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Financial projections in innovation selection: the role of scenario presentation, expertise, and risk

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  • Avagyan, Vardan
  • Camacho, Nuno
  • Van der Stede, Wim A.
  • Stremersch, Stefan

Abstract

Innovation project selection is a decision of major relevance to firms. Errors in this decisionmay have serious consequences for firms, especially as many firms struggle with optimiz-ing innovation project selection decisions. In their pitches to innovation decision-makers,project teams invariably present financial projections on their innovation projects, whichoften include best- and worst-case scenario presentation. Despite the potential influencethe presentation of such financial projections has on firms’ innovation project selectiondecisions, this topic has not received sufficient attention in the literature. This study exam-ines the role of scenario presentation on financial projections in innovation project selec-tion by conducting two conjoint experiments among 2,425 managers and 11 follow-upinterviews with senior executives. First, the findings of this study suggest that firms shouldhelp project teams present small- rather than large-range scenarios. This is important for atleast the 57% of firms surveyed in this study where project teams are reported to present‘too wide’ and ‘too extreme’ scenarios. Second, firms seeking to promote transformationalinnovation in their innovation pipeline should make the presentation of small-range sce-narios required for an innovation proposal to be presented to a project selection commit-tee. This is relevant for 79% of surveyed firms that would like to select moretransformational than core innovation projects and especially for the half of which thatcurrently do not require scenario presentation. Third, project teams with less expertiseshould develop scenarios analytically rather than intuitively and convey the project’sstrategic merit to decision-makers to help increase innovation project selection likelihood

Suggested Citation

  • Avagyan, Vardan & Camacho, Nuno & Van der Stede, Wim A. & Stremersch, Stefan, 2022. "Financial projections in innovation selection: the role of scenario presentation, expertise, and risk," LSE Research Online Documents on Economics 112474, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:112474
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    File URL: http://eprints.lse.ac.uk/112474/
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    Cited by:

    1. M. O. Kuznetsova, 2022. "Approaches To Managing Innovative Risks Of Industrial Companies," Strategic decisions and risk management, Real Economy Publishing House, vol. 12(4).

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    More about this item

    Keywords

    innovation; innovation project selection decisions; financial projections; finance; marketing-accounting interface; marketing-finance interface; new product development; scenario presentation;
    All these keywords.

    JEL classification:

    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General
    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce

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