Strategic Management of Technological Innovation Melissa Schilling 6e

Strategic Management of Technological Innovation Melissa Schilling 6e

Strategic Management of Technological Innovation, 6e (Schilling)

Chapter 7 Choosing Innovation Projects

1) The allocation of a finite quantity of resources over different possible uses is known as research rationing.

Answer: FALSE

Difficulty: 1 Easy

Topic: Overview

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2) The ratio of R&D expenditures to sales is known as R&D trajectory.

Answer: FALSE

Difficulty: 1 Easy

Topic: The Development Budget

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3) According to the net present value method of discounted cash flow analysis, the time required to break even on a project using discounted cash flows is known as period of return.

Answer: FALSE

Difficulty: 1 Easy

Topic: Quantitative Methods for Choosing Projects

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4) Both net present value and internal rate of return techniques provide concrete financial estimates that facilitate strategic planning and trade-off decisions.

Answer: TRUE

Difficulty: 1 Easy

Topic: Quantitative Methods for Choosing Projects

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5) Standard discounted cash flow analysis has the potential to severely undervalue a development project’s contribution to a firm.

Answer: TRUE

Difficulty: 1 Easy

Topic: Quantitative Methods for Choosing Projects

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6) Calculating the internal rate of return of a project typically must be done by trial and error.

Answer: TRUE

Difficulty: 1 Easy

Topic: Quantitative Methods for Choosing Projects

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7) From a real options perspective, the value of a call stock option is zero as long as the price of the stock is more than the exercise price.

Answer: FALSE

Difficulty: 1 Easy

Topic: Quantitative Methods for Choosing Projects

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8) Options are valuable when there is uncertainty, and because technology trajectories are uncertain, an options approach may be useful.

Answer: TRUE

Difficulty: 1 Easy

Topic: Quantitative Methods for Choosing Projects

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9) While the value of a stock is independent of the call holder’s behavior, the value of a R&D investment is not independent of the investor’s behavior.

Answer: TRUE

Difficulty: 1 Easy

Topic: Quantitative Methods for Choosing Projects

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10) The investor is an active driver of the value of an investment.

Answer: TRUE

Difficulty: 1 Easy

Topic: Quantitative Methods for Choosing Projects

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11) Breakthrough projects typically offer fundamental improvements in the cost, quality, and performance of a technology over preceding generations.

Answer: FALSE

Difficulty: 1 Easy

Topic: Qualitative Methods for Choosing Projects

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12) A derivative project is designed to serve a core group of consumers, whereas platform projects represent modifications of the basic platform design to appeal to different niches within that core group.

Answer: FALSE

Difficulty: 2 Medium

Topic: Qualitative Methods for Choosing Projects

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13) Conjoint analysis enables a subjective assessment of a complex decision to be decomposed into quantitative scores of the relative importance of different criteria.

Answer: TRUE

Difficulty: 1 Easy

Topic: Combining Quantitative and Qualitative Information

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14) Data envelopment analysis (DEA) utilizes linear programming.

Answer: TRUE

Difficulty: 1 Easy

Topic: Combining Quantitative and Qualitative Information

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15) The drawback to data envelopment analysis (DEA) is that it does not allow comparisons of projects using multiple kinds of measures.

Answer: FALSE

Difficulty: 1 Easy

Topic: Combining Quantitative and Qualitative Information

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16) ________ refers to the allocation of a finite quantity of resources over different possible uses.

1. A) Systematic enrollment
2. B) Translational funding
3. C) Organizational appropriation
4. D) Capital rationing

Answer: D

Difficulty: 1 Easy

Topic: Overview

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17) Mark is a wealthy private financier who funds projects without utilizing a venture capital limited partnership structure. He typically provides funds for start-up projects that are $1 million or less. There have been instances in the past where Mark lost a huge share of money in some projects, but he also received high returns on some other projects. He is aware of the risks, but that does not stop him from funding start-ups. Which of the following would best describe Mark?

1. A) He is a market leader.
2. B) He is a laggard.
3. C) He is an angel investor.
4. D) He is a broker.

Answer: C

Difficulty: 3 Hard

Topic: The Development Budget

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18) Which of the following statements is true of angel investors?

1. A) They are usually listed in public directories.
2. B) They typically fund projects that are $50 million or more.
3. C) They are often wealthy individuals who have been very successful in business.
4. D) They avoid funding start-ups because of the high risks involved in these businesses.

Answer: C

Difficulty: 2 Medium

Topic: The Development Budget

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19) Which of the following is true of quantitative methods of analyzing new projects, particularly in rapidly changing environments?

1. A) They enable managers to use rigorous statistical comparisons of projects.
2. B) Their accuracy is unquestionable.
3. C) Discounted cash flow methods are the least commonly used quantitative methods.
4. D) They are particularly accurate in highly uncertain or rapidly changing environments.

Answer: A

Difficulty: 2 Medium

Topic: Quantitative Methods for Choosing Projects

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20) The discounted cash inflows of a project minus the discounted cash outflows is referred to as the ________ of the project.

1. A) internal rate of return
2. B) net present value
3. C) real option
4. D) screening value

Answer: B

Difficulty: 1 Easy

Topic: Quantitative Methods for Choosing Projects

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21) What is the net present value (NPV) of a project if the present value of cash inflow is $10,000 and the present value of cash outflows is $5,000?

1. A) $2,000
2. B) $5,000
3. C) $10,000
4. D) $15,000

Answer: B

Difficulty: 2 Medium

Topic: Quantitative Methods for Choosing Projects

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22) If the net present value of a project is greater than zero, then the:

1. A) project cannot be carried out as the cash outflow is too high.
2. B) present value of cash outflows is higher than the present value of cash inflow.
3. C) project will require five years to break even.
4. D) project generates wealth.

Answer: D

Difficulty: 2 Medium

Topic: Quantitative Methods for Choosing Projects

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23) In the context of a research and development (R&D) program, which of the following can be considered the exercise price?

1. A) The cost of the R&D program
2. B) The cost of future investment required to capitalize on the R&D program
3. C) The returns to the R&D investment
4. D) The returns to the R&D investment minus the cost of the R&D program

Answer: B

Difficulty: 1 Easy

Topic: Quantitative Methods for Choosing Projects

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24) If a firm has the option of investing in R&D, the cost of commercializing a new technology that is developed can be considered the:

1. A) exercise price.
2. B) price of a call option.
3. C) benefit of exercising the option.
4. D) the value of the option.

Answer: A

Difficulty: 2 Medium

Topic: Quantitative Methods for Choosing Projects

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25) Which of the following is an advantage of using the real options approach of evaluating a project?

1. A) It results in better technology investment decisions than a cash flow analysis approach.
2. B) It is useful as technology investment scenarios often conform to the same capital market assumptions upon which the approach is based.
3. C) It is cheap to use in case of a firm undertaking solo new product development.
4. D) It is valuable only when there is no uncertainty in technology trajectories.

Answer: A

Difficulty: 2 Medium

Topic: Quantitative Methods for Choosing Projects

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26) Which of the following is a disadvantage of using internal rate of return for assessing a project?

1. A) It fails to take into account the time value of money and risk.
2. B) It cannot be calculated by trial and error.
3. C) It discriminates heavily against long-term and risky projects.
4. D) It fails to provide concrete financial estimates.

Answer: C

Difficulty: 2 Medium

Topic: Disadvantages of Quantitative methods

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27) In the context of qualitative methods for choosing projects, screening questions are used mainly to:

1. A) increase the rate of employee attrition.
2. B) structure the discussion about project details like potential costs and benefits.
3. C) increase employee turnover rates.
4. D) choose the best consulting firm to analyze a potential project.

Answer: B

Difficulty: 2 Medium

Topic: Qualitative Methods for Choosing Projects

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28) NewDigger Inc. makes backhoes for digging ditches and trenches. It has developed an environmental-friendly liquid that, when poured on the ground, reduces the time and labor required to dig trenches of various depths, depending on how much is applied. The firm has recently started using this product commercially. This would most probably be considered a(n) ________ project for NewDigger.

1. A) derivative
2. B) platform
3. C) breakthrough
4. D) additive

Answer: C

Difficulty: 3 Hard

Topic: Qualitative Methods for Choosing Projects

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29) TechToTeach Co. has developed and sold a product that can be used by students to take faster notes in a classroom as the teacher speaks. The device automatically records the teacher’s voice and converts it into a text format. This new technology has been widely accepted by various universities and has been appreciated by students, thus increasing the company’s inflow. This technology can be most accurately described as a(n) ________ project by TechToTeach.

1. A) advanced R&D
2. B) platform
3. C) breakthrough
4. D) derivative

Answer: C

Difficulty: 3 Hard

Topic: Qualitative Methods for Choosing Projects

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30) Coolers Inc., a house appliances manufacturer, has upgraded its technology by making all its appliances work on voice sensors instead of remote controls or manual operations. Though the technology is new, Coolers has decided to introduce the product in the market at the same rates as its earlier technology so that its usual customers can purchase these products. This project is a(n) ________ for Coolers Inc.

1. A) platform project
2. B) derivative project
3. C) breakthrough project
4. D) start-up project

Answer: A

Difficulty: 3 Hard

Topic: Qualitative Methods for Choosing Projects

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31) A firm that invests heavily in derivative projects that may be immediately commercialized with little risk:

1. A) will have greater long-term strategic momentum.
2. B) will be on the leading edge of technology.
3. C) will likely be unable to compete when the market shifts to a newer technology.
4. D) will have poor returns on its R&D investment in the short run.

Answer: C

Difficulty: 2 Medium

Topic: Qualitative Methods for Choosing Projects

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32) In the ________ method, in order to establish scales of customer preferences, individuals in a group are each given a stack of cards with an object or idea on each card.

1. A) derivative
2. B) conceptual
3. C) DEA
4. D) Q-sort

Answer: D

Difficulty: 1 Easy

Topic: Qualitative Methods for Choosing Projects

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33) Jack took part in a survey in which he was asked to rank the importance of certain features of the smart television he had recently purchased. The result was then used by the surveying firm to assess the different attributes of the ranking. This survey would most accurately be termed a ________.

1. A) cognitive analysis
2. B) transactional analysis
3. C) program analysis
4. D) conjoint analysis

Answer: D

Difficulty: 2 Medium

Topic: Combining Quantitative and Qualitative Information

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34) Fabmark Consultancy was asked by a client to evaluate the attractiveness of a potential project to develop a new product line. The data provided by the client included cash flow estimates (in dollars), ranking of marketability by the sales force, and ranking of different product attributes from a potential customer focus group. Which of the following methods would allow Fabmark Consultancy to combine this information and analyze it?

1. A) Q-sort
2. B) Data envelopment analysis
3. C) Attribute ranking
4. D) Breakeven analysis

Answer: D

Difficulty: 3 Hard

Topic: Combining Quantitative and Qualitative Information

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35) Which of the following statements is true of conjoint analysis?

1. A) It is a simple method for ranking objects or ideas on a number of different dimensions.
2. B) It is used by managers to compare their desired balance of projects with their actual balance of projects.
3. C) It requires the creation of a hypothetical efficiency frontier.
4. D) It is most commonly used to assess the relative importance to customers of different product attributes.

Answer: D

Difficulty: 2 Medium

Topic: Combining Quantitative and Qualitative Information

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36) Why do technology start-ups face a much higher cost of capital than larger competitors? Discuss the sources from which new technology start-ups can obtain external financing.

Answer: While large firms can fund innovation projects internally, new technology start-ups must often obtain external financing. This can sometimes be daunting. Because technology start-ups often have both an unproven technology and an unproven business concept (and sometimes an unproven management team), they typically face a much higher cost of capital than larger competitors, and their options for obtaining capital can be very limited.

In the first few stages of start-up and growth, entrepreneurs may have to turn to friends, family, and personal debt. Start-ups might also be able to obtain some initial funding through government agencies. If the idea and the management team seem promising enough, the entrepreneur can tap “angel investors” and venture capitalists as sources of both funds and mentoring. Angel investors are private investors who fund projects without utilizing a venture capital limited partnership structure. For projects that require more than $1 million, entrepreneurs often turn to venture capital, either from independent venture capital firms or corporate venture capital sources. The support of a venture capitalist provides a number of valuable benefits including credibility among other investors (and thus better access to capital) and mentoring.

Difficulty: 2 Medium

Topic: The Development Budget

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37) What is the internal rate of return of a project? How is it calculated? What are the drawbacks of using this method?

Answer: The internal rate of return (IRR) of a project is the discount rate that makes the net present value of the investment zero. Managers can compare this rate of return to their required return to decide if the investment should be made. Calculating the IRR of a project typically must be done by trial and error, substituting progressively higher interest rates into the net present value (NPV) equation until the NPV is driven down to zero. Calculators and computers can perform this trial and error. This measure should be used cautiously, however; if cash flows arrive in varying amounts per period, there can be multiple rates of return, and typical calculators or computer programs will often simply report the first IRR that is found.

Difficulty: 2 Medium

Topic: Quantitative Methods for Choosing Projects

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38) Explain how the real options method uses stock options. Are there any drawbacks to this method?

Answer: To understand real options, it is first useful to consider the financial model upon which they are based—stock options. In “real options,” the assets underlying the value of the option are nonfinancial resources. An investor who makes an initial investment in basic R&D or in breakthrough technologies is, it is argued, buying a real call option to implement that technology later should it prove to be valuable. With respect to research and development:

1. The cost of the R&D program can be considered the price of a call option.
2. The cost of future investment required to capitalize on the R&D program (such as the cost of commercializing a new technology that is developed) can be considered the exercise price.
3. The returns to the R&D investment are analogous to the value of a stock purchased with a call option.

One drawback is the fact that technology investment scenarios often do not conform to the same capital market assumptions upon which the approach is based. Furthermore, while the value of a stock is independent of the call holder’s behavior (that is, the call holder can simply wait and observe whether the value of the stock rises or falls), the value of an R&D investment is not independent of the investor’s behavior.

Difficulty: 2 Medium

Topic: Quantitative Methods for Choosing Projects

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39) Dayton Regional Medical Center has decided to build a new wing for its outpatient services. Dayton wants to know which services are important to its patients in this new wing. Do they prefer large waiting rooms for family members or small rooms adjacent to recovery rooms? Do they prefer patient advocates to keep them informed, or would nurses be better? What technique would be appropriate to come up with the weights and trade-offs for these types of services? Explain why you consider the technique to be most appropriate.

Answer: A conjoint analysis technique would be the best choice for this analysis. Conjoint analysis can estimate the specific value of features of the outpatient center. As a part of the analysis, pricing for these services can also be determined. Multiple regression can be used to assess the degree to which each service influences the overall rating, resulting in the assignment of specific weights to individual criteria for different configurations of the outpatient center. Although Dayton Regional Medical Center cannot please everyone, it can come up with the “best” configuration for its patient base.

Difficulty: 2 Medium

Topic: Combining Quantitative and Qualitative Information

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40) General Sys Inc. has gathered data to evaluate the attractiveness of a potential project. It knows the cash flows expected under different scenarios. It has conducted a focus group that ranks various product attributes, and it has the ranking of various marketing techniques provided by a consulting company. What method should General Sys use to evaluate this project? Why is this method the best one to use?

Answer: General Sys should use data envelopment analysis (DEA) to conduct its evaluation. This method allows analysis of multiple criteria that have different kinds of measurement units. In this case, measurement units include dollars (cash flows) and rankings (focus group and consulting company). DEA uses linear programming to combine these different measures to create a hypothetical efficiency frontier that represents the best performance on each measure. These values can then be used to compare this project with other projects.

Difficulty: 2 Medium

Topic: Combining Quantitative and Qualitative Information

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