Real R&D Options
This is a practical guide to how organizations can use Real Option techniques to effectively value research and development by companies.
TABLE OF CONTENTS Real R&D Options
Chapter 4: An Options Approach to New Product Development Experience from Philips Electronics
ONNO LINT, ENRICO PENNINGS
SUMMARY
This chapter considers the product development process as a series of (real) options with reducing uncertainty over time. Criteria are developed to decide on speeding up or delaying the development process. The chapter demonstrates how, in the R&D phase, any particular project may be assigned within a 2 2 matrix of uncertainty versus R&D option value. A similar matrix can be established for the product launch phase. The matrices support portfolio management throughout the different phases of development and enable management to decide on an appropriate point at which to abandon individual projects. The approach originates from applying real options insights to the product development process at Philips Electronics. The chapter is illustrated with some actual R&D projects.
4.1 INTRODUCTION
Management is often confronted with the dilemma of whether or not to invest in a particular stage of the new product development (NPD) program, given a high level of market and technology uncertainty. Rapid product obsolescence and the emergence of new markets require a fast resource allocation process in NPD, while at the same time market and technology uncertainty demand flexibility in the program (see Sanchez, 1995 and Wind and Mahajan, 1988). The trade-off between accelerating time to market and making pre-launch improvements in product performance is a topical concern. On the one hand, an accelerated market introduction may lead to a substantial gain of future market share (see Urban et al., 1986; Liebermann and Montgomery, 1988; or Brown and Lattin, 1994).
Copyright Elsevier Science Ltd. 2003 under license agreement with Books24x7
