain a player. As such, we recommend the S-curve be used
as more of a descriptive tool than a prescriptive tool (Henderson and Lim).
It is also useful to get a handle on when the firm is approaching the
natural/physical limit of a technology (See Figure 4), because as the technology
reaches its physical/natural limit, more effort ("money") is required to make
incremental improvements. In simple terms, there is a significant cost to making
these improvements, resulting in smaller gains.
31
Natural Limit
Performance
Metric
2
1
Figure 4: Technology "S-Curve"
Adapted from Source: (Henderson, 2001, Lecture 2)
Managing the transition between S-curves is a critical strategic task: sticking with
an old S-curve can be disastrous (Henderson, 2001, Lecture 3).
Technological Discontinuities
"The Innovator's Dilemma" by Clay Christensen asserts that customers don't
understand discontinuities. A discontinuity is a breakthrough innovation that
advances by a large margin the technological performance of an industry
(Christensen, 1997). Often, in its earliest embodiment, the performance is below
that of the sustaining technology as shown by the second S-curve in Figure 4.
"Value is created when new technology is matched to customer need. But
customer needs change: as the technology evolves existing customers develop
new needs, and in addition the technology may appeal to new kinds of
customers, with new kinds of needs" (Henderson, 2001, Lecture 3).
This perspective can help a firm understand its technology position as it relates
to others in the industry. Christensen sites a number of examples (i.e. disk drive)
of how companies in certain industries could not make the leap from incremental
to discontinuous technological advances.
Incremental advances do not enable
the company to benefit from discontinuous technological advances (Christensen,
32
1997). This is further evidence for the importance in knowing how to value early
stage R&D.
We have stated a company cannot maintain its competitive advantage by solely
making incremental improvements to current technology. These incremental
improvements often don't provide the highest margins on the investment and
consequently, the company must invest in new technology in the hopes of
creating long-term value. Therefore, it is imperative to know how to value early
stage technology (potential disruptive technology) as a means to capitalize on
these investments.
33
R&D Project Portfolio
The R&D project portfolio is a collection of on-going projects in various stages of
technology development and having varying levels of risk. The R&D projects are
managed in a portfolio to maintain a certain risk balance. The portfolio is
dynamic. As projects progress through the development cycle, decisions need to
be made to determine which projects will remain in the portfolio, which will be
abandoned and if applicable which will be added. (Balachandra, 1989, p.19) It
should be noted that these projects, though listed, as independent entities in the
portfolio are usually dependent. For example, three of the projects may be
required to integrate at their point of maturity to form a subsystem that will be
used in a product.
The following chart indicates methods used for selection of projects and for
managing the portfolio process. R. G. Cooper et al cooperatively with the
Industrial Research Institute (IRI) published results from an "R&D portfolio
management best practices study: method used & performance results achieved"
(Cooper et al, 1998). One conclusion from this benchmarking study follows.
"Economic models are the most popular project selection tools (Figure 5). They
are familiar to managers, and they are accepted for other types of investment
analysis in the business - for example, for capital expenditure decisions. But
they do have limitations. The toughest project selection decisions lay in the first
few gates of the process when relatively little is known about the project. And it
is here that traditional economic approaches suffer the most, because they
require considerable financial data that are quite inaccurate" (Cooper et al,
1998).
34
77.5
77.3
Financial Method
1 78.0
72.5
Business Strategy
1 42.1
40.6
Bubble Diagram
Scoring Model
137.9
23.1
Checklists
36.1
Others
0
Reads:
. 77.3% of businesses use a
Financial method for project
selection & portfolio management.
77.5% of the top performers use
this method.
40
20
60
80
Percent of Business Using (%)
Figure 5: Popularity of Project Selection & Portfolio Methods
Source: (Cooper et al, 1998)
35
100
Patent Portfolio
Companies want to obtain the maximum benefit from their patents. The most
obvious use is to incorporate the patents into successful opportunities. A
framework that many companies are trying to successfully incorporate into their
overall strategy is the idea of extracting the maximum value from their patent
portfolios for monetary returns. This is not a new idea, but has become
increasingly more strategic in nature given the rewards that certain companies
have had in aggressively using their IP portfolios. A primary example is IBM,
who currently receives $1.5 billion in revenue annually from licensing of its
intellectual property. (Davis & Harrison, 2001, p.2)
A study conducted on how various companies' extracted value from their IP
portfolio yielded the Value Hierarchy. It's a pyramid that has five levels, and
each level represents what the company expects to receive in terms of value
from its IP portfolio. It is important to understand, that the levels build upon one
another. (Davis & Harrison, 2001, p.12) Figure 6 shows the Value Hierarchy
and Table 3 provides a description of each level in the pyramid and the best
practices to achieving each level.
Visionary
Integrated
Profit Center
Cost Center
Defensive
Figure 6: Value Hierarchy
Source: (Davis & Harrison, 2001, p.12)
36
Level
Level 1
Level 2
Name
Defensive
Cost Center
Key Objectives
Generate a significant
number of patents for their
IP portfolio
Ensure that their core
*
business is adequately
protected
Initiate basic processes to
*
facilitate patent generation
and maintenance
* Initiate basic processes for
enforcing patents
* Ensure that their technical
people have freedom to
innovate
& Reduce costs associated
with their IP portfolio(s)
Refine and focus the IP that
*
is allowed into their portfolios
*
1.
2.
3.
4.
5.
1.
2.
3.
4.
5.
Level 3
Profit Center
o
0
Level 4
Integrated
0
*
"
Level 5
Visionary
0
*
*
Extract value directly from
their IP as quickly and
inexpensively as possible
Focus on non-core, nonstrategic IP that has tactical
(as opposed to strategic)
value
1.
2.
Extracting strategic value
from their IP
Integrating IP awareness
and operations throughout
all functions of the company
Becoming more
sophisticated and innovative
in managing and extracting
value from the firm's IP
1.
Staking a claim on the future
Encouraging disruptive
technologies
Embedding intellectual
assets and IA management
into the company culture
3.
4.
5.
2.
3.
4.
5.
1.
2.
__
Best Practices
Take stock of what you own.
Obtain intellectual property while
ensuring design freedom.
Maintain your patents (don't let
the good ones lapse).
Respect the IP rights of others.
Be willing to enforce, or don't
bother to patent at all.
Relate patent portfolio to
business use.
Establish an IP committee with
cross-functional members.
Establish a process and criteria
for screening patents.
Set detailed guidelines for patent
filing and renewal.
Regularly and systematically
review the portfolio to prune
patents not worth maintaining.
Obtain management buy-in.
Start a proactive licensing
organization.
Consider IP donations and
royalty audits.
Organize to extract value.
Develop advanced screening
criteria.
Align IP strategy with corporate
strategy.
Manage IP and intellectual
assets across multiple functions.
Conduct competitive
assessment.
Codify IP knowledge and share it
with all business units.
Focus on strategic value
extraction.
Patent strategically - Identify
and exploit trends in one's own
industry to create new rules of
the game.
Institute a performance
measurement and reporting
system.
Table 3: Value Hierarchy Levels
Source: (Davis & Harrison, 2001)
37
The Value Hierarchy is a tool that "allows companies to understand where they
are in their awareness of IP as a business asset, and to create a way for them to
articulate where they want to be, and then identify the best practices to allow
them to get there." (Davis & Harrison, 2001, p. 11) It's also important to
understand not all companies need to strive to be at level 5, and that many
companies are actually engaging in activities from several different levels. (Davis
& Harrison, p.14)
38
Current Methods Used in Valuation
Let's look at value using the Corporate Value Model in Figure 7. "Corporate
value is derived from four elements: its operations or business units, its financial
structure (assets and liabilities), its management, and its opportunities.
Value of
Corporation
Operating
Businesses
Management
Financial
Structure
Other
Opportunities
R&D
Cash
Other
Figure 7: Corporate Value Model
Source: (Boer, 1999, p. 17)
The independence of a company's operations from its financial structure is now
widely accepted in the science of valuation. The most common valuation
approaches determine the value of the operating businesses based on their
earnings or cash flow, subtract the liabilities, and add back the value of any nonoperating assets" (Boer, 1999, p. 17). These do not account for the future value
a company can receive based on investments made at a particular point in time.
For example, an R&D investment has the potential to create value in the future.
So, how can we measure the value (return) of this type of investment?
39
Return on Investments
Investments are made on the premise the outcome will be of greater value than
the initial amount invested. A common method to value an investment is to
calculate the return on investment (ROI). This calculation can be performed
before, during or after the investment has been made. The base formula is
earnings divided by the investment. If the calculation is attempted before the
outcome of the investment is known, than the earnings become a discounted
cash flow. Net present value and internal rate of return are two of the most
common methods.
Alternatively, other methods exist to forecast the potential monetary returns on
an investment. Two methods in use today are expected commercial value and
options (real options).
Though other methods exist, we provide a short description of NPV (Net Present
Value), IRR (Internal Rate of Return), ECV (Expected Commercial Value) and
Options. Following the description is a comparison among these methods.
Net Present Value
"The net present value (NPV) is defined as the present value (PV) of a project's
future cash flow minus the initial investment (1) in the project" (Gropelli and
Nikbakht, 2000, p. 151).
NPV = PV - I
If the project has a negative NPV, the cost of the project is more than what it will
be worth, so the decision would be not to invest. However, the investment is
recommended for projects with an NPV greater than or in some cases equal to
zero.
40
Internal Rate of Return
"The internal rate of return (IRR) is a measure of the rate of profitability, and the
discount rate that makes the NPV equal to zero" (Gropelli and Nikbakht, 2000, p.
159).
In other words, "it provides a percentage figure that indicates the relative
yield on different uses of capital" (Riggs, 1982, p. 119).
IRR = (FV/PV)l/"
-
1
FV = future value
PV = present value
N = number of investments
One major weakness of these methods is using a current snap shot in time. Both
methods produce a result that is the discount cash flow value of "today", and do
not account for "tomorrow" or anytime out in the future. In reality, the farther out
the more difficult it is to estimate. Another shortcoming is using a constant
discount rate over the project duration, this leads to inaccuracies because in
reality the discount rate fluctuates just as inflation and interest rates do. Finally,
neither of these takes into consideration the technology or market success
factors. Technology success and a certain level of market success are implied to
create the future cash flow earnings.
ECV and Options take into account time and the success factors (technology and
market). These are an improvement over simple NPV and IRR since uncertainty
in both technology and market success can be refined as more information is
attained.
41
Expected Commercial Value
"The ECV method seeks to determine the value or commercial worth of projects
(see Figure 8) and is one of the more well-thought financial models" (Cooper et
al, 1998). "It uses decision-tree analysis, breaking the project into decision
stages - for example, Development and Commercialization". The benefit of
decision-tree analysis is it defines the various possibilities with probabilities of
each occurring. "This method also approximates real options theory, and thus is
appropriate for handling higher risk projects" (Cooper et al, 1998).
Commercial
Success
$ECV
Development
PCs
Technical
Success
Launch
Pts
$C
Yes
No
Yes
Commercial
Failure
Technical
Failure
$ECV = [(NPV * Pcs - C) * Pts - D]
$ECV =
=
$ Pts
$PCs=
=
$D
=
$C
$NPV =
Expected commercial value of the project
Probability of technical success
Probability of commercial success (Given technical success)
System development costs remaining in the project
Commercialization (launch) costs
Net present value of projects future earnings (discounted to today)
Figure 8: Determining the Expected Commercial Value
Source: (Cooper et al, 1998, p. 165)
Unlike NPV, ECV recognizes technology investments are not always one-time
investments, but are traditionally made in increments over time. In addition, it
takes into account technology and market success factors. However, in order to
calculate ECV, the formula requires calculating the expected NPV, and suffers
from the same inherent shortcomings.
42
Cooper et al revealed in their best practices survey, "in spite of their theoretical
rigor, financial models (NPV and ECV) yield the worst portfolios of projects, not
because the models are wrong, but because the input data were so much in
error" (Cooper et al, 2001, p. 5). In essence, the outcome is only as good as the
assumptions.
43
Options / Real Options
One of the most prevalent uses of options is in the stock market. For example,
many employees are given stock options as part of their compensation
packages. Stock options are presented in a document stating the maximum
number of shares that can be purchased, the exercise price and expiration date
of the options. These options are call options and allow the employee to
purchase stock at the price stated in the document within the specified time.
Options are not permanent and need to be exercised before their expiration date
because once they expire they are worthless. The idea behind stock options is
the opportunity for large gains; it allows the employee to decide when in the
future (bounded by the options expiration date) to exercise the options to gain the
most value.
For a call option, the employee wants to exercise the options when
the exercise price is much less than the market share price.
"A real option is the extension of options pricing theory for managing real (nonfinancial) assets." (Amram & Kulatilaka, 1999, p. vii) The real options approach
is not always needed, and when there are no options present, traditional tools
are sufficient. Real options are beneficial when "uncertainty is large enough that
it is sensible to wait for more information; value seems to be captured in
possibilities for future growth options rather than current cash flow; and there will
be project updates and mid-course strategy corrections." (Amram & Kulatilaka,
1999, p.24)
"The following inputs are the only information you need to value a real option:
. The current value of the underlying asset
.
The time to the decision date, which is defined by the features of the
investment
.
The investment cost or exercise price
.
The risk-free rate of interest
.
The volatility of the underlying asset
2 Non-financial is added for clarity
44
.
Cash payouts or non capital returns to holding the underlying asset"
(adapted from Amram and Kulatilaka, 1999, p. 37)
Figure 9, is a representation of the real options process and solutions methods
and option calculators.
laI
Identify and Define Real Options
1*o
Establish the Mathematical
Representation
Choose Solution Method
Dynamic Programming
PDE
J4
.9
co)
4I
Simulations
4'
4,
Choose Option Calculator
* Analytical Solutions
Binomial Model
Monte Carlo Method
(e.g. Black-Scholes)
, Analytical Approximations
. Numerical Solutions
(e.g. Finite Difference
Methods)
Figure 9: Solution Methods and Option Calculators
Source: (Amram and Kulatilaka, 1999, p. 108)
The "real option" approach addresses risk and uncertainty, because levels of
uncertainty are dealt with in relation to time. (Amram & Kulatilaka, 1999, p.14)
Flexibility exists with this approach in that managers can change their investment
decisions when things don't turn out as planned. "Every good manager knows
that many decisions are best taken later rather than sooner, thereby allowing us
to observe how conditions actually evolve before committing ourselves to capital
expenditures" (Verity, 1999, p. 1).
45
Though Merck has been using options thinking since the mid 1990's (Nichols,
1994, p.88-99), the options approach for valuation is not widely used.
Pharmaceutical companies invest heavily in R&D, and "options thinking" is a
good method to apply over the course of this industries commercialization
process. "In the words of the company's CFO Judy Lewent "When you make an
initial investment in a research project, you are paying an entry fee for a
right...To me all kinds of business decisions are options" (Nichols, 1994, p. 8899).
One of the shortcomings of the Real Options approach is the complexity in using
it. "Although the option valuation model vastly increases our ability to value
financial and non-financial assets, it remains a model. Our experience is that
model risk, caused by poor model framework, fails to capture the key drivers of
option value and is the largest potential source of an error in the real options
approach.. .Framing a model requires trade-offs. Novice users of the real options
approach tend to include too many sources of uncertainty in the model
framework, increasing the potential for tracking error." (Amram & Kulatilaka, 1999
pp.60-61)
Summary
Each method discussed above has its benefits and shortcomings. Our major
findings in the analysis of current financial methods are as follows:
.
NPV is more applicable in assessing the expected value of a technology in
its mature stage rather than in its earlier stages.
.
NPV and IRR rely on the prediction of future cash flows. However, no one
can predict the future with a high degree of accuracy. Also, these
methods don't take into account uncertainty and risk. In most instances,
more risky investments equate to higher returns if successful.
.
The ECV method requires calculating NPV, so the same shortcomings
apply. It also relies on predictions of technical and commercial success.
46
.
To be effective, real options must account for all possible outcomes. In
addition, it relies on assumptions. The outcome is only as good as the
assumptions.
Method
NPV
Advantages
* Uses Cash flows instead
of net earnings
" Recognizes time value of
money
" Straightforward
IRR
9 Uses Cash flows instead
of net earnings
" Recognizes time value of
money
" Straightforward
ECV
*
Options
Decision tree analysis
9 Can use for incremental
investments
* Considers technical and
commercial success
factors
* Handles staged
investments
* Not a one time decision
Disadvantages
e Prediction of future cash
flows
* Wrong assumption on
future cash flow can lead
to wrong decision
. Discount rate can
change from year to year
like interest rate
* Doesn't take into account
risk
* No consideration of
staged investments
. Assumes technical and
market success
e Gives unrealistic rates of
return
* Give different rates of
return
* Doesn't take into account
risk
* R&D usually has staged
investments
* Assumes technical and
market success
* Uses NPV so has its
shortcomings
* Assumptions on
technical and commercial
success
e
Complex
* Dependent on correct
model/framework
* Not easy to use
. Assumptions on
technical and commercial
success
Figure 10: Financial methods comparison
"Traditional concepts of return on investment (ROI), such as pay-back period,
discounted cash flow, net present value and internal rate of return, can be
applied with increasing degrees of precision along the new product development
sequence. A rough estimate can be made after comparing the proposed
opportunity with the selection criteria and assigning priority. A better estimate
47
can be made at the conclusion of the quantitative confirmation research, and a
best estimate can be made after the final production model of the product and
marketing mix have been designed." (Bacon and Butler, 1998, p. 127)
Our conclusion is if used in isolation, these methods are inappropriate to value
technology in its earlier stages.
48
Intangibles
Intangible assets have been around for a long time. Even before the accounting
system was implemented, merchants and traders were reliant on their
reputations for the well being of their business. Their reputation influenced their
customers in ways such as attracting or dissuading potential business. It's
reasonable to argue most people would prefer to do business with a fair and
honest merchant rather than one they thought of as dishonest. Though these
merchants may not have associated a monetary value to their reputation, they
knew it added value to their business. The question is, if intangible assets have
been around so long, and we knew they were valuable, why are they so
important now? To answer this, we first need to define in more detail intangible
assets and then examine the emergence of their importance.
What is an Intangible Asset?
Simply stated an intangible asset is a "claim to future benefits that does not have
a physical or financial (a stock or a bond) embodiment." (Lev, p.5) In the
example above, the intangible asset was reputation. Today, we can think of
many companies that have strong reputations and brands, for instance Coca
Cola or Disney. The terms intangibles, intellectual capital and knowledge assets
are often used to refer to intangible assets. Three major linkages of intangibles
exist and are characterized by their relation to the generator of the assets:
discovery (innovation), organizational practices, and human resources.
Product
innovations are an example of intangibles generated from discovery and are
usually produced from a company's R&D organization. Intangibles created by
organizational practices, relate to better, smarter and different ways of doing
business. And those produced from human resources are generally created by
unique personnel policies. (Lev, pp. 6-7)
We define intangible assets as nonphysical sources of value (claims to future
benefits) generated by innovation, unique organizational processes or human
resources, or a combination of these. They often interact with tangible assets to
49
create corporate value and economic growth. (Lev, p7; Sullivan, p.17; Boulton,
p.30)
Importance of Intangible Assets
So, why are they so important now? As quoted by Alan Greenspan, the U.S.
Federal Reserve Chairman, "virtually unimaginable a half-century ago was the
extent to which concepts and ideas would substitute for physical resources and
human brawn in the production of goods and services." (Boulton, 2000, p xv)
Recently in a speech given at the Washington Economic Policy Conference of
the National Association for Business Economics, Washington, D.C. on March
27, 2001, Greenspan stated, "over time, and particularly during the last decade
or two, an ever-increasing share of GDP has reflected the value of ideas more
than material substance or manual labor input". These statements are backed
by the increase of knowledge workers in the workforce. As proof of this, Table 4
shows the increase of knowledge workers in the U.S. workforce over the past
century.
Year
1999
Knowledge Workers
(millions)
7.6
Propo rtion of all
Emplo yment (%)
5.7
1990
5.6
4.7
1980
3.7
3.8
1970
2.6
3.3
1960
1.6
2.3
1950
1.1
1.9
1900
0.2
0.7
Table 4: Knowledge Workers, 1900-1999
Source: (Lev, 2001, p.15)
There are two related economic factors behind this - the first is intense business
competition brought on by globalization and the second is information
technology. "These two fundamental developments have dramatically changed
the structure of corporations and have catapulted intangibles into the role of the
50
major value driver of businesses in developed economies." (Lev, 2001, p.9), see
Figure 11.
Intensified competition,
Induced by globalization, deregulation, technological change
Fundamental corporate change,
Emphasis on innovation, non-vertical organization, intensive use of information technology
Innovation - related
intangibles
Human Resource
intangibles
Organizational
intangibles
Figure 11: Relationship of Intangibles
Adapted from Source: (Lev, 2001), Intangibles: Management, Measurement and Reporting
51
Types of Intangibles
A number of intangibles have been identified as interacting with one another to
create the intellectual capital of a firm. The identification of these capitals has
come about by the models developed around intellectual capital. There are two
primary areas of focus, "one is to help understand and discuss how an
organization might develop intellectual capital; and the other is to understand
intellectual capital so value may be extracted and used by the organization."
(Stewart, 1998, p.76-77) Teece has also identified value can be captured from
knowledge and competence. (Teece, 1998)
In valuing R&D investments, our emphasis is in the area of value extraction. The
main drivers in extracting value are the three 'capitals' intellectual, human and
structural capitals.
Intellectual Capital
Intellectual capital is essentially the knowledge of the company, both tacit and
codified, and "is the sum of everything everybody in a company knows that gives
it a competitive edge", (Sullivan, 2000; Stewart, 1999). The knowledge of a
company is equated to 'capital' because it "brings to the foreground the
brainpower assets of the organization, recognizing them as having a degree of
importance comparable to the traditional land, labor, and tangible assets."
(Sullivan, 2000, p.4)
Codified knowledge is knowledge that has been captured in some form of
communication medium, i.e., electronic, documentation, etc. Tacit knowledge
resides with an individual and is often a skill, ability or classified as 'know-how'.
(Sullivan, 2000) The difference between tacit and codified knowledge is best
defined and depicted in Table 5, below.
52
Industrial Knowledge
Tacit
Definition
Knowledge which is difficult to
articulate and may be embedded in
Codified
Knowledge which is written down in some
medium
ways of doing things
Ownership
Examples
Ownership resides with the holder of
the know-how; difficult to copy and/to
Technology easier to protect using the
mechanism of the law; yet also easier to
transfer
transfer
Blueprints
Experience
Computer Programs
Formulae
Documents
Lore
Group Skills
Table 5: Types of Knowledge
Source: (Sullivan, 2000, p.228)
Included in intellectual capital, are intellectual property and intellectual assets as
illustrated in Figure 12. Intellectual assets are the human knowledge that is
captured in some form of media, and thus owned by the company. Intellectual
property are those intellectual assets that are legally protected. These are the
sources of innovation the firm can commercialize to realize profits. The main
difference between an intellectual property and an intellectual asset is formal
legal protection. Intellectual property takes the form of patents, copyrights, trade
secrets, and trademarks. (Sullivan, 2000, p.231)
Intellectual Capital
Figure 12: Intellectual Capital of the Firm
Source: (Sullivan, 2000, p.229)
53
Human Capital
Human Capital is really the source of all knowledge in the company. It is not
owned by the company, but on loan to the company from the people who
possess it. (Mayo, 2001, p.31) Contained in it are the individual and collective
capabilities, commitment, personal knowledge and experience, including tacit
knowledge, of all persons related to the company whose job is directly related to
delivering service or value to the customer, these include employees,
contractors, suppliers, etc. "But it is more than individuals alone: It includes the
way in which they work together, and the relationships they have both inside and
outside the organization" (Mayo, 2001). Human capital is a resource to the
company because it can generate value for the company, yet the company could
not deliver this value without the employees themselves. (Sullivan, 2000, p.229230) From a value extraction perspective, it is important to understand the
difference between human capital and intellectual assets. The company owns its
intellectual assets, but does not own the human capital it employs. So it is
imperative the company transforms knowledge from its human capital to
intellectual assets so it can assert ownership of it. (Sullivan, 2000, p.229)
Figure 13 shows the relationship between human capital and intellectual assets.
Human Capital
Intellectual Assets
Knowledge
Commercializable
Intellectual Assets
&
_ _ _ _ _ _ _ -_ _ _
Know-How
Supporting
Intellectual Assets
- Administration
- Infrastructure
Figure 13: Human Capital and Intellectual Assets
Source: (Sullivan, 2000, p.158)
54
Structural Capital
Structural Capital is the mechanism to support the intellectual capital. It remains
in place when the human capital goes home and encompasses direct and nondirect support, as well as physical and non-physical assets. Examples of direct
support include physical elements like desks, computers, and telephones, and
non-physical items such as information systems, software and work processes.
Indirect support includes physical elements such as lights, electricity, and water,
and non-physical items such as strategic plans, cost structures and payroll
systems. Overall "the structure capital provides the environment that encourages
the human capital to create and leverage its knowledge." (Sullivan, 2000, p.232)
Value Extraction
There are three types of management practices that view intellectual capital as a
form of value extraction. They are IAM, (Intellectual Assets Management), IPM
(Intellectual Property Management) and ICM (Intellectual Capital Management).
Table 6 provides a detail description of each.
Management Type
IAM (Intellectual Asset
Management)
IPM (Intellectual Property
Management)
ICM (Intellectual Capital
Management)
Characteristics
Involved with all activities, decision and work processes, IT
infrastructure (i.e., databases) used for commercializing and
obtaining additional value from the firm's intellectual assets and
innovations.
Involved in the same activities as IAM, but concentrates on value
from commercializing individual patented technologies or
innovations. This is a narrower focus than IAM.
Uses the intellectual capital of the company as the foundation to
define its vision; achieves benefits by aligning intellectual capital
resources with the vision and strategy; advertises externally on the
firm's strategic uses of intellectual capital and the how these uses
affect the firm's long-term ability to create value for shareholders.
Table 6: Management for Value Extraction
Source: (Sullivan, 1998, pp. 12-13)
There is an important relationship between the nature of the company's business
and its need to use one or more of the three management systems. (Sullivan,
1998, p.11) Figure 14 summarizes the findings of this relationship and provides
examples.
55
Service
Companies
Product
Companies
Process
Emphasis
Product
Emphasis
Continuous
Service Provided
Discrete Services
Provided
Exam ples
Refinery Company
Oil & Gas Pipeline
Automobile Companies
Computer Companies
Electric & Gas Utilities
Telephone Companies
Banks
Insurance Companies
Law Firms
Consulting Firms
Intellectual
Property
Large Amount
Large Amount
Small Amount
very Small Amount
Human Capital
ICM
Focus
Management
Systems
Needed
Small Amount of
Technical, Large Amount
of Managerial
Administrative
&
Intellectual
Assets
Small Amount of
Large Amount
Large Amount
Technical, Administrative, Technical, Administrative, Technical, Large Amount
of Managerial &
Managerial
Managerial
Administrative
Yes
Yes
Yes
Yes
Tactical & Strategic
Tactical & Strategic
Strategic
Strategic
IPM, IAM, ICM
IPM, lAM, ICM
1CM
1CM
Figure 14:1CM Preferences by Company Type
Source: (Sullivan, 1998, p.12)
Sources of value extraction include those intellectual assets that can be sold or
used to generate money or wealth in the marketplace. Figure 15 depicts an
example of how value is extracted. The activities involved in extracting the value
concentrate in key areas like managing the innovation process, the generation
and maintenance of the intellectual assets of the firm, competitive assessments,
enforcing the legal rights of the intellectual property and converting the value into
profits. (Sullivan, 2000, p.184)
Conversion
Mechanism
Sources of Value
* Innovations
* Complementary
Business Assets,
e.g.:
o
o
o
o
Purchasing
Manufacturing
Distribution
Sales
.
.
.
*
*
*
*
Sale
Out-license
Joint Venture
Strategic Alliance
Integrate with
Current Business
Create New
Business
Donate
Figure 15: Sources of Valuation and Conversion Mechanisms
Source: (Sullivan, 2000, p.234)
56
In order to extract value from intellectual assets, the activities of the company
need to align to the strategic direction of the company. Alignment of the
technology to the company's strategies (both business and technology) and its
values needs to occur. If the technology does not align, it should be abandoned
because development will not help the company achieve its vision.
The current intellectual capital (including both assets and properties), the core
competencies and capabilities, and the human capital should be taken into
consideration when valuing technology. Technology should be viewed in
relation to the intellectual and human capital and needs to complement or
improve upon them. The core competencies and capabilities of the company are
major components of intellectual capital. A core competence is a critical
skill/expertise in a particular area. A firm's strengths and weaknesses help to
identify capabilities. Assessing human capital allows the firm to strengthen weak
areas, and capitalize on its competencies. A companies capabilities and
competencies come from its employees (people).
The Intellectual Capital Management (ICM) model uses management of
intellectual, human and structural capital combined with physical assets to create
value for the company. (Sullivan, 1998, pp. 69-70) Figure 16 illustrates how the
intangible and physical assets can be used to create value.
57
Intellectual Capital
(Unique Assets)
Human
Capital
Value Extraction
Intellectual
Assets
(n
A0
Cz
Intellectual
Property
C
0
0
Structural Capital
(Generic Assets)
Figure 16: A Model of an IC Company
Source: (Sullivan, 2000, p.30)
58
U-
$
Value Creation
Complementary Business Assets
(Differentiable Assets)
U,
Ways of Valuing Technology
We highlight two approaches used to aid in the valuation of early technologies.
The first way demonstrates this by utilizing IPM and the second is based on
radical innovation.
Maximizing Value from Patent Portfolio
When the strategy for using the patent portfolio is to maximize value extraction,
the amount of value an early stage technology has is primarily determined by its
potential as a patent. The importance of aligning the company's strategies is
demonstrated in the assessments used to value early stage technology. The
technology strategy of the company dictates the intellectual property
management strategy, which details how the intellectual property portfolio will be
used to generate value for the company. The guidelines used for managing the
IP portfolio help to establish the criteria for assessing early technology. So in
order to maximize the value, "The focus is on maintaining a strong link between
patenting activities and the company's business strategies." (Sullivan, 1998,
p.149)
As an example of how IPM is used we examine Avery-Dennison. It has an
aggressive value extraction strategy; they want to maximize the return on their
intellectual property. In order to accomplish this, they use the following tools to
help them in valuing the discovery of new technologies, including those that are
not incremental in nature. They use the Corporate Decision Model, the Patent
Map, the Patent Funnel Map and the Patent Value Map. (Avery-Dennison
information source, Sullivan, pp. 230-235)
The Corporate Decision Model ranks the potential opportunities for each
intellectual asset as it compares to the competitions. This helps them identify if
and where they will have exclusivity with the introduction of the new technology.
59
a
0
Trade Secrets
Trade secrets: very
Limited employee
exoosure
Journal Article
(Publication) or
German Utility
Trade Secrets:
Seek licens or
Stoo
US or
Foreign Specific
Seek license or
Stop
NJ
as
y-
C- 0
C
E
S
US + Specific
US +
Big 2-3 Model
Foreign Patents
Figure 17: Corporate Decision Model for Investing in Intellectual Property
Source: (Sullivan, 1999, p.232)
The Patent Map is a 2x2 map, where the technology is mapped against time.
Each quadrant is a categorization for the technology and provides direction on
what form the intellectual property should take. The mapping occurs by
answering two questions, 1) What is the timing? and 2) What is the technology
value?
Soon
1-3m
PROVISIO NAL
REGULAR PATENT
Used if claims match product or to
establish market or techncology
leadership position throug h patenting
File CIP as needed to capture new
technology developments
Used if produc-t still being developed
Abandon prov isional if market doesn't
accept produc
E
Technology value
Low or TBD
o
--
High or
Unknown
4-6 m nths
Make business decisior n based on
bIity to cam
ble product if
can claim,
makta
file patent
f n't claim, and can maintain
secrecy, keep as trade secret
Value to Corporate High
Unsure if a claim will cover product
Value to Corporate low at this time
Develop technology
Keep confidential
No patent filing
DEVELOP TECHNOLOGY
or PUBLISH
7-12 months
Figure 18: 2x2 Patent Map
Source: (Sullivan, 1999, p.233)
60
TRADE SECRET
The Patent Funnel Map tracks the development of the firm's intellectual property.
It tracks an idea from inception to its outcome and helps to facilitate where in the
patent process the idea resides.
STAGE 1
Documentation
Brainstorm Concept
Patent Map
STAGE 2
Invention
Disclosure
STAGE 3
Internal
Technical/Business
Review
STAGE 4
Draft
Preparation
STAGE 5
Draft Review
FILED
EA #2
EA#
OrhnTest:
Trade Secret
__EA#
Gatea
1:tthere Gate : 2
Is
Gat:
an invention?
TetIRWien
Gae 3:
GaWite
ete 3:roe
es:Apod
Gate 4:
Draft
Gate 5:
Final draft approval
Figure 19: Patent Funnel Map
Source: (Sullivan, 1998, p.234)
The last model is the Patent Value Model, and this is used to assess the value
and control of the firm's patents and other intellectual assets. This model was
originally developed for the Neste Corporation, and has been customized to
maximize the benefits for the firm in categorizing its patent portfolio. It is used to
classify each of the firm's patents by one of five technology values:
* Key - grow the company
*
Base - protect core competencies
* Spare - not currently using
.
Pacing - those needed to merely keep up with competition
*
Emerging - will move the company ahead of competition
-
The control of the asset is defined by its sponsorship
*
Prohibited - not fully owned by the firm
61
.
Strategic - is controlled by internal strategic business unit and is currently
not commercialized
.
Commercial - asset is fully owned by the firm and is on sale in at least
one market
.
Potentially strategic - asset is currently supported by corporate R&D
.
Excess - asset can be licensed, sold or abandoned
.
Not possible - further development work or competitive analysis must be
done to determine if the asset will be of value to the firm.
VALUE:
How used?
SPONSORSHIP
Internal/External Control
Figure 20: Patent Value Model
Source: (Sullivan, 1999, p.235)
Recognizing a Radical Innovation
The Rensselaer Radical Innovation Research Project defines a radical innovation
as one that has "either unprecedented performance features or familiar features
that offer potential for significant improvements in performance or cost. In our
view, radical innovations create such a dramatic change in products, processes,
62
or services that they transform existing markets or industries, or create new
ones." (Leifer et al, 2000, p.5)
Recognizing and valuing a non-incremental technology is part of what they call
the "fuzzy front end". The reason for this fuzziness is all the uncertainty
surrounding it. There is a high degree of technical and market uncertainty. This
is further aggravated by trajectory, idea opportunity and recognition, process, and
business case, among other things. (Leifer et al, 2000, pp.19-20) To aid in
identifying and valuing a radical innovation, they introduce the concept of a
"radical innovation hub", pictured in Figure 21 below.
Initiate
a
spin-out.
Form a project
team to launch an
internal venture.
Return ideas that aren't
"ripe" to the hub, which
can serve as a repository.
Recommend
licensing the
technology.
Initial Evaluation
.
.
--
Radical Innovation Hub
Consults with senior management about using
articulation of strategic intent to modulate the level of
radical innovative activity.
Implements techniques for stimulating idea generation.
.Acts as home base for hunters and gathers and as
"receiver" for radical innovations.
.Helps the champion articulate the opportunity.
.Convenes the evaluation panel.
Gatherer
Hunter
Business lUnit A
Corporate R&D
Business Unit B
Figure 21: A Radical Innovation Hub
Source: (Leifer et al, 2000, p.51)
63
Once ideas are generated they need to be "delivered" to the proper place for
assessment. There are two ways in which these ideas are delivered, first
through "hunters", these are people who are actively seeking out ideas with
business potential and second via "gatherers", these are people who are alert to
and react to promising ideas. (Leifer et al, 2000, p.37) The initial evaluation and
assessment cannot be left to gut instincts, but must be based on a system with
metrics. They outline "the crucial steps for an initial evaluation of a radical idea:
.
Build an evaluation team that includes senior business and corporate
managers, business development managers, veterans of radical
innovation projects, and when appropriate, outside experts.
.
Focus on the commitment of human and financial resources to take the
next step, assuming that evaluators like what they see. In most cases, the
next step is to attack the most critical uncertainties, questions, and
assumptions uncovered during the initial evaluation.
.
Develop an evaluation protocol with criteria appropriate for assessing
radical innovations. Initial decisions about a growth opportunity should not
be based on projections of financial cash flows, market share gains, or the
measures typically applied to incremental innovation projects. Rather, the
focus should be on the deliverable benefits of the technology - how rich
and robust they might be - and on whether the market will be 'big enough'
if the benefits envisioned for the new technology are delivered. The initial
evaluation process is unlikely to answer any of these questions and will
probably generate more questions than it answers. Management will be
justifiably uncomfortable, but the process should uncover what is known
and some of what is unknown about the radical innovation and the
perceived business opportunity." (Leifer et al, 2000, pp.49-50)
Summary
IPM and radical innovation both establish criteria for valuing early stage
technology. Though other methods exist, these demonstrate how specific the
criterion needs to be for any particular company. Both methods stress the
64
importance of strategic alignment, and value the technology based on the
perceived potential it possesses. The main disadvantage of IPM is that it aids in
valuing the technology mainly from a patent potential. While the main
disadvantage of the radical innovation, is it concentrates on non-incremental
innovations. It is clear the method selected must be able to balance the
strategies of the company.
65
Conclusion
Companies are continually looking for better ways to manage their R&D
investments during the innovation process. It is important for companies to be
able to identify those technologies, both incremental and non-incremental that
hold potential value as early as possible. Though incremental technologies help
to provide value for the company today, it is critical the company be able to
identify those new technologies that will help them to either create or to sustain
leadership in their industry in the future. In addition to identifying the valuable
technologies, companies must effectively manage their limited resources. Some
examples of these constraints are, the number of ongoing projects at a given
time, and the allocation of resources (people and equipment) and funds. R&D
establishes the guidelines for managing the project and patent portfolios to
ensure a proper balance exists between technology risk and market success.
"Corporations define value according to the standards put in place by the
accounting profession. In accounting, value is not "accounted for" until it is
realized or a transaction has occurred. Yet we all know that in-process R&D
(technology maturity cycle)3 - as well as the entire patent portfolio - has
immense value to the firm, even though it does not show up on balance sheets.
Our view of the world has been shaped by double entry accounting, which was
first created in 1494 by Luca Pacioli, an Italian monk. This is fundamentally the
same accounting system that is used by global corporations around the world
today to calculate and report revenues, profits, and expenses, and make
decisions about resource allocations, risk management, and investment returns.
While accounting is very good at recording transactions that have occurred in the
past, it is not good at predicting future revenue streams. In addition, accounting
only records events and transactions, so financial statements routinely exclude
ideas that have not yet manifested themselves in a transaction" (Davis and
Harrison, 2001).
3 Words in italics added for clarity (in-process R&D equates to technology maturity cycle)
66
With the emerging importance of intangible assets, it stands to reason financial
methods we used in the past should change or new ones be created.
As noted
earlier, the deficiencies of these financial methods include not reporting the value
created by intangibles or their usefulness in helping businesses make the critical
decisions needed in this complex business environment (Lev, 2000). Companies
today are creating value in new ways with physical and intangible assets that
traditional accounting systems cannot measure. (Boulton, 2000, p xvi) It is clear
a new framework for valuing R&D investments in the early stages is required, so
companies can create the maximum value from its investments.
67
----Intentionally Left Blank----
68
Section 3: The Xerox R&T Valuation Process
Organizational Structure
Xerox Corporation consists of five main areas, the corporate office, business
operations (BUs), customer operations, operations support and the innovation
group. Figure 22 is a top-level organizational view of Xerox Corporation; note the
Xerox Research and Technology group (R&T) is part of the Xerox Innovation
Group.
.a......
* rhnWlogyERatpsib
mghesa Bv
Maa.n.s
e ra*
Offio ProductfSolutions
*ALM
aTix
'WomrhMoi
*LAWt
*,b1. IAffai
*XKuv
* muskuiqrgcsunauIcamu
EFhibssfumqi
- FX RehU
Figure 22: Xerox Corporation - Organizational Structure
Source: (http://www.xerox.com)
69
Process Context
The corporate office sets the direction and defines the overall strategy for the
firm. The business operations, customer operations, operations support groups
(i.e., marketing, finance, etc.), and R&T establish their strategies in alignment
with the corporate strategy. This ensures supporting strategies put in place align
to the overall business strategy and enable the company to meet its objectives.
The R&T organization is responsible for the technology strategy of the
corporation. One of its primary functions is to discover, grow and mature
technologies. The development (commercialization activities) is the primary
output of the various business operations groups. A major component in the
technology strategy is the technology valuation process, which is critical in
identifying the new technologies needed to achieve the company's growth and is
used in the yearly planning process.
The business operations are the revenue generators of the company and plan
their expenses in order to support revenue generation and potential opportunities
for future revenue. The R&T budget impacts several areas, the research
organization, the business operations, supplies and manufacturing organizations.
Though R&T is considered centralized, the supplies and manufacturing
organizations conduct limited research internally. The business operations
groups are focused on product development and have agreements with
centralized R&T for specific research in their market segment to aid in
commercialization as well as developing new technologies for future products.
As a result, it is essential that coordination between these groups and the
research organization exist eliminating duplication of effort. Some of the monies
received into R&T are designated to support technology in the near term (current
business needs) of the business operations groups, while the balance is used to
develop new technologies to expand current business applications or leverage
competencies to create new opportunity technologies within the company.
70
This division of resources and organization charters aligns with technology
maturity. Early stage technology is analogous to R&T, and mature stage
technology is developed into products in the business operations groups.
Corporate
Funding
BU1
BU2
..-
BUn
R&T
Figure 23: R&T spending distribution
Figure 23 depicts how the money is distributed to support the research activities
of the firm. The company has standing committees to review strategy as it
relates to strategic areas of the business. The members are from various parts of
the company, for example research, the business units and corporate strategy.
These committees meet as needed and it is their responsibility to approve
technology that should be used in these areas.
Valuation Process
When a technology is in the embryonic stage, in many cases little information is
known about its potential uses. However, as the technology matures, information
accumulates and potential uses are identified. Therefore, Xerox's valuation
process must take into consideration these different stages of technology
maturity when valuing investments. Xerox does not manage projects on a
project-by-project basis, but manages projects within an R&T portfolio. Xerox
has tried different methods in the past to assess R&T investments in their
attempt to ensure proper selection of projects enabling the company to meet its
business objectives.
71
Traditional methods such as net present value and expected commercial value
have been applied to mature projects within the portfolio. The calculation for
these methods is not too difficult and is well understood. The decision to
proceed with developing a product uses an NPV sensitivity analysis to capture
many scenarios as part of the projects preliminary business case. So,
organizations are quite familiar with this method of valuation. However, the
information required for these methods put any investment in early stage
technology at a severe disadvantage. This is mostly due to the uncertainty of
technical and market success, and the assumptions around deriving these
"success" probabilities. In addition, there is uncertainty related to where and how
the technology can be applied. The numerical outcome is typically less desirable
(NPV and ECV close to zero or negative in many cases) or if it is a decent value,
is not taken as highly credible, due to the assumptions made to attain the value.
So the decision at that moment in time, known as a go/no-go decision, may be
not to invest, but the question remains "How sound is that decision based on the
predictions made?" Therefore, two shortcomings exist: 1) the information used to
make these decisions is not well known in the early stages, and 2) these
methods provide a one-time decision.
A couple of methods have been used for valuing early stage technology. The
first two methods are the predominant methods that are used to value early stage
technology. Though technical committees consisting of subject matter experts
perform the valuation there is an amount of intuitiveness relied upon, rather than
precise measurement.
The first method uses a couple of indicators to assess the technology. Market
attractiveness is the first of these indicators. No precise measurements are
taken to determine this; instead the technology is viewed against how well it
aligns with the market opportunity. In more specific terms the technology is
categorized into a specific market segment, and the particular market segment is
examined to determine the size of the market and the outlook of its growth rate.
These are used to determine how attractive the market space is for the
72
technology. The second indicator is how well this technology fits into the current
R&T project portfolio. The aim of the portfolio is to balance the investments
against the opportunities. The market segment that a particular project is
targeting usually defines the opportunities that it should capture. The desire is to
maintain a proper balance to achieve the desired vision of the company. This
means that larger investments are occurring in areas where the opportunities are
growing rather than shrinking. Figure 24 shows the types of projects that are
contained in the portfolio, and the mix of these projects determines how the
balance is maintained.
L
Defend current
market share in a
high growth area
Seek opportunity
to increase market
share in a high
growth area
Defend current
market share in a
low growth area
Seek opportunity
to increase market
share in a low
growth area
Defensive
Opportunity
Figure 24: Portfolio Balance
To pictorially show the potential opportunities for the technology, a bubble chart
is created. An estimate of the potential market size is plotted against the market
growth rate. The size of the bubble indicates the relative size of the investment.
This process shows how the project aligns with market opportunities and ensures
alignment with the overall strategy.
73
10-
-C
0
CD
CO
0
2
4
6
8
10
Market Size
Figure 25: Example of a bubble chart
Adapted from Source: (http://chartworks.com)
The second method used is the risk/reward method. This process weighs the
technical value against the risk. The outcome is a bubble chart plotting market
uncertainty against the technology uncertainty, and an overall probability of
success (the size of the bubble is the "hoped for monetary return"). This requires
knowledge of the both technology and market success, which again is difficult to
ascertain for technology in the early stages.
The third method that has been tried is the options approach using the binomial
model. Its major shortcoming is the need to develop the entire decision tree in
order to make a decision, and the detail needed to assign probabilities for
technical and market success. Also, it is not as familiar as traditional methods,
which makes it more difficult to use.
The valuation team has not been satisfied with any one method and desires a
consistent method of valuation for R&T investments. A process, which nurtures
competencies that can deliver value, is credible, efficient, and easy to understand
and use is needed to achieve this goal.
A method that has been used in assessing Xerox's resources to understand
where they are today and where they need to be in the future is the Resource-
74
Based View (RBV). Realizing the importance of intangible assets, such as
intellectual capacity, especially human capital, requires the use of a method that
accounts for them, and assesses them in relation to the value of the technology.
The RBV perspective can be adapted to allow for consistent measurements to be
made and allows nurturing and growth of critical competencies needed to bring
that technology to market.
Resource-Based View
In the RBV perspective resources of the firm are viewed as they relate to
competitive advantage. (Fahy et al, p.126; Peteraf, 1993; Wernerfelt, 1995) The
view starts with an assumption that the firm desires sustainable competitive
advantage (SCA) and that by achieving this, allows it to earn above-average
returns measured in conventional terms such as market share and profitability.
(Fahy et al, p.126) "Successful firms possess heterogeneous collections of
resources, that these varied collections of resources allow firms to implement
different strategies, that different strategies yield different returns, and that
successful strategies and their associated return streams are sustainable to the
extent that they are prohibitively costly to imitate." (Foss and Robertson 1) The
main idea behind the strategies used in the definition of RBV, is they are not only
inward looking, but also outward looking taking into account industry analysis and
the competitive environment. The strength behind it is resources can be either
physical or intangible. This approach has its foundations in economics and
explains how the resources of a company drive its performance in a competitive
business environment. (Collis and Montgomery, 1995, p.119)
-
There are five tests in RBV
1. Test of inimitability: Can the resource be copied easily?
2. Test of durability: How long will the resource last?
3. Test of appropriability: Who captures the value created by the value?
4. Test of substitutability: Can a different resource replace it?
5. Test of competitive superiority: Whose resource is really better?
(Collis and Montgomery, 1995, pp.120-123)
75
The RBV takes into account both tangible and intangible assets, and these are
both needed in establishing criteria to value early stage technologies.
It is
grounded in economics, which provides rigor to the assessment criteria and at
the same time is not dependent on financial methods for valuation. Most
importantly, it takes into account the strategies of the company. The RBV
provides a foundation on which to establish criteria for valuing early stage
technologies.
Foundation of the VERDI Framework
The foundation for this new framework is rooted in RBV. The methods that were
introduced in Section two and that are being used today at Xerox have not taken
into account the entire value stream.
The RBV method takes into account both
tangible and intangible assets; it provides rigor to the assessment criteria and at
the same time is not dependent on financial methods for valuation. Most
importantly, it takes into account the strategies of the company allowing for
alignment and entire value stream. Thus, the RBV method provides a foundation
to establish criteria for valuing early stage technologies.
76
Section 4: VERDI Framework
The foundation of the VERDI (Valuing Early-stage R&D Investments) framework
is based on a resource-based view perspective published by Collis and
Montgomery (1995). The framework is applicable for early-stage technology,
specifically for technologies just entering or in the growth stage. Both the
embryonic and growth stages are considered early-stages, but since there is so
little known information about a technology in the embryonic stage, creating
standard assessment criteria is very challenging.
This paper is not meant to cover the full spectrum of R&D activities, but an
example here may clearly illustrate why the VERDI framework is appropriate for
early-stage technologies beyond the embryonic stage. Often times in companies
that engage heavily in R&D activities, the very first stage of technology maturity,
the embryonic stage occurs in the laboratory. Usually a discovery is made or an
invention is proposed, and the goal of early stage R&D is to stabilize and ensure
the discovery is real or that the invention has the potential to work. The
technology is developed to a point to prove stability and repeatability, as well as
investigate possible uses. By the time greater investments need to occur, the
technology is usually on the cusp of entering, or has just entered the growth
stage. Figure 26 illustrates this process schematically.
Technology evolves
idea
IE
Embryonic
Growth
Inside the R&D Laboratory
Figure 26: Embryonic to Growth inside R&D Lab
It is during the growth stage that the VERDI framework can help to assess the
value of the technology. As stated earlier, it is usually premature to use
77
traditional financial methods in the early-stages of technology. However, enough
information is available at the growth stage to apply a non-financial assessment
to obtain some measure of value. As the technology matures and more
information is available on its potential uses and applications, the organization
can use VERDI to determine its value in non-financial terms and begin to use
some of the traditional financial methods for determining its value in financial
terms.
78
The Filtering Process
VERDI starts with the established vision, mission and strategies of the firm.
These are essential pieces in laying the groundwork for the assessment criteria.
Each of these can be thought of as a filter, which will either trap the technology or
allow it to pass through to the next criteria level. If a technology successfully
makes it through all filters, it becomes a serious candidate for investment. Figure
27 shows a pictorial representation of this filtering.
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Figure 27: Filtering of an Idea
As with any filtering process, each filter has a specific level of purification. In
Figure 27 above, the filters start at a coarse level and progress to a higher
degree of refinement. As the idea progresses into the Technology Strategy filter,
it is faced with the two finest levels of filtration, the Intellectual Property (IP)
strategy and the R&D project portfolio strategy.
The actual level of refinement in these two filters is dependent on the particular
firm in which VERDI is being implemented. For some companies, the IP strategy
filter may be just as stringent in its filtering properties as the R&D project portfolio
79
strategy. In other firms, the IP strategy may be quite coarse or even non-existent
in terms of what it will filter out and allow to pass-through. Recall in Section 2,
figure 6, the Value Hierarchy, a pyramid containing five levels of IP values. A
company in the first level with a defensive strategy will not have a fine level of
filtration; their goal is to build up their patent portfolio as quickly as possible. In
this situation for the most part, any idea worth patenting is invested in and added
to the portfolio. Conversely, a company in the second level of the pyramid, the
Cost Center, will have a finer filtering process. The goal at this level is to patent
wisely to save money in terms of maintenance costs in managing the IP portfolio.
This means only those technologies that have been assessed and are worth
paying the patent filing and maintenance fees are considered. All other ideas
that do not at least meet the minimum criteria are discarded.
80
VERDI Methodology
idea
Technology evolves
-
IDEA
R&D Laboratory
Technology
Assessment
V
E
R
D
,,Interim
Opportunity
E
Decision
Information
Available
N
Final
Decision
Figure 28: VERDI Methodology
The process starts with a technology concept (as depicted above, this usually
occurs in the R&D laboratory) and ends with a decision. As visually illustrated,
the technology evolves from the embryonic to the growth stage before entering
into the VERDI process. After the technology has incubated and reached the
growth stage, the technology assessment can be performed. Based on the
outcome of the assessment, potential technology opportunities are brought forth
and as additional information is available, re-assessment should occur. Finally, a
decision on which opportunities to invest in is made by the appropriate
governance body. We recommend a panel consisting of knowledgeable
business and technology managers.
81
Governance
Central to the creation and implementation of the process are people with the
right kinds of skills and knowledge. As stated earlier in the paper, it is necessary
that decisions represent the interests of all stakeholders. Though at some level
each employee and stockholder has a vested interest, it is impossible to have
everyone participate in the process. The participants in this decision process
should represent the various stakeholders and their interests and should include
subject matter experts (SMEs) in specific areas and/or competencies of the firm.
For the best possible outcome and subsequent actions, the members selected to
participate must be senior decision makers that have the authority and resources
to act on the decisions that come out of VERDI.
In terms of size, the exact number of people selected and the specific areas they
represent will vary from one company to the next. A general rule of thumb is that
too large a body can be ineffective if fast decisions and continuity of participation
is important.
An additional requirement for the committee is to have a small number of
members who participate in every meeting. This core set of individuals (the
nucleus of the committee) will ensure stability and help to maintain consistency in
the valuation process.
The chair of the committee needs to have a vested interest in the outcome of the
VERDI decision-making process that is, to look for and develop the best
technology opportunities to secure the future of the firm. In terms of a generic
company organization structure the position that best personifies these
characteristics is the Chief Technology Officer (CTO). In most instances this
individual has the charter to develop and/or pursue those technology
opportunities that have the greatest benefit to the company, both in the present
and the future. This requires opportunities be examined inside and outside the
firm. The committee members should be senior decision makers who have the
82
authority to make the decisions and the power to act on them by using their
resources to carry them out. The following figure is an example of the potential
make-up of the committee.
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FinanceBusiness
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of the committee. Each member may have an allegiance to their home
organization, but they have the responsibility and the incentive to act in the best
interest of the firm. The VERDI committee is a governing body who is
responsible for making the best decisions for the company's future technology
investments. This will help to cut down or prevent altogether the traditional
politics, gaming and personal agendas that can occur.
An advocate or sponsor for each technology in the process is desirable. We
propose that the technologies under discussion be divided equally (or possibly
even randomly) between the members of the assessment committee; this implies
83
that the advocate for a particular technology may not be responsible for a
technology that directly impacts her organization. The purpose of the division of
responsibility is to foster extended learning and to decrease the likelihood of
personal agendas. As stated earlier, each member has taken the responsibility
to act in the best interest of the firm, and not just in the best interest for herself or
her organization. This means that even if the assigned advocate is not wholly
behind a technology he/she is still responsible for taking the appropriate actions
based on the consensus of the committee. It is the responsibility of the advocate
to track the technology as it moves through its maturity cycle. Again we point
out, information surrounding the technology changes throughout this cycle so,
the advocate must be in charge of gaining access to and providing the most
accurate information to the committee during the technology assessment. The
advocacy policy fosters a well-rounded and balanced assessment committee.
The committee should meet regularly to provide the assessment of each
technology. Meeting frequency should be determined based upon availability of
new information on the technology, market and trend data.
84
Required Information
Not only are people needed to carry out the process, but also information is
necessary for the committee to make the assessments required. The level of
information and availability will vary from one technology to the next, but at a
minimum the following information is needed:
1. Detailed information on the technology should be made available. It is
important to formalize what is known about the technology as soon as
possible. An idea becomes an intellectual asset once the information has
been codified, until then, the idea does not have a fair chance at
assessment. It needs to be in a format that can be shared with others to
allow them to appraise its potential value. The most common method to
codify information is in a document, either hard copy or electronic format.
Given the availability of digital recording, the information could be
recorded, as voice, or image and voice as appropriate. No matter what
media is selected, the committee needs to have access to the technology
in its codified form in order to assess it.
2. Market intelligence needs to be accessible, and will provide information on
the firm's competitors, who they are and detailed information on their
current and future products as well as provide an understanding of the
current and future market place trends. Understanding the firm's core
competencies, skills and overall capability is essential in determining how
far a technology can be developed internally. Access to the database(s)
that contains the intellectual assets including intellectual property, pending
patents, and trade secrets is needed. Information pertaining to
partnerships, cross licensing and joint ventures may also be required for
the assessment.
Additional information can also be made available to the committee, but those
listed above are the minimum set of data needed to perform the assessment. To
85
help facilitate the assessment, it would be best if a common interface and
mechanism to access the data were developed. The most common problem
faced by many firms is too much data, with poor or inadequate means of
accessing it.
86
Adaptation of the RBV Method for Technology Assessment
The original five tests in RBV were (1) Inimitability, (2) Durability, (3)
Appropriability, (4) Substitutability, and (5) Competitive Superiority (Collis and
Montgomery, 1995). In order to value technology as opposed to resources or
competencies, these tests need to be adapted. In examining technology, we
found it convenient to combine some of the criteria. For instance, inimitability
and substitutability can be examined and determined at the same time. In the
exploitation of technology it is important to consider what applications might be
pursued, what value chains might be used, what business models may be
practiced, and how might the world of competitors respond. Thus, we propose a
set of valuation criteria as follows: (1) Inimitability, (2) Extensibility, (3) Durability,
(4) Appropriability, (5) Competitiveness, and (6) Market Attractiveness.
Definitions
We strictly define the following terms to prevent any misinterpretation of their
intended meanings.
"The application of scientific and engineering
knowledge to achieve a practical result"
(Roussel, et al, 1991, p. 13).
Embryonic stage
The attributes of the idea/technology are
documented and studied to determine its
viability before further development can occur.
Growth stage
The technology is reliably repeatable and all its
characteristics fully studied and understood.
Mature stage
The technology is tested to determine where it
will be most useful.
Path dependency
The technology depends on knowledge built up
from current technologies.
Complementary assets
Other technology or products needed to get
value (complement) out of the technology.
Appropriability
How the firm receives the value from applying
the technology
-
-
-
-
-
-
-
Technology
87
-
The "new"9 criteria are as follows
1. Inimitability - This criterion examines how unique a technology is and
how easily it can be substituted. The theory here is that unique
technologies that cannot be easily substituted are inherently more
valuable. Combining the original RBV test of inimitability and
substitutability into one derived this criterion.
2. Extensibility - This new criterion explores in what other industries,
applications, etc. this technology may be pertinent. It is believed
technologies that have multiple uses and broad applications are of greater
value. The ability to identify additional potential opportunities allows the
selection committee to better understand the value of the idea.
3. Durability - This criterion examines how long the technology can endure.
Durability is not just the life of the idea, i.e., if it becomes a U.S. patent it is
protected for 20 years from the date of patenting or those filed prior to
June 1995, 20 years or 17 years from date of issuing. It also
encompasses the idea of incremental and non-incremental technologies.
This test helps the committee understand if the idea presented could be a
potential disruption to a current technology.
4. Appropriability - This criterion poses the question of who will receive the
benefits of applying the technology. Will value be extracted from the
outcome of the applied technology, as well as through the entire value
chain? Technologies that cannot be exploited because of a weak or nonexistent value chain are, in general of lower value. This criterion builds
some rudimentary understanding of potential business models (e.g.
vertically integrated at one extreme and licensing out at another).
5. Competitiveness - This criterion examines the competitiveness of the
technology against alternative technologies. The information gathered in
this test may also help the committee understand if the current technology
in use is hitting its natural limit, and if the new idea presented could be a
88
disruption. Note that the competitiveness criterion is not orthogonal to the
previous points i.e. the competitiveness may be tied to criteria 1-4 above.
6. Market Attractiveness - Finally we employ a criterion to identify where
and how the technology could be used. The tests in this area could
identify what markets it could be useful in, how large these markets are
and how successful it could be in these markets. This criteria will help to
determine if this is a market the firm should enter - i.e., identifies new
market opportunities.
This new series of criteria extends the RBV framework for the assessment of
growth stage technologies. The explanation of the terminology contained in this
process ensures that the VERDI panel speaks a common language. This is
critical given panel members come from different functions across multiple
organizations. Furthermore, this common language encourages communication
in a fair and unbiased manner for selection of technologies that enables the
company to sustain its competitive advantage in current and future markets.
89
Technology Stage
As indicated earlier, VERDI is applicable to those technologies in the growth
stage. To determine if VERDI can be used to assess the technology, it is first
necessary to identify the stage of the technology. If either potential applications
or markets cannot be identified, the technology is still in its embryonic stage and
further development in the laboratory is required. On the other hand, if potential
applications and/or markets are known, and though there is a considerable
amount of uncertainty, the technology is considered to be in the growth stage.
Technologies at this stage can be assessed using our framework.
90
Technology Assessment
In order to perform the assessment, a process needs to be established for the
committee to follow and practice. The process created will be highly dependent
upon the firm and its standard practice of doing business. The questions listed
below in each of the six categories are meant to guide the creation of the
process. The actual implementation could be a questionnaire, a ballot, a series
of open-ended questions for discussion, etc. The firm adopting this framework
would best know how to implement it based upon the current work culture and
environment.
Below is a list of general questions to assist in developing the assessment
criteria for the technology in the six areas:
1. Inimitability
Unique function
"
Does it provide a unique function or, does it perform a function in a unique way?
*
If it's unique is it desirable to patent it or keep it as a trade secret?
*
Does prior art exist? Are there related patents?
*
Can the competition develop a work around?
*
Can an alternate technology be substituted for this one?
Path dependency
*
Does this build on prior technology?
*
Is its development dependent on the core capabilities/skills of the firm?
*
Do competitors share a similar knowledge base?
*
Do we have brand loyalty in providing the solution? Would our customers expect
this from us?
*
Does any competitor have greater brand loyalty associated with the solution?
Economic deterrence
*
How much will it cost to imitate/substitute this technology? Is the magnitude
large or small? Does that magnitude identity where potential competitive
responses may come from?
*
Can the marketplace handle additional competitors (cannibalization, increased
market share)?
91
*
Does the competition have or have access to the physical assets and resources
required to replicate the technology?
*
Does the competition have or have access to technical skills to support
development of the technology?
2. Durability
"
What is the potential life of this idea? Does the technology perform its function
significantly better than any competitors? Will it take a long time for competitors
to catch up?
"
Can complementary assets be added to lengthen the duration in which its value
will persist?
*
Do we have the complementary assets needed to lengthen its durability?
*
Does the competition have complementary assets needed to lengthen durability?
*
Will a change in market conditions deem this idea obsolete? (e.g. instant film is
obsolete in the face of digital photography.
3. Appropriability
*
*
Does a value chain exist to support exploitation of the technology?
*
Who owns those assets?
*
Do we have to partner to receive the value from the technology?
Does this technology rely on other technologies outside of the industry?
4. Extensibility
"
Does this technology have additional uses internally? Externally?
*
Can it be used across the business?
*
Does it have application outside core industry? Do we have the skills to develop
it for outside use?
*
Does extensibility factor into cost to develop the technology and if so, how?
5. Competitiveness
"
Is the technology superior?
*
How does this technology "compete" or "compare" against current technology
performing similar functions? Both internal and external to the company.
*
How does this technology "compete" or "compare" against known future
technology? Both internal and external.
"
How far out is the technology from commercialization?
"
Does the rating of competitiveness help to identify opportunities for disruption?
Or is the technology incremental?
92
6. Market Attractiveness
"
Can this technology exist in the current market or in an appreciable size market?
*
Is there potential for huge market growth?
*
Does a new market have to be created to support the technology? Can we
create it? Is it accessible to us?
Once the process has been defined, the committee is charged with obtaining the
required information to answer the questions related to each technology and
establish the frequency of assessment meetings. The assessment should be
conducted as a collective and corroborative decision making process in order to
achieve consensus. The discussion of each technology provides a way for the
committee not only to learn about those technologies being assessed, but also to
reach a reasonable and impartial judgment on research investments. Assessing
technology requires a mechanism to distinguish between those opportunities
having the potential to create substantial value for the firm and those that do not.
This also provides a level of confidence that decisions are not made based on
politics or someone's gut feeling. Some of the criteria are more important than
others; so weighting these criteria is necessary. Again, we do not propose which
criteria should be weighted more heavily than another, as this is dependent upon
the strategies of the firm implementing it.
Many technologies exist at the onset of this process. However, all of them will
not progress in a satisfactory manner to the maturity stage. Sufficient resources
both monetary and non-monetary do not exist to develop every technology
entering this process. It is up to the committee to make sound judgments about
early-stage technology investments. Due to the dynamic nature of this process,
technologies with a potential to create value for the company should be
supported as long as continual progress takes place. As technology progresses
through the growth stage, more information is available. The ability to invest now
with the option to stop investments later based on refined information is a useful
approach coined "the options thinking approach". This approach allows for
uncertainty to be refined based on an accumulation of information.
93
In order to fully assess the technology, in addition to the VERDI assessment an
account of resources needs to be included as well. A resource assessment will
help the firm to understand if the technology can be developed in-house or if they
will need to obtain resources from outside the firm, or possibly to partner in order
to develop the technology.
See Figure 30.
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Figure 30: Resource Assessment
VERDI needs to be adapted and personalized to fit the individual needs of the
firm in which it is to be applied. In the next section, this broad framework is
customized for Xerox.
94
Section 5: Proposal for VERDIX
(Valuing Early-stage R&D Investments at Xerox)
In this section we elaborate on how the VERDIX process can be
implemented. The suggestions here are based on knowledge of the
Xerox culture and processes. Our emphasis in this section is to describe
the formal processes and infrastructures that could bring about a
disciplined and repeatable process that is reasonably lightweight and
therefore won't discourage participation. The basis of the valuation
methodology is as described in the preceding section.
Overview
Prior to our discussion on the valuation methodology, it is first important to
provide a brief overview of Xerox's organizational structure, its foundation,
vision, mission and strategies. This overview provides the proper context
for application of VERDIX. Xerox is functionally organized as previously
mentioned in figure 22 of Section 3. At the top of the company is the
corporate office; at the next level are the major business units (BU) and
other business groups that provide support.
Xerox's Values
These are the beliefs held collectively by the employees and are as
-
follows
"Since our inception, we have operated under the guidance of six
core values:
.
We succeed through satisfied customers.
.
We value and empower employees.
.
We deliver quality and excellence in all we do.
.
We provide superior return to our shareholders.
.
We use technology to deliver market leadership.
95
.
We behave responsibly as a corporate citizen" 4
Xerox's Vision and Mission Statements
As acknowledged in Section 1, the vision and mission statements are
based on the company's values. The vision establishes an understanding
of the company's future and the mission provides a high-level explanation
on the steps they will take to pursue it. Xerox's vision statement is simply,
"The Document Company",5, it is meant to convey to the world that Xerox
wants to be synonymous with the word "document", in every possible way,
both current and future. Today documents are both physical and nonphysical. The physical form is a piece or pieces(s) of paper; the nonphysical form is the digital form or file. Today Xerox is producing,
supporting and providing services for paper documents, and currently
leading the market in digital document services, as well as working on
paperless technologies like electronic paper6 . In order to attain its vision,
the company needs to create a mission statement. The mission statement
details at the highest level the steps the company will take to reach its
vision. Xerox's mission states, "Our strategic intent is to help people find
better ways to do great work - by constantly leading in document
technologies, products and services that improve our customers' work
processes and business results."7 This broad mission statement defines
what the company as a whole will do, and allows for each organization
within the company to create their own mission statement to aid the firm in
achieving its vision.
4 Xerox's values are taken from http://www.xerox.com.
5 Xerox's vision is taken from http://www.xerox.com.
6 Xerox spun off Gyricon Media in December 2000, producers of SmartPaperTM, the amazing media
that combines the functionality of a LCD screen with the thinness and flexibility of regular paper.
Xerox's mission is taken from http://www.xerox.com.
96
Membership
The VERDIX committee we propose is ideally made up of members that
represent varying interests throughout the company. Each business,
operation and support organization may have at least one representative.
There should be at minimum three representatives from the Xerox
Innovation Group (XIG), with at least one representative from XIG R&T,
XIG IP, and XIG strategy. A single delegate from an organization will
have complete and total representation for that organization. If an
organization has more than one person, than one person must be
identified from the contingency that possesses complete and total
representation for that organization. The selection of this person is left up
to the local organization. Figure 31 shows an example of the VERDIX
committee membership.
Xerox
Innovation
R&T
Xerox
Innovation
IP
Chief
Technology
Officer
Dcouen\
Systems
b
rGttor
&
Xerox
Innovation
Strategy
Corporate
Business
Strategy
m
r
Xerox
Global
Services
Office
Products
Office
Figure 31: Example of the VERDIX committee membership
The composition of the committee is just one aspect of membership. Let's
now address the qualifications needed to be a member. Given the charter
of the committee, it is necessary for these individuals to be senior
members of their respective organizations. In this capacity, they have the
broadest understanding of the business, as well as an adequate
knowledge of the technologies supporting their specific businesses.
97
Essentially, they wear two "hats"; the first represents the interests of the
company and the second the interests of their home organization. The
incentives offered to the senior members need to be balanced between
both VERDIX as well as their home organization. Each individual must
consciously bring impartial input to the assessment process. In their role
as advocate, it is their responsibility to ensure all required information for
the technology they represent is provided to the committee during
assessment. Their responsibility is not to provide a preliminary judgment
as to how any technology should be assessed, since this is the outcome
of a consensus decision made by the VERDIX committee.
98
Accountability
As stated previously, each organization will need representation on the
committee. Different cultures and work processes exist across
organizations. Therefore, we will require each organization to establish a
process for selecting its committee representative(s). Remember, these
people represent the interests of the organization, and the main
representative needs to maintain the balance between acting in the best
interest of the corporation and their home organization.
The VERDIX committee has an enormous charge in that it must make
critical investment decisions for the future of the company. As such, this
membership should be taken very seriously. Not only should the
expectations of this position be conveyed across each organization, but
also incentives should be structured in a way as to achieve the desired
objectives of the position. Serving in this capacity should become part of
the individual's yearly objectives. Otherwise, it could potentially become a
low priority task for him/her. Each committee member has the following
responsibilities:
1) Be prepared for each meeting.
2) Provide input as required.
3) Assume the advocacy role for one or more technologies.
4) Attend regularly scheduled meetings.
While this is not an exhaustive list, everyone is expected to perform all of
the necessary tasks to be productive members of the committee. An
advocate is assigned to each of the potential technologies. To maintain a
sense of balance, we propose technologies be handed out round-robin
style. The advocate may not be from the same organization as the
technology and, at the same time, at a personal level may not
wholeheartedly agree on pursuing the technology. The fact is they have
the responsibility to act on the actions determined by the committee.
99
Advocacy is an important part of membership, and in order to preserve a
level playing field, incentives need to be carefully implemented.
The intent of this committee is twofold. First, it will help organizations
prioritize how they use existing technology funds. Second, it will assist in
decisions concerning what technologies to foster and/or those to exploit.
100
Meetings
Due to the amount of innovation that occurs, assessment meetings will
occur monthly. The meeting dates will be determined at the beginning of
the year, so that the dates are published and communicated to the entire
firm. To simplify and standardize the process a standing agenda will be
used. The agenda will contain current technologies that are in VERDIX
and those that are potentials for entrance into VERDIX. A sample of the
agenda is as follows:
Old Business
Potential Technology 1
Potential Technology 2
Potential Technology n
New Business
Idea 1
Idea 2
Idea n
An agenda will be compiled five business days before the scheduled
meeting date. The published agenda will show each item and the time
slot for its discussion. The meetings will be conducted using standard
Xerox meeting methods. The appointed chair of the VERDIX committee,
the Chief Technology Officer, or someone from his office with the proper
authorities granted, will lead the meeting, and the roles of facilitator,
timekeeper, scribe and scorekeeper will be assigned prior to the start of
the meeting.
The items under old business are those ideas that made it through the
initial assessment, but are being monitored closely to determine whether
they will remain in the R&T growth project portfolio, or if they will be
abandoned or redirected. These re-enter the assessment process only
101
when a significant8 amount of pertinent information has been made
available. If there is not enough new information, or no new information,
then these technologies remain in a monitor state. If no new information
becomes available within six months, then the committee needs to
determine if the technology is still worth monitoring or if it is a candidate
for abandonment.
8 Significant - in this instance means information that would change one or more of the established
ratings for any of the six characteristics of the framework.
102
Supporting IT Infrastructure
As noted in Section 4, a large amount of information needs to be
collected, categorized and made available in order for the assessment to
be accurate and meaningful. There are several databases that will be
used to compile the information needed. Xerox maintains several internal
databases in addition to providing access to external ones. Listed below
are the databases that are accessed to obtain the information required for
-
valuation
1) USPTO (United States Patent and Trademark Office)
2) Xerox patent and pending patent
3) Market intelligence
4) Market trends
5) Resources
6) Finance/Spending
7) R&T Project Database
103
Query 1:
Does technology z provide a unique function?
Response:
Ifa match(s) occur the following info is presented:
a Patent ID
e Patent life
e Owner
9 Related patents
e Industry
e Citations
Resources
Skills / core
competencie
Finance
-Money
-Money
- Money
allocated for R&T
spent year to date
remaining
sets
Avlability of personnel
costs
Availability of resources
rFuture plsns for sdded
resources
-Skill
- Outsourcing
Market
Intelligence
Market
Trends*>
- Trends
in current industry
(smong competitors)
- Complementary industry
trends
-Customer trends
Info on competitors (firm
into)
- InTo on competitive products
- Info on technologies used by
competition
- Competition customer info
-
Action to the query
Xerox
Patents
R&T
Projecti
Portfolio
tech category
core technology area
frame
-time
- related technology(s)
- money invested to date
filed
associated products
-date
-
- related techs
-licensing; partnership info
USPTO*
Xerox
Patents
issued
Pending!
Old Ideas
category
date issued; expiration date
products
related techs
licensing; partnership info
-tech
-all
- associated
-
US patents issued to date
-categoies
dates of expiration
ownership
* These represent external databases
Figure 32: askOnceTM Interface
In order to efficiently access the databases a common interface to access
them is required. Within Xerox, we recommend use of the Xerox
developed askOnceTM meta-search software. This is a relationship tool
that can extract the required data from the provided sources and present it
to the user in a meaningful format. The advantage of askOnceTM is it
allows for multiple repositories (various databases with different formats
and structures) and data-types to be searched with a single query. Figure
32 depicts an example of how the databases are linked, how a query to
the linked databases is acted on, and what data is extracted and
presented.
104
If askOnceTM is not available for use, alternative methods using the
existing infrastructure can be implemented. Many data repositories,
internal databases, DocuShareTM sites (web interfaced document
repository systems), and file servers reside in Xerox. These can be
accessed manually to extract the information necessary for assessment.
However, this would be a very time consuming task.
105
Valuation Process
Any technology in its growth stage requiring investment by Xerox is
presented to the committee in great detail. Any idea that has passed
through the embryonic stage gets committed to a form of documentation,
known as a proposal. One of the primary reasons for providing the
proposal is to establish where the technology is in relation to the maturity
cycle. The VERDIX assessment is only to be used for those technologies
in the growth stage. The information provided in the proposal helps
determine if the technology has entered VERDIX too early or even
possibly too late. The proposal contains detailed information on the
potential technology as demonstrated in Table 7.
106
Description
Information Required
Descriptive Title of idea/new technology
Description of the problem the idea/new
technology addresses.
Title, name of the technology
Details of the problem, how it
was solved in the past (if at
all) and how the new
technology solves/addresses
the problem.
Summary of idea/new technology
Executive summary
Detailed description of idea
Full technical description of
the idea. Describe how to
make and use the idea and
its novel embodiments.
Cover the process, method,
materials with sketches, flow
charts, usage etc. What are
the advantages of your idea
for Xerox?
Team Members
If applicable, list those
individuals who have worked
on this or on a similar idea.
Related concepts or prior art searches
Provide any/all related
patents. Information
obtained through search of
USPTO, internal Xerox
database, and current
database of pending ideas.
Provide detailed information
on the development to date
Development Information I Prototype
Opportunities for use (by Xerox or outside)
on the technology, to prove
repeatability and stability. If
applicable provide prototype,
model or experiment data.
Provide information if there is
a definite plan to use this in a
future Xerox product, list
product/project names if
applicable. If this is
applicable for another
industry, provide the detail
information.
Input from the submitter's
management. The
information provided is the
pre-assessment, which is
made by the manager.
Management input
Table 7: Technology Proposal
107
The proposal must be made available to the committee chair one week (or
at the latest five business days) prior to the meeting. All required pre-read
material is sent out via email and posted electronically five business days
before the date of the meeting. The proposal is an electronic data entry
process. All required information is entered by the submitter(s) and the
sponsoring management's input is an added source of credibility. The
information can be entered via a web interface or submitted via an
electronic document and the data is captured for use in a database. The
deadline to submit a proposal is one week prior to the scheduled meeting
date; this allows ample time for the agenda to be established and for all
pre-read information to be provided to members so they can be prepared
for the meeting. The committee members are expected to have reviewed
all proposals and pre-read materials prior to the meeting.
The submitter and their immediate management are expected to be oncall to field any questions that the committee may have concerning the
proposal. They will receive information on the time slot assigned in which
they need to be accessible. Thus, the contact person needs to be
available via phone or web meeting during the scheduled time slot.
Additional information that must be available for the committee to use is
market information (trend data) and technology trends, financial data,
resources and skills/core competencies. This data is available in the
databases and readily accessed using the askOnceTM interface.
108
Scoring
Each committee member will have access to a copy of the document
(either hard or electronic) containing a series of questions (as discussed
below under the heading "questionnaire") based on our adapted RBV
approach for technology valuation. The responses given to this sequence
of questions combine to make up the assessment score for each of the six
criteria.
The questions are answered according to a 9 - point scale (1,3,5,7, and
9), with the 1 representing the lowest (worst) value and 9 representing the
maximum (best) value. Since no individual balloting takes place, the
committee must reach a consensus, from an adequate discussion of the
technology, on each question before assigning its score. The scorekeeper
enters the score assigned to each of the six categories and compiles them
in an electronic document (Excel spreadsheet). The macros provided in
the spreadsheet manipulate the data and the value for each criterion is
assigned. Graphical views of the assessment are generated for ease of
viewing. Lastly, based on the combination of the individual category
scores a determination to invest, partner, or abandon the technology can
be obtained.
To better understand the assessment and scoring procedures, a
demonstration is provided after the introduction of the assessment
questionnaire. Based on the assessment outcome (scoring), potential
recommendations are presented to complete the valuation process.
109
Assessment Questionnaire
The potential technology is assessed using the guidelines in the
questionnaire below. Each question is to be answered and scored by the
group rather than individually and should be discussed before a rating has
been determined. The length/amount of discussion does not have to be
long, but needs to be thorough to ensure that the best rating was
achieved.
Inimitability
There are three factors, labeled a, b, and c, comprising the inimitability
criteria.
a.
1.
Uniqueness
Does it provide a unique function?
a. No
b. Yes
Assessment
1
9
Additional Considerations
Score
Has a full new/novel test been
I conducted?
If the answer to Q1 is "Yes", skip to Q2, if "No" then proceed to Q1a.
la. Does it provide a function in a
unique way?
a. No
b. Yes
Assessment
1
9
Additional Considerations
Score
Has a full new/novel test been
conducted?
If the answer to Q1 a is No, then this idea is not likely to generate high
value as an intellectual property, but may have an application in a product.
It should be abandoned only from the IP perspective.
2.
Do we want to patent this
technology?
a. No
b.
Assessment
Additional Considerations
1
Why not? Provide reasons for
it remaining a trade secret
rather than an IP.
9
Yes
110
Score
Additional Considerations
Is there significant prior art that
would challenge this invention?
a. Yes
*
3.
b.
Does this mean that it is an
incremental technology? Who
owns the related patents?
How strong is their position?
Will Company X benefit from
patenting this?
Does this indicate first mover
advantage? Does this indicate
that it is too costly? Will the
market accept it?
No
_1
*This question should be thought about when scoring uniqueness. It is not
part of the numerical scoring, because a technology should not be
penalized if significant prior art exists. On the other hand, if prior art
doesn't exist, Company X can potentially achieve the benefits of the first
mover advantage, by getting this technology commercialized before any
competitor.
4.
Can the competition* develop a
work around? (Degree of difficulty
to develop work around)
a. Low degree of difficulty
Assessment
Additional Considerations
1
Provide time line. Faster than
Company X? Lower in cost?
Provide time line. Faster than
Company X? Lower in cost?
Provide time line. Faster than
Company X? Lower in cost?
b.
Medium degree of difficulty
5
c.
High degree of difficulty
9
Score
*Competition - could be deemed to be those firms that have
products/similar technologies competing in the same market segment as
Company X. Competition could also be any firm that has the capabilities
to develop the same technology, for instance a company that has like
resources including skills and money to invest in development.
5.
Is there a substitute for this
technology?
a. Yes
b.
Assessment
1
9
No
111
Additional Considerations
Is the substitute more costly
than this new technology? Is
the substitute better than this
technology? Who owns the
substitute? If Company X
owns it, are we willing to
cannibalize?
Score
b.
1.
Path dependency
Additional Considerations
Is this technology (or application of
it) built on or dependent upon
current technologies in use, i.e.
incremental?
a. Yes
b.
Score
Need to assess where on the
technology curve the related
technologies reside. Is this an
area that Company X
wants/needs to expand in?
Does the benefit far out way
the cost?
Is this a sign of disruption? Is
this discontinuous? Is it the
natural progression? Is the
market ready to accept it? Is
the switching cost high? Are
complementaries in place?
No
Discussion about Q1 is required. However, this question does not
become part of the final path dependency score.
2.
3.
Is this technology (or application of
it) within core competencies/skill
sets? (Degree low-med-high)
a. Low
Assessment
Additional Considerations
1
b.
Medium
5
c.
High
9
Can it be outsourced? Is it
affordable to outsource?
Can the balance be
outsourced? Is it affordable?
Are the resources available
(free to work on this)? When
will the resources be free to
work on this? Will they be free
in time? If not, can we afford
to outsource?
Assessment
Additional Considerations
9
Would it be financially feasible
for them to outsource this?
Would it be financially feasible
for them to outsource this?
What advantage do they
have? Could they beat us to
commercialization? Could
they do it cheaper?
Do our competitors share a similar
knowledge base? (Degree lowmed-high)
a. Low
b.
Medium
5
c.
High
1
112
Score
Score
4.
Is this technology (or application of
it) synonymous with our brand?
(Degree low-med-high)
a. Low
b.
c.
5.
Additional Considerations
1
Is this a risk to our reputation?
Is this a candidate for
licensing? For partnering?
For spin-off?
c.
Economic Deterrence
1.
How much will it cost the
competition to implement this
technology?
a. < 1x
Assessment
1
5
9
2.
1
If the cost is low, what makes
this advantageous to pursue?
Is it tactical? Is it strategic?
Is this enough of a significant
amount of difference?
3
5
7
9
< 20x
< 100x
Assessment
9
5
1
113
Score
Is it therefore advantageous
for Company X to lead the
market with it? Offer it as a
license? Partner? Spin off?
Abandon?
Additional Considerations
< 5x
Does the competitor have or have
access to technical skills to support
development of the technology? If
not can they acquire them?
a. Very unlikely
b. Likely
c. Highly likely
Additional Considerations
Assessment
c. < lox
d.
e.
Score
5
9
Medium
High
Is this technology (or application of
it) synonymous with our
competitor's brand? (Degree lowmed-high)
a. Low
b. Medium
c. High
b.
Assessment
Score
Would competition be willing
to follow us? Is the market
ready to accept this? Does
our trend data agree with this?
Additional Considerations
Can they acquire these assets
or use of these assets at low
or high cost? If at low cost,
what threat does this pose?
Score
3.
4.
Does the competitor have the
physical assets or resources? If
not can they acquire them easily?
a. Very unlikely
b. Likely
c. Highly likely
Assessment
Does the competitor have or have
access to technical skills to support
development of the technology? If
not can they acquire them?
a. Very unlikely
b. Likely
c. Highly likely
Assessment
9
5
1
9
5
1
Additional Considerations
Score
Can they acquire these assets
or use of these assets at low
or high cost? If at low cost,
what threat does this pose?
Additional Considerations
Score
Can they acquire these assets
or use of these assets at low
or high cost? If at low cost,
what threat does this pose?
Durability
1.
What is the estimated life of the
technology against current
technology?
a. < Amount*
b.
Assessment
Additional Considerations
1
Is this tactical? Even if short
lived, is it cheaper than current
technology?
If it is strategic, will it be cost
effective during its life versus
current technology?
9
> Amount
Score
*Amount - is determined by the committee.
2.
What is the life estimate given
current market condition?
a. < Amount
b. > Amount
Assessment
1
9
*Amount - is determined by the committee.
114
Additional Considerations
Is it high because of firstmover advantage? Will our
processes be able to meet the
market demands of lower cost
in the timeframe it will demand
it?
Score
3.
Who controls the complementary
assets?
a. Competition
b.
4.
1
9
Company X
Is a change in market conditions
likely to deem the technology
obsolete?
a. Low
b. Medium
c. High
Additional Considerations
Assessment
Can we gain control? How
much will it cost us to gain
more?
Can we maintain control?
How much can we afford to
lose?
Additional Considerations
Assessment
9
5
1
Score
Score
What is the time frame? Will
we be able to benefit from first
mover advantage?
L
Appropriability
1.
Does Company X own the value
chain?
a. Yes
b. No
Additional Considerations
Assessment
9
1
Score
Can we create one quickly?
Cheaply?
If the answer to Q1 is "Yes", Score will be 9, if "No" then proceed to Q2
and use its score.
2.
3.
Can a value chain be easily
created?
a. Very likely
b. Likely
c. Highly unlikely
Assessment
Additional Considerations
9
5
1
Can we afford to?
Can we afford to?
Are there other possibilities to
consider?
Does this technology rely on other
technologies outside of the
industry?
a. Yes
Assessment
Additional Considerations
1
Are they proprietary? Can we
have access to them?
b.
No
9
115
_
Score
Score
Extensibility
1.
Does this technology have
additional uses internally?
a. Very likely
b.
c.
Assessment
Additional Considerations
9
Can it be used for another
application without adapting it?
Slight modification
Likely
Highly unlikely
5
1
2. Does this technology have
Assessment
Major overhaul needed
Additional Considerations
additional uses externally?
a. Very likely
9
Can it be used for another
b.
c.
5
1
application without adapting it?
Slight modification
Major overhaul needed
Likely
Highly unlikely
*Amount - is determined by the committee. This is dependent on number
of businesses in the company.
Competitiveness
In assessing competitiveness we are trying to determine whether it is
superior to any possible alternatives. When comparing the function
provided by the technology to its alternatives, appropriate figures of merit
(FOM) must be selected. There should be a minimum of two and a
maximum of five FOMs identified and used. Development cost is one
example of an FOM. For instance, technology "A" costs significantly less
(i.e., a factor of 1Ox) to develop than any of its alternatives. Because each
technology has its own performance characteristics the committee must
determine the appropriate FOMs required for the assessment along with
the corresponding industry benchmarks.
The FOMs are needed to allow the committee to answer questions one
through three. More specifically in each of our comparisons these
attributes are utilized.
116
Score
Score
1.
2.
3.
How does the function of the
technology "compare" against the
function of alternative
technologies?
a. Significantly below alternative
technology
Assessment
Additional Considerations
1
Must determine what is meant
by significantly below, below,
above, and significantly above
b.
c.
Below alternative technology
Same
3
5
d.
e.
Above alternative technology
Significantly above alternative
technology
7
9
How does this technology
"9compare" against current
technology in use?
a. Significantly below current
technology
This is on par with current
level
Assessment
Additional Considerations
1
Must determine what is meant
by significantly below, below,
above, and significantly above
b.
c.
Below current technology
Same
3
5
d.
e.
Above current technology
Significantly above current
technology
7
9
How does this technology
''compare" against predicted future
technology?
a. Significantly below future
technology
Assessment
Additional Considerations
1
Must determine what is meant
by significantly below, below,
above, and significantly above
b.
c.
Below future technology
Same
3
5
d.
e.
Above future technology
Significantly above future
technology
7
9
Score
Score
This is on par with current
level
Score
This is on par with current
level
I
117
4.
How far out is the technology from
commercialization?
a. > 7 years
Assessment
Additional Considerations
1
Provide a potential timeline for
commercialization; maybe this
would be fine given we don't
have good durability at this
time; or complementary assets
don't exist
b.
c.
5 years < x < 7 years
3 years < x < 5 years
3
5
d.
e.
1 years < x < 3years
< 1 year
7
9
Score
All the same comments apply
in all these categories
Provide a potential timeline for
commercialization. Just
because this can get out in a
year, doesn't mean that the
market will be ready for this in
a year.
For market attractiveness, the committee must understand the size of the
current market and any potential growth in that market. Growth can also
be gained from the creation of a new market.
Market Attractiveness
1.
Can this technology live within the
existing market (this means a
market that Company X is In)?
a. Highly unlikely
b.
c.
2.
Additional Considerations
1
No differentiation based on
current technology in the
market; too much competition
exists for this technology to
provide value
5
9
Likely
Very likely
Does a new market have to be
created to support this technology
a. Very likely
b.
c.
Assessment
Technology is best in breed
and market data shows there
is value in developing this
technology
Assessment
Additional Considerations
1
A new market must be created
to support this technology.
5
9
Likely
Highly unlikely
118
Score
This technology can exist
within the current market
Score
3.
What is the potential market growth
for this technology?
a. Small
b.
c.
Assessment
Additional Considerations
1
Market potential < 10%*
growth
Market potential is about 10%*
Market potential >> 10%*
growth
5
9
Medium
Large
This amount should be determined by the trends related to the particular
market.
*
119
Score
Assessment Outcome
After each criterion score has been tabulated, a summary table as shown
in Figure 33 is prepared. The summary table allows the committee to
easily view the results. Since each business unit produces products for a
particular market segment, the importance of one criterion may be
different, or seen as more important than another. This should be
accounted for in the scoring. Based on the business strategies of the
company, a weighting factor for those criteria having more importance
should be stipulated by the committee. Taking this into account, each
value is calculated by weighting the criterion inimitability, durability,
appropriability, extensibility, competitiveness, and market attractiveness
by the values of 20%, 12.5%, 12.5%, 5%, 20%, and 30%, respectively.
The summary matrix allows for recommendations to be made based on
the scores from each criterion.
Criterion
Criteria
Value
Inimitability
Uniqueness
Path Dependency
Economic Deterrence
Durability
Appropriability
Extensibility
Competitiveness
Market Attractiveness
Figure 33: Summary Matrix
120
Illustration using toner/manufacturing process A
In the assessment process, completing our questionnaire requires thinking about
the technology under consideration as compared to other technologies. For the
purpose of this illustration, toner/manufacturing process B is used as the
alternate technology.
Inimitability
There are three factors, labeled a, b, and c, comprising the inimitability criteria:
uniqueness, path dependence, and economic deterrence. A weighting factor is
used for this criterion since uniqueness is more important than path dependency
and economic deterrence. Thus, to calculate the score for inimitability requires
the committee to use 50%, 25%, and 25% as weighting factors for uniqueness,
path dependency and economic deterrence, respectively.
a. Uniqueness
1.
Does it provide a unique function?
a. No
b. Yes
Assessment
1
9
Additional Considerations
Score
1
Has a full new/novel test been
conducted?
If the answer to Q1 is "Yes", skip to Q2 and use score from Q1, if "No" then
proceed to Q1a and use score from Q1a.
la. Does it provide a function in a
unique way?
a. No
b. Yes
Assessment
1
9
Additional Considerations
Score
9
Has a full new/novel test been
conducted?
If the answer to Q1 a is No, then this idea is not likely to generate high value as
an intellectual property, but may have an application in a product. It should be
abandoned only from the IP perspective.
2.
Do we want to patent this
technology?
a. No
b.
Yes
Assessment
Additional Considerations
Score
1
Why not? Provide reasons for
remaining as trade secret
rather than IP.
9
9
121
3.
Additional Considerations
Is there significant prior art that
would challenge this invention?
a. Yes
b.
Does this mean that it is an
incremental technology? Who
owns the related patents?
How strong is their position?
Will Company X benefit from
patenting this?
Does this indicate first mover
advantage? Does this indicate
that it is too costly? Will the
market accept it?
No
*This question should be thought about when scoring uniqueness. It is not part
of the numerical scoring, because a technology should not be penalized if
significant prior art exists. On the other hand, if prior art doesn't exist, Company
X can potentially achieve the benefits of the first mover advantage, by getting this
technology commercialized before any competitor.
4.
Can the competition* develop a
work around? (Degree of difficulty
to develop work around)
a. Low degree of difficulty
Assessment
Additional Considerations
Score
1
Provide time line. Faster than
Company X? Lower in cost?
Provide time line. Faster than
Company X? Lower in cost?
Provide time line. Faster than
Company X? Lower in cost?
5
b.
Medium degree of difficulty
5
c.
High degree of difficulty
9
*Competition - could be deemed to be those firms that have products/similar
technologies competing in the same market segment as Company X. For
example, if the technology being assessed were determined applicable in the
office environment, then the main competitors in this arena would be HP, Canon,
and Ricoh. Competition could also be any firm that has the capabilities to
develop the same technology, for instance a company that has like resources
including skills and money to invest in development.
5.
Is there a substitute for this
technology?
a. Yes
b.
No
Assessment
1
Additional Considerations
Is the substitute more costly
than this new technology? Is
the substitute better than this
technology? Who owns the
substitute? If Company X
owns it, are we willing to
cannibalize?
Score
1
9
(9+9+5+1)/4
6.0
Uniqueness Score
122
b. Path dependency
1.
Additional Considerations
Does this technology (or
application of it) add value
something currently providing
value for the company, i.e.
incremental?
a. Yes
b.
Score
Need to assess where on the
technology curve the related
technologies reside. Is this an
area that Company X
wants/needs to expand in?
Does the benefit far out way
the cost?
Is this a sign of disruption?
Discontinuous? Natural
progression? Is the market
ready to accept it? Is the
switching cost high? Are
complementaries in place?
No
Discussion about Q1 is required. However, this question does not become part
of the final path dependency score.
2.
3.
Is this technology (or application of
it) within core competencies/skill
sets? (Degree low-med-high)
a. Low
Assessment
1
b.
Medium
5
c.
High
9
Do our competitors share a similar
knowledge base? (Degree lowmed-high)
a. Low
Additional Considerations
Can it be outsourced? Is it
affordable to outsource?
Can the balance be
outsourced? Is it affordable?
Score
9
Assessment
Additional Considerations
Score
9
Would it be financially feasible
for them to outsource this?
Would it be financially feasible
for them to outsource this?
What advantage do they
have? Could they beat us to
commercialization? Could
they do it cheaper?
1
b.
Medium
5
c.
High
1
123
4.
Is this technology (or application of
it) synonymous with our
competitor's brand? (Degree lowmed-high)
a. Low
b. Medium
c. High
Assessment
1
5
9
Additional Considerations
Score
9
Is it therefore advantageous
for Company X to lead the
market with it? Offer it as a
license? Partner? Spin off?
Abandon?
(9+1+9)/3
6.33
Path Dependency Score
c. Economic Deterrence
1.
How much will it cost to implement
this technology?
a. < 1x
b.
<5x
c. <lox
d.
e.
2.
3.
< 20x
< 100x
Assessment
Additional Considerations
Score
1
If the cost is low, what makes
this advantageous to pursue?
Is it tactical? Is it strategic?
5
3
5
7
9
Does the competitor have the
physical assets or resources? If
not can they acquire them?
a. Very unlikely
b. Likely
c. Highly likely
Assessment
Does the competitor have the
technical skills to support
development of the technology? If
not can they acquire them?
a. Very unlikely
b. Likely
c. Highly likely
Assessment
Would competition be willing
to follow us? Is the market
ready to accept this? Does
our trend data agree with this?
Additional Considerations
9
5
1
9
5
1
124
Score
1
Additional Considerations
Score
1
(5+1+1)/3
Economic Deterrence Score
2.33
(((0.5*6)+6)+((0.25*6.33)+6.33)+ ((0.25*2.33)+2.33)))/3
Inimitability Score
6.61
Durability
1.
What is the estimated life of the
technology against current
technology?
a. < Amount*
b.
> Amount
Assessment
Additional Considerations
Score
1
Is this tactical? Even if short
lived, is it cheaper than current
technology?
Even if longer, will it be cost
effective during its life versus
current technology?
9
9
*The amount is 7; this is a substitute for toner/manufacturing process B
2.
What is the life estimate given
current market condition?
a. < Amount
b. > Amount
Assessment
1
9
Additional Considerations
Score
9
Is it high because of firstmover advantage? Will our
processes be able to meet the
market demands of lower cost
in the timeframe it will demand
it?
The amount is 15; this amount is chosen based on trends in the printing
industry (the assumption is that the need exists for printing for 15 years)
*
3.
Who controls the complementary
assets?
a. Competition
b.
4.
Company X
Is a change in market conditions
likely to deem the technology
obsolete?
a. Low
b. Medium
c. High
Assessment
1
9
Assessment
9
5
1
125
Additional Considerations
Can we gain control? How
much will it cost us to gain
more?
Can we maintain control?
How much can we afford to
lose?
Additional Considerations
Score
9
Score
5
What is the time frame? Will
we be able to benefit from first
mover advantage?
(9+9+9+5)/4
Durability Score
8
Appropriability
1.
Does Company X own the value
chain?
a. Yes
b. No
Assessment
9
1
Additional Considerations
Score
9
Can we create one quickly?
Cheaply?
If the answer to Q1 is "Yes", Score will be 9, if "No" then proceed to Q2 and use
its score.
2.
3.
Can a value chain be easily
created?
a. Very likely
b. Likely
c. Highly unlikely
Assessment
Does this technology rely on other
technologies outside of the
industry?
a. Yes
Assessment
Additional Considerations
Score
1
Are they proprietary? Can we
have access to them?
9
b.
No
9
5
1
Additional Considerations
Score
Can we afford to?
Can we afford to?
Are their other possibilities to
consider?
9
(9+9)/2
Appropriability Score
9
Extensibility
1.
Does this technology have
additional uses internally?
a. Yes
b.
No
Assessment
Additional Considerations
Score
9
Can it be used for another
application without adapting it?
This could also mean that it is
not used in the current
industry.
9
1
126
2.
Does this technology have
applicability externally?
a. Very likely
b.
c.
Likely
Highly unlikely
Assessment
Additional Considerations
Score
9
Can it be used for another
application without adapting it?
This could also mean that it is
not used in the current
industry.
1
5
1
(9+1)/2
Extensibility Score
5
Competitiveness
The FOMs identified for toner/manufacturing processes are:
1. Environmental impact (green),
2. Particle size, and
3. Cost
These FOMs are needed to allow the committee to answer questions one
through three. More specifically in each of our comparisons these attributes are
utilized. Many companies in the printing industry use toner/manufacturing
process B. Therefore a comparison between the FOMs identified for both
toner/manufacturing process B and A is needed to assess competitiveness. For
environmental impact, a significant amount of energy is needed to generate small
particles from large particles. Typical particle size for toner/manufacturing
processes B and A range from 7-9ptm and less than 6pm respectively.
Additionally because of the particle size toner/manufacturing process A is more
cost effective than B.
127
1.
2.
3.
How does the function of the
technology "compare" against the
function of alternative
technologies?
a. Significantly below current
technology
Assessment
Additional Considerations
Score
1
Must determine what is meant
by significantly below, below,
above, and significantly above
7
b.
c.
Below current technology
Same
3
5
d.
e.
Above current technology
Significantly above current
technology
7
9
How does this technology
"compare" against current
technology in use?
a. Significantly below current
technology
This is on par with current
level
Assessment
Additional Considerations
Score
1
Must determine what is meant
by significantly below, below,
above, and significantly above
7
b.
c.
Below current technology
Same
3
5
d.
e.
Above current technology
Significantly above current
technology
7
9
How does this technology
''compare" against predicted future
technology?
a. Significantly below current
technology
Assessment
Additional Considerations
Score
1
Must determine what is meant
by significantly below, below,
above, and significantly above
5
b.
c.
Below current technology
Same
3
5
d.
e.
Above current technology
Significantly above current
technology
7
9
128
This is on par with current
level
This is on par with current
level
4.
How far out is the technology from
commercialization?
a. > 7 years
Assessment
Additional Considerations
Score
1
Provide a potential timeline for
commercialization; maybe this
would be fine given we don't
have good durability at this
time; or complementary assets
don't exist
9
b.
c.
5 years < x < 7 years
3 years < x < 5 years
3
5
d.
e.
1 years < x < 3years
< 1 year
7
9
All the same comments apply
in all these categories
Provide a potential timeline for
commercialization. Just
because this can get out in a
year, doesn't mean that the
market will be ready for this in
a year.
(7+7+5+9)/4
Competitiveness Score
7
For market attractiveness, the committee must understand the size of the current
market and any potential growth in that market. Growth can also be gained from
the creation of a new market.
Market Attractiveness
1.
Can this technology live within the
existing market (this means a
market that Company X is In)?
a. Highly unlikely
b.
c.
Likely
Very likely
Assessment
Additional Considerations
Score
1
No differentiation based on
current technology in the
market; too much competition
exists for this technology to
provide value
9
5
9
129
Technology is best in breed
and market data shows there
is value in developing this
technology
2.
Does a new market have to be
created to support this technology
a. Very likely
b.
c.
3.
Likely
Highly unlikely
What is the potential market growth
for this technology?
a. Small
b.
c.
Medium
Large
Assessment
Additional Considerations
Score
1
A new market must be created
to support this technology; in
this case it would be outside of
the office market
9
5
9
This technology can exist
within current market
Assessment
Additional Considerations
Score
1
Market potential < 10%*
growth
Market potential is about 10%*
Market potential >> 10%*
growth
5
5
9
(9+9+5)/3
Market Attractiveness Score
7.67
130
Criteria
Criterion
Value
Inimitability
Uniqueness
Path Dependency
Economic Deterrence
Durability
6.61
Criterion
Weighted
Value
7.93
8
9
Appropriability
9
10.125
Extensibility
5
5.25
Competitiveness
7
8.4
7.67
9.97
Market Attractiveness
Figure 34: Toner/manufacturing process A Summary Matrix
Interpretation of the values from the summary matrix of Figure 34 is based on the
nine-point scale listed:
1 - significantly below
3 - below
5 - on par
7 - above
9 - significantly above
Recommendations
Upon completion of the technology assessment process, the committee has
some additional decisions to make in order to determine the suitable course of
action. This section advises the committee on the appropriate next steps to be
taken. The recommendations listed are not meant to be an answer key, and
should not be used in that manner. Instead, the results are to be used to direct
the committee as they determine a course of action. The recommendations
asserted here are based on the individual scores achieved by each criterion as
well as the combination of key criteria in the process.
131
Multiple combinations of the criterion exist. Therefore, to simplify the final
decision, obvious things are stated at the onset. If all of the criteria are assigned
a score of one, this technology should not be considered for further investment.
On the other end of the spectrum, if all criteria are assigned a value of nine, an
obvious decision to invest in this technology is desired. Since, a value of five
equates to on par, a very solid decision to invest occurs when all the criteria have
a criterion value greater than five.
Let's explore the toner/manufacturing process A summary matrix shown in Figure
34. By weighting inimitability, competitiveness and market attractiveness, we in
essence give them more importance than other criterion. These factors should
be above par when contemplating investing decisions. In this case, all criteria
except for extensibility scored above par. So then, what decision should be
made?
The graph in Figure 35 is used to highlight the values that comprise inimitability.
Uniqueness and path dependency scored high in comparison to economic
deterrence. Because of its uniqueness, a recommendation for
toner/manufacturing process A to be reviewed by the IP group is necessary.
This group can determine what appropriate patent(s) can be filed, and what
potential licensing opportunities can be explored. In terms of path dependency,
Company X possesses the core competencies in this area.
132
Inim itability
econonic deterrence
path dependency
uniqueness
1
0
4
3
2
6
5
7
Assessed Value
Figure 35: Inimitability Assessment
We stated that competitiveness and market attractiveness are important
indicators in this process. Figures 36 and 37 show the corresponding values that
make up these criteria.
Competitiveness
04
0
Q3
Q2
01
0
2
6
4
Assessed Values
Figure 36: Competitiveness Assessment
133
8
10
Market Attractiveness
Q3
0
Q2
Q1
10
8
6
4
2
0
Assessed Values
Figure 37: Market Attractiveness Assessment
From the graph in Figure 38, the committee can visualize how the criteria stack
up against each other.
VERDIX Assessment (weighted)
Market Attractiveness
Competiveness
Extensibility
Appropriability
Durability
Inimitability
0
2
4
6
8
10
12
Weighted Values
Figure 38: VERDIX Assessment
However, before making a final decision, a skills assessment should be
conducted. From the questions related to path dependency, it was determined
Company X has a core competence in this area, but this does not address if
134
resources are available to develop this technology. Toner/manufacturing process
A is a definite candidate for investment.
When results for each criterion do not rate higher than par, special consideration
needs to be taken to ensure that the appropriate follow-up steps are taken. For
example, in Figure 39, we show the assessment outcomes for two technologies,
Oppi and Opp2, the non-weighted and weighted values are shown. Graphical
illustrations similar to those created for the toner example should be created for
all example outcomes.
Criteria
Inimitability
Uniqueness
Path Dependency
Economic Deterrence
Durability
Appropriability
Extensibility
Competitiveness
Market Attractiveness
Opp1
9.94
Opp2
7.78/9.33
5.00/5.62
5.00/5.62
5.00/5.25
4.0/4.8
3.67/4.77
7.00/7.87
3.00=
5.00/5.25
7.5/9.0
7.67/9.97
Figure 39: Example outcomes
In Oppl, the value for inimitability is quite large in comparison to the other values
attained. In fact all other values are right around the par value of five. By looking
at the majority of values, one may jump to the conclusion that this technology
should not be considered for investment, but before that assessment is made,
the high rating for inimitability needs to be thoroughly considered. The
committee is not in a position to determine how this technology should be
handled by the IP group, but a recommendation that the IP group examine this
technology is an appropriate next step.
Looking at Opp2, the criteria with the larger weight values, market attractiveness,
competitiveness and inimitability are very high, averaging over nine. In this case
135
we note that appropriability is low in comparison to the other values in the matrix.
It is worth investing in if the company will be able to receive the monetary stream
from it - and in this case the current information is indicating that Xerox does not
have the appropriability for the technology. The appropriate next step in this
situation is for the committee to engage the Business Opportunities Group in
XIG. They have the charter to create business opportunities with Xerox
technology, and their further assessment may reveal potential partnership
opportunities for Xerox to pursue with this technology.
136
Section 6: Summary
As stated throughout this thesis, value is not solely measured in monetary terms,
but because it is commonly associated with financial worth, many methods
established for determining value have their foundations in financial models. We
have recognized that since technology progresses through a maturity cycle, in its
earliest stages, its value cannot be readily determined by using financial
methods. The value for early-stage technology is determined by accounting for
tangibles and intangibles, and its investment returns are both non-monetary and
monetary. Since technology development is dynamic, different methods of
valuing technology during its maturity cycle are required, thus in later stages of
maturity it is appropriate to use financial tools. We have explicitly accounted for
this by designing an adapted resource-based view framework (Collis and
Montgomery, 1995), VERDI. We have also suggested an approach for adopting
and using this framework in a particular application at Xerox Corporation.
We were able to show how the VERDI framework could be adopted and
customized to meet the needs of a particular firm, in this case Xerox Corporation.
For this thesis, the authors desire was to test this framework by applying it to
past technologies, where the outcome is known, but unfortunately did not have
the time frame to accomplish this task. By performing this analysis it would have
allowed us to see the relevance of valuing the technology early.
The VERDI framework was established to provide a standard assessment
process for early stage technology investments. The outcome of a standard
committee based process may offer consistency in both the assessment and
scoring methods. It has the potential to provide rigor to reduce the potential for
gaming and personal agendas. While the scoring assessment is one outcome of
the committee, the most important consequence is the learning gained from the
discussion surrounding key questions within the assessment and scoring each
technology. As a result of VERDI, a common understanding and language is
established and could be used by the individuals involved in the process.
137
It is possible to not only use the framework as an assessment tool, but a
communications tool as well. The standardized process and common
terminology developed is not only beneficial for the assessors, but enables the
innovators to understand the value of their work and the process by which it is
valued. As a defined process, incorporated into a firm's day to day operations, it
allows everyone to understand how new technology is valued and the avenues
that are pursued to gain the most from investing in it.
From an organizational standpoint, VERDI demonstrates proper alignment of
values, visions, and missions with corporate and business unit strategies and
provides a stable unbiased assessment process. It allows those outside of the
R&D group to understand that innovation in its earliest beginnings can be valued.
As described in Section 1, many firms are structured with business units and a
centralized R&D function. The business units run like independent businesses
within the firm. They are responsible for their bottom line and it is important they
manage their funds and make wise investments to increase their net profit back
to the firm. On the other hand the R&D organization has resources allocated to
them at the beginning of the year from corporate or the business units directly
and since they are not a profit center, they are not expected to return profits back
to the company. Therefore, the central R&D group is often viewed as an
overhead expense. The VERDI framework is the vehicle to communicate to
others outside the R&D organization the value of their day-to-day operations and
the importance of investing in them.
In order to successfully implement VERDI, the framework needs to be
customized to fit the firm. We were able to propose an application of VERDI that
could exist within the context of Xerox Corporation.
The customized framework,
VERDIX, detailed the specific steps and processes that would be used if the
framework were adopted within the company. The explicit terminology and
course of actions outlined in Section 5 accounts for the corporate culture of
Xerox. We caution that it may not be suitable to simply lift this modification of
138
VERDI and apply it to another firm. Cultures vary from one firm to the next and
the team that carries out the task of customizing VERDI needs to consider how
change, or new processes are rolled out and adopted in the enterprise.
Furthermore, understanding the values, vision and mission in conjunction with
the strategies of the company is critical to establishing the assessment subcriteria for the framework. This understanding will aid in setting the working
procedures and membership norms by which their assessment committee will
operate. The framework involves a committee comprised of highly skilled and
experienced individuals who represent the combined interests of the firm and
have the authority to act on their decisions. Since the leader of the assessment
committee is the chief technology officer, or a similar position, it is imperative that
he/she endorses the VERDI framework and adoption. If this cannot be achieved,
then the VERDI framework if applied will not be a governing and authoritative
power, but will only be able to act as a recommendation panel.
As seen through an example, the VERDI framework can be applied to companies
who design and manufacture products. It is most applicable to those companies
that engage heavily in R&D activities, for instance high-tech companies,
manufacturers of durable goods, like the automotive industry and aerospace and
defense contracting firms. The VERDI framework could also be tailored for use
by venture capitalists that invest in high technology start-ups. It would allow
them a method to value and monitor the technology. A subset of VERDI can be
used to assess the resource and competency base of the firm, which is where
our framework has its roots.
139
Future Work
The next step for the VERDI framework is to test it with early-stage technologies
under development today. Assessment of the technologies needs to occur and
the results cataloged. The technologies could be monitored through maturity,
and the results of the assessment could be reviewed to see how useful the
VERDI framework was in valuing the technology in its early stages. The authors
hope to perform a similar task upon return to Xerox.
A number of books in the literature have dealt with the idea of extracting value by
including tangible and intangible assets. In addition, some authors provide
insight on the methods used for valuing technology in the context of the portfolio
of R&D projects. To understand how these methods stack up against each other,
a study should be performed to compare the outcomes achieved by using these
methods. Using past technologies in this study, one could show which
technologies were chosen for investment. Gathering information on past
technologies would be much easier and would make a good point of comparison
since you would know how these technologies progressed through their maturity
cycle.
140
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