Product development is often viewed as secondary to research, particularly in technology industries. But failing to attribute strategic importance to the product development that commercializes technology investments ignores the fact that successful technology innovation often fails to produce commercially successful products. In fact, it is investment in new-product development that is the single strongest predictor of a company’s future value.1
The product-development process, however, is often seen as an undependable black box that rarely produces results that exceed business expectations. Traditional financial models have limited success exposing the numerous product-development risks that underlie the assumptions in a typical business case. Net present value (NPV) remains the most commonly used decision-making tool in product development, but has been criticized for not properly accounting for uncertainty and project flexibility — that is, multistage development funding and abandonment options.2 Decision trees more accurately capture the multistage nature of development, using probability-based expected monetary values, but can be time-consuming and complex to construct. An emerging alternative to decision trees is real options,3 a technique that applies financial options theory to nonfinancial assets and encourages managers to consider the value of strategic investments in terms of risks that can be held, hedged or transferred. However, the real options technique has yet to be widely implemented for product development, because the ability... To read the complete article, login or sign-up using the form below.
Become a premium subscriber today to read this and all MIT Sloan Managmeent Review articles.
Buy this article. Purchase one or more copies of this article in PDF form.
Become a premium subscriber today to read this article and the entire archive of MIT SMR articles.
Upgrade your existing subscription to premium
Sign in if you are a premium subscriber.
Do you subscribe the MIT Sloan Management Review in print? Enter the email address and password you used when ordering. Don't remember? Lookup your subscription account information
- Register for free access to recent articles and the current issue of MIT Sloan Management Review.
- Subscribe and read articles from the past three years online.
- Premium subscription give you access to the entire archive of articles.
