Chapter 7-1

Discussion Questions
October 30, 2012
POSTECH Strategic Management of Information and Technology Laboratory
Dept. of Industrial & Management Engineering
Discussion Questions
■ Chapter 7. Choosing Innovation Projects
1. What are the advantages and disadvantages of discounted cash flow methods
such as NPV and IRR?
– Advantage
• Ability to support rigorous mathematical and statistical comparisons of innovation projects
– Disadvantage
• a) Their accuracy relies on the accuracy of the assumptions made by managers
and these assumptions can be inaccurate and lead to misleading results.
This is especially true in the realm of technological innovation
because it is often next to impossible to know a technology’s trajectory before it unfolds
• b) They do not incorporate information regarding the strategic important of a project
Discussion Questions
■ Chapter 7. Choosing Innovation Projects
2. For what kind of development projects might a real options approach be appropriate?
For what kind of projects would it be inappropriate?
– The real options approach is appropriate
• When there is significant uncertainty concerning the outcomes of an innovation project
• When a firm’s investment in its own capabilities is an important consideration
• When the investment is most similar to a call option (i.e. small initial investment and not dependent on
the investors behavior)
• When evaluating advanced R&D and breakthrough projects
– The real options approach is inappropriate
• When it comes to evaluating platform and derivative projects
* Real options may be more complex than is necessary

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