Assessing a project or idea objectively often appears to be harder than one would initially think due to countless influential factors. A project which seemed extraordinary at the beginning might turn out to be a disaster.
Hence, we need a way to reach a valid assessment. This way can be found in the Innovation Management Suite.
We utilize two models in order to appreciate an idea or project.
Qualitative model
By using a checklist we can make an inventory of qualitative criteria such as:
· Fitting with the current business model and strategy
· Market attractive features like size and growth
· Attractiveness from the point of view of the customer
· Distinctive features in proportion to the competition
· Available competencies and resources
· Impact on the organization.
The next step is to score these criteria on a scale from one to five. However, certain criteria might affect your organization more than others. Therefore we assign relative importance to the scores. An initial maximum score of five might thus be differently interpreted.
The advantage of this approach is that we are able to manage uncertainties more efficiently. If, for instance certain market data is lacking, we assign a lower relative importance to that score and increase it when more data becomes available. Accuracy, and thus validity, is therefore greatly enhanced.
Quantitative model
This model allows us to estimate the costs and benefits of a project or idea. Today we see frequent use of the Discount Cash Flow model and its variations. Key features are:
· Free cash flows during the entire lifecycle
· The value of money over time
· Risk premium demanded by investors and banks
· Residual value.
When a product is introduced upon the market the free cash flow is in a negative state. When research a certain amount of sales the break-even point is reached which allow a positive development of the cash flow granted that sales keep on increasing. When a product or service reaches the end of its lifecycle, the free cash flow will again turn into a negative state.
Unfortunately reality often turns out differently than we have described above. Development costs might appear to be higher than expected, sales might drop etcetera. Therefore we make use of scenarios in which we can take those uncertainties into account. The figure below clarifies this.
The lines represent the Net Present Value of the product.
Scenarios can be elaborated and put into perspective of the likeliness of occurrence by using, for instance, the Monte Carlo Simulation.
We have mentioned only a few of the possibilities of appreciation methods and models to be found in the Innovation Management Suite. For an extensive overview please do not hesitate to contact us.