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Real‐option valuation of research and development investments Implications for performance measurement

Real‐option valuation of research and development investments Implications for performance... Purpose – Aims to promote an integrated performance measurement system. Design/methodology/approach – The literature on R&D performance measurement identifies the need for an integrated performance measurement system for strategy implementation. Develops a theoretical framework for R&D performance measures, incorporating real options to define strategic net present value, which values the plan to make R&D investments. Findings – Real options techniques can be used to value managers' options to shelter investments from adverse effects and exploit upside potential. The shift in valuation paradigms from a naïve net present value model to active risk management implicit in real options requires performance measures that reflect real option value and defines strategic value created (SVC), which is based on residual income concepts. Since residual income is known to be superior to ROI in motivating goal congruence, infers that SVC has similar advantages. Originality/value – Illustrates how SVC would be used as a performance measure for a new drug in the commercialization stage, considers several relevant questions and discusses how SVC could be used in a firm's balanced scorecard. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Managerial Auditing Journal Emerald Publishing

Real‐option valuation of research and development investments Implications for performance measurement

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Publisher
Emerald Publishing
Copyright
Copyright © 2005 Emerald Group Publishing Limited. All rights reserved.
ISSN
0268-6902
DOI
10.1108/02686900510570704
Publisher site
See Article on Publisher Site

Abstract

Purpose – Aims to promote an integrated performance measurement system. Design/methodology/approach – The literature on R&D performance measurement identifies the need for an integrated performance measurement system for strategy implementation. Develops a theoretical framework for R&D performance measures, incorporating real options to define strategic net present value, which values the plan to make R&D investments. Findings – Real options techniques can be used to value managers' options to shelter investments from adverse effects and exploit upside potential. The shift in valuation paradigms from a naïve net present value model to active risk management implicit in real options requires performance measures that reflect real option value and defines strategic value created (SVC), which is based on residual income concepts. Since residual income is known to be superior to ROI in motivating goal congruence, infers that SVC has similar advantages. Originality/value – Illustrates how SVC would be used as a performance measure for a new drug in the commercialization stage, considers several relevant questions and discusses how SVC could be used in a firm's balanced scorecard.

Journal

Managerial Auditing Journal – Emerald Publishing

Published: Jan 1, 2005

Keywords: Income; Performance measures; Research and development

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