NEW PRODUCT DEVELOPMENT RISK MANAGEMENT AND DECISION-MAKING: THE USE OF REAL OPTIONS

Abstract

Companies must continuously develop new products to achieve and sustain a strategic position in a fierce market. But developing new products involves a lot of risk and uncertainty on profit and losses. In the present article, the concept of real options theory is prospected and a model to use the real options in new product development (NPD) is proposed, so that financial aspects can be properly considered at each project phase of the product development. The real option valuation method is often presented as an alternative to the conventional net present value (NPV) approach. It is based on the same principals of financial options: the right to buy or sell financial values at a predetermined price, with no obligation to do so. In NPD, a multi-period approach that takes into account the flexibility of, for instance, being able to postpone prototyping and design decisions, waiting for more information about technologies, customer acceptance, funding, etc., is considered. Conclusion is that such model can provide more robustness to the decisions processes within NPD.