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.
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