Using simulation to analyze R&D value creation

As the front-end to product and system lifecycles, research and development activities serve as engines of value creation. By nature, though, R&D involves significant uncertainty. As such, it often is viewed as an investment problem, whereby funds are invested in ventures under risk, with the hope of achieving future value. This paper investigates the use of organizational simulation to analyze the R&D investment problem, focusing on ways to increase value created from R&D. Based on a process-focused model of R&D systems, initial results indicate that using a real options framework to valuate R&D outperforms traditional discounted cash flow (DCF) methods in total value created, but that DCF methods are preferred for return on R&D investment. To complement the process-focused R&D system model, a product-focused model of R&D is specified and integrated with the process-focused model.