Understanding R&D value creation with organizational simulation

Research and development functions are fundamental drivers of value creation in technology‐based enterprises. Successful R&D is a function of invention and R&D management. This paper studies R&D management issues from the perspective of their effect on value creation. The particular issues studied are: (i) How does one attach a value to a particular proposed R&D activity, and (ii) how does one allocate funding over the various stages comprising an R&D value stream? Organizational simulation is used in an experiment to determine the value creation effectiveness of alternative investment policies. Experimental results indicate the superiority of valuation methods (options pricing vs. traditional net present value approaches) and budget allocation strategies under differing conditions and differing value‐oriented performance measures. An application of the model to R&D in the forest products industry is presented.