An options approach to new product development. experience from Philips Electronics.

This chapter discusses the new product development (NPD) process as a series of real options with reducing uncertainty over time. A classic redesign of NPD process in such a way that management can better deal with market and technology uncertainty is the phase review process. Phase review processes divide NPD into a predetermined set of stages with checkpoints (gates). Each gate is characterized by a set of deliverables or inputs, a set of criteria, and an output. The inputs of the functional area at each stage are the deliverables from the functional area at the preceding stage. The criteria are the hurdles that the project must pass at the gate to have it opened to the next stage. At these stages, management can perform different kinds of assessment such as market, technical, financial, and legal. By dividing the NPD process into different stages at which a go/no-go decision is made, this approach deals effectively with market and technology uncertainty surrounding the new product. By treating NPD as an incremental process, the option approach gives explicit decision rules for the trade-off between validating the project or market preemption.