The Option Approach to the New Product Development Process*

*Study financed by the Netherlands Technology Foundation (STW) The authors gratefully acknowledge discussants at Philips Corporate Research and Philips Corporate Strategy, especially Joop Dat, for fruitful discussions. The article expresses the view of the authors solely and doesnot necessarily correspond with former or current research and product policy decisions at Philips Electronics. 1 [Abstract] Current phase-review processes for new product development can not properly capture the economic value of managerial flexibility to continue or abandon a project at different stages of development. Due to this, the discussion whether it is fruitful to skip phases in the development process in order to create time-to-market advantage is left open. By applying insights from the valuation of real options, this article proposes a framework for the assessment of new product development at different stages. Moreover, we derive criteria to speed up the development process or not and introduce the options portfolios, which serve as a basis for assessment and as a tool for choosing an optimal set of business initiatives from a variety of feasible alternatives. We have explored the portfolio approach at Philips Electronics and illustrate the article with examples of some current R&D projects. 2 1. Introduction Today's world is characterized by major changes in market and economic conditions, coupled with rapid advances in technologies. Management is often confronted with the dilemma whether or not to invest in a particular stage of the new product development (NPD) program, given market and technology uncertainties surrounding such a decision in current markets, most of all technology-driven or high-tech markets (Moriarty and Kosnik, 1989). The changing economic conditions and technologies combined with increased domestic and global competition, changing customer needs, rapid product obsolescence and the emergence of new markets, require a fast resource Therefore, the trade-off between accelerating time-to-market or making pre-launch improvements in product performance has become a topical concern. On the one hand, an accelerated market introduction may lead to a substantial gain of future market share. The market share advantage that results from a rapid time to market has been explored by Urban et al. give surveys on the acceleration of the NPD process by skipping phases. On the other hand, as argued by Griffin and Page (1993), reducing time to market is only advisable when this does not limit the probability of success of the final product to be introduced to the market. Furthermore, Crawford (1992) discusses that there are …