The value of information updating in new product development (Q1001586)

Managing uncertainty in new product development projects for improved valuation and decision making is one of the most complex and challenging problems in operations management. It is important for any corporation depending on the success of new products and innovations. The work presented in this book addresses the problem of decision making under uncertainty in new product development projects by developing a general valuation model that takes the managerial flexibility into account to respond to two sources of uncertainty: technical uncertainty stemming from the performance variability of the project, and market uncertainty in form of market performance requirement variability. It shows how uncertainty can be handled and partly resolved by conducting an information update during the development process. It is one of the first comprehensive models that combine statistical decision theory in form of Bayesian analysis with a real options framework for projects exposed to different sources of uncertainty. The developed model allows the determination of the value of projects that are exposed to the two aforementioned sources of uncertainty. In addition, the value of an information update, the optimal updating point in time, as well as the optimal managerial decisions in response to this uncertainty reduction can be determined. The analysis allows for the exploration of the conditions under which an update is beneficial and the study of the effects of the information update on the optimal managerial policy over the entire development process. At the same time, the benefit of higher initial investments in design flexibility, which reduce the later costs of corrective actions, can be analysed to derive a threshold value for these investments. The proposed framework makes an important theoretical contribution in addressing the problem of decision making under uncertainty in new product development projects, while at the same time, it is of significant value to managers who face the difficult task of evaluating and managing complex product development projects. The book is organised in 6 chapters. Chapter 1 makes an introduction to the subject matter, while Chapter 2 reviews the relevant literature including new product development, real options analysis, and decision theory. Chapter 3 presents the formulation of the proposed valuation model, while Chapter 4 analyses this model and derives its properties. Chapter 5 presents a numerical study that is based on a real-life new product development investment project, while Chapter 6 summarises the main findings of the whole study, discusses key contributions to the current research in the field, provides clear managerial insights, and identifies possible extensions of the developed model and directions for future research.