Structuring the New Product Development Pipeline

In many new product development (NPD) situations, the development process is characterized by uncertainty, and no single development approach (e.g., a particular technological version) will necessarily lead to a successful product. In order to increase the likelihood of having at least one successful product at the end of the NPD process, managers may choose to fund simultaneously multiple approaches. This strategy becomes a lot more complicated when the number of stages (e.g., concept screening, prototype testing) characterizing the NPD process increases. The managerial challenge is thus to construct ex-ante an appropriate NPD pipeline by choosing the right (i.e., optimal) number of approaches to be funded simultaneously at each stage. The so-called pipeline problem is present in other contexts as well. These include advertising copy selection, national rollout of new products with test markets as well as situations such as recruiting for academic positions. In this paper, we present a normative model for structuring such pipelines -using a decision theoretic framework. The model incorporates inter-disciplinary considerations such as R&D, marketing, and product development. The structure of the optimal pipeline is driven by three critical factors: the cost of a development approach, its probability of survival, and the expected profitability if a successful product is developed and launched. We illustrate the workability and implications of the model by applying it to a number of real-world scenarios in the pharmaceutical industry, and by comparing its normative pipelines recommendations against actual pipelines. We also present general qualitative insights with regard to the optimal pipeline structure under two scenarios: one-stage NPD and two-stage NPD. Our results suggest, in general, that the pharmaceutical firms we studied employ narrower pipelines for their new drugs development than they should, and thereby they underspend on R&D.