Linking R&D Performance Measurement and Valuation to Corporate Strategy, written by Wayne G. Bremser, Ph.D., CPA, with Villanova University and Hemantha S. B. Herath, Ph.D., ACMA, provides information on R&D performance measurement and valuation useful to executives such as the CFO or controller.
The current trend in R&D management is to link R&D to corporate strategy. This linkage typically is created through a company's performance measurement process. However, the linkage presents challenges because it requires integration of various organizational components and R&D projects have unique qualities and involve new knowledge.
This Portfolio explains and contrasts various principles and techniques for measuring performance of R&D projects and departments. U.S. GAAP and IFRS standards are summarized to provide a frame of reference for financial measures that may be relevant to the organization's performance measurement system.
Linking R&D Performance Measurement and Valuation to Corporate Strategy presents a model of the functions of R&D performance measurement systems and describes R&D metrics (i.e., performance measures) for different purposes. Techniques for valuing the benefits of R&D projects are also described.
Additionally, this Portfolio presents real option valuation models and examples of how they are used and demonstrates why real option models may provide the most accurate and useful valuation results for strategy implementation.
In designing a PMS for R&D, it is important to consider principles and practices that have been used by successful firms. Many research studies provide insight into performance measurement practices.
Linking R&D Performance Measurement and Valuation to Corporate Strategy provides information on R&D PMS and valuation techniques that would be useful to executives such as a chief executive officer (CEO), chief financial officer (CFO), R&D manager, chief technology officer (CTO), or controller.
This Portfolio's four basic objectives are to:
1. Explain and contrast various principles and techniques for measuring the performance of R&D projects and departments.
2. Summarize U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) to provide a frame of reference for financial measures that may be relevant to the organization's PMS.
3. Explain the functions of R&D PMS and describe R&D metrics for different purposes.
4. Develop a comprehensive set of R&D valuation models that can be adopted by practitioners to provide useful valuations for strategy implementation.
Linking R&D Performance Measurement and Valuation to Corporate Strategy allows you to benefit from:
This Portfolio is included in the Accounting Policy & Practice Series, a comprehensive series of titles which explain, explicate, and offer commentary on a wide range of accounting and financial management topics, including revenue recognition, income taxes, leasing, business combinations, debt instruments, risk management, internal controls and more.
Detailed Analysis
I. Background and Scope of Portfolio
A. Background
B. Scope of Portfolio
II. The Research and Development Performance Measurement Process
A. R& D Resource Allocations
1. Types of Research
2. Resource Allocation Reporting
B. Key R& D Performance Measurement Concepts
1. Common Measures
2. Linkages and Unique Measures
3. Alignment
C. Key R& D Performance Measurement Issues
1. Linkage to Strategy
2. Linkage to Profitability
3. Alignment and Integration
4. Leading and Lagging Measures
5. Valuing R& D
6. Knowledge
7. Effectiveness
8. Efficiency
9. Responsibility Accounting
10. Levels
11. Outsourcing
12. Budgeting
13. Tracking Projects
14. Information Technology
15. Incentives
D. Performance Measurement Models
1. Balanced Scorecard
2. Performance Prism
3. Technology Value Pyramid
4. Stage-Gateâ„¢ Model
III. Research and Development Accounting
A. Generally Accepted Accounting Principles
B. Research and Development Activities
C. Research and Development Costs
D. Computer Software
E. R& D Disclosures
F. International Financial Reporting Standards
G. Financial Measures
IV. Research and Development Performance Measurement Methods and Techniques
A. General
B. Functions of R& D Performance Measurement Systems
1. Communication and Diagnostic
a. Facilitate Communication
b. Facilitate Alignment
c. Provide a Framework to Monitor Progress
d. Report on Actual Performance
e. Provide Timely Monitoring and Access
f. Assess Correlation
2. Organizational Learning
a. Facilitate Identification of New Opportunities
b. Support Organizational Learning
c. Support Organizational Cultural Objectives
3. Support Strategic Decisionmaking
a. Provide Perspective Link to Competitive Environment
b. Promote Ethical Behavior
c. Support Risk Management Model
4. Motivation and Incentives
a. Support Personnel in Achieving Organizational Goals
b. Encourage and Facilitate Innovation
c. Provide Information to Support Performance Awards
C. Metric and Measurement Concepts and Analysis
1. Measurement Methods - Qualitative Versus Quantitative
2. Objective Versus Subjective
3. Measurement Method Classification
4. Common Measures
D. Selecting R& D Performance Measurement Metrics
1. Select One Measure and Correlated Measures
2. Metric Level
3. Performance Measures Versus Diagnostic Measures
E. R& D Performance Metric Documentation Record
1. What Is the Metric Name?
2. Why Is This Metric Necessary?
3. What Performance Is the Metric Intended to Measure?
4. What Measurement Method Is Used to Calculate the Metric?
5. What Relevance Is the Measure to Current or Planned Strategic Initiative(s) or Themes?
6. What Relevance Is the Measure to the Company's Goals or Objectives?
7. What Relevance Is the Measure to BSC Perspective or Metrics Clusters?
8. What Is the Logic Underlying the Measure?
9. How Would the Firm Collect This Measurement Information?
10. How Will Targets Be Set?
11. What Are the Anticipated Reasons for Variances From Target?
12. How Strongly Is This Measure Correlated With Other Measures Currently Being Used?
13. How Will the Metrics Be Reported?
14. How Often Would the Metrics Be Reported?
15. Who Has the Authority and Responsibility for the Measure?
16. How Will Using This Metric Affect Behavior?
17. Overall, How Will Using This Metric Contribute to the R& D PMS Functioning?
F. R& D Metrics and Framework
1. What Are New Products Contributing to Revenues?
2. What Are New Products Contributing to Net Income or Operating Cash Flow?
3. What Is Being Invested in R& D?
4. What Is the Return on Investment in R& D?
5. What Is the Value of the Products and Services in the Pipeline?
6. What Is the Value of the New Product Portfolio Developed in the Last x Years?
7. How Do Customers View New Product Performance?
8. How Responsive Is R& D to Market Changes on a Timely Basis?
9. How Do New Product Designs Compare With Competitors and Project Objectives?
10. What Is the Effectiveness in Selecting R& D Projects?
11. What Is R& D Efficiency and Productivity?
12. How Effective Are the R& D Processes?
13. How Does R& D Create Value by Supporting the Organization's Continuous Improvement Initiatives?
14. How Effective Is R& D in Launching New Products?
15. How Effective Are Efforts in Generating New Ideas and Managing the Ideation Process?
16. Are Supplier Relationships Contributing to R& D Strategy Implementation?
17. What Is R& D's Contribution to the Organization's Innovative Capabilities and Accomplishments?
18. How Are Technology Platforms Providing a Basis for New Products?
19. Are R& D Intellectual Assets Capable of Achieving Goals and Objectives?
20. Do the Firm's Technological Capabilities Support the Organization's Strategy?
21. Are External Partners Being Effectively Used to Implement R& D Strategy?
22. How Are Breakthrough Technology and New Product Development Investments Contributing to the Organization's Success?
G. R& D Metrics Selection and Reporting
1. Strategic Question Framework Example
2. Balanced Scorecard Linkage Example
V. Research and Development Valuation Models
Introductory Material
A. Traditional Capital Budgeting Techniques
1. Deterministic Models
2. Probabilistic (Risk) Models
a. Decision Tree Analysis (DTA)
b. Monte Carlo Simulation (MCS)
(1) Building a Simulation Model
(2) Monte Carlo Sampling Process
(3) Inverse Transformation Method
(4) Selecting an Input Distribution
(5) Output Distribution
3. Project Risk
4. A Detailed Simulation Example
5. Pitfalls of Traditional Models (Limitations of DCF)
a. R& D Project Characteristics
b. Discount Rate Selection Problem
c. Value of Managerial Flexibility Through Early Uncertainty Resolution
B. Real Options Analysis
1. Basic Concepts and Analogy to Financial Options
2. Options Variables and Validity of Assumptions
3. Illustration of an Option to Defer an R& D Investment
4. Basic Real Options Valuation Framework
a. Binomial Framework for Valuing Real Options
b. Developing a Multi-Period Binomial Lattice
c. Black - Scholes Model
d. Application of B-S Model to Value an Option to Defer
e. Application of the Binomial Model to Value an Option to Defer
f. Valuing an American-Type Real Call Option Using the Binomial Model
5. Estimation of Volatility
6. R& D Risk Management Using Real Options
C. Modeling R& D as Real Options
1. A Basic Example of the Real Options Approach
2. Compound Real Options
a. Sequential Decision Framework for R& D
b. Valuing a European Sequential Compound Real Option (Uncorrelated Assets)
c. Valuing an American-type Sequential Compound Real Option (Uncorrelated Assets)
D. Numerical Example 1: European-Type Sequential Compound Real Option
1. Traditional DCF Calculation
2. Computations for the European-Type Sequential Compound Real Option
E. Numerical Example 2: American-Type Sequential Compound Real Option
F. Real Options Summary
Working Papers
TABLE OF WORKSHEETS
Worksheet 1 Glossary and List of Symbols Used
Worksheet 2 Summary of Resource Allocations for R& D Activities
Worksheet 3 R& D Performance Measurement Issues Diagnostic Questionnaire
Worksheet 4 R& D Performance Measurement Metric Documentation Record
Worksheet 5 R& D Strategic Questions Relevant to Performance Measurement
Bibliography
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