Modeling and optimizing intellectual asset production in industrial laboratories

We present a modeling framework to maximize value output of an industrial laboratory in which there is open-end research department that generates novel ideas and multiple development stages that commercialize some ideas into intellectual assets as well as final products. Resources control takes place at both tactical and strategic levels. The former decision is made at a fast time scale, and determines whether an individual idea should be advanced to a downstream development stage. As basis for this decision, the potential profitability of an idea is assessed by its option value instead of the expected return. The strategic management is carried out by long-term budget allocation between idea generation and development. We formulate and solve an optimization problem for determining the intrinsic rate of return of the laboratory. Our key finding is that the optimal allocation can be heavily biased towards idea generation, to the extent that its output overwhelms development resources. Such configuration inevitably causes a non-trivial number of generated ideas to be dropped, but the waste is appropriate for maximizing the total profit.