Element Expected Commercial Value Financial Analysis

We began using the published expected commercial value concept for evaluating financial options associated with programs entering the innovation pipeline.18 Of note in our process are the "bang" (ECV) and the "bang for the buck" (ECV/resource limitations) financial impact evaluations. These demonstrate the financial gain to be achieved based on the degree of resourcing needed to achieve the goal. ECV seeks to maximize the commercial value of the portfolio. It determines a basic net present value calculation and reduces or constrains it by the risk in the project and specified budget constraints. In our modeling, technical and commercial risks constrain the calculation, along with R&D resources, required development dollars, and required capital investment necessary to achieve the programs goals. The decision tree analysis is in Figure 9.1-5.

This method is a decision tree analysis based on future earnings, probabilities of commercial (Pcs) and technical success (Pts) from anchored scales, launch ($C), and development ($D) costs. A strategic importance rating can also be factored into the formula to weight the ECV upward or downward depending on strategic intent. Over time it serves as an excellent discussion tool for the business and technology teams for monitoring the project's ECV and ECV/development costs as the project moved through the pipeline. It can be dangerous to use the ECV method solely to eliminate programs, especially when evaluating programs early in the innovation pipeline or programs with high risk. Options analysis should be applied in these cases as another method for evaluating the opportunity. Internal rate of return and payback on capital invested are also metrics used in the financial analysis.19

Figure 9.1-5 Decision Tree Analysis ECV = [(NPV * PCS - C) * PTS] - D]

Failure

Commercial Success

Figure 9.1-5 Decision Tree Analysis ECV = [(NPV * PCS - C) * PTS] - D]

Commercial Success

Commercial Failure

Failure

Source: Robert Cooper.

$NPV

Commercial Failure

Source: Robert Cooper.

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