Valuation of R&D investments for new products: A real options approach focusing on key uncertainties

M.J.F. Wouters; B. Roorda; R. Gal

doi:10.1109/IEEM.2009.5373118

Valuation of R&D investments for new products: A real options approach focusing on key uncertainties

M.J.F. Wouters, B. Roorda, R. Gal

Research output: Chapter in Book/Report/Conference proceeding › Conference contribution › Academic › peer-review

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Abstract

Firms make very significant investments in new product development (NPD) projects, yet the economic return on these investments is often uncertain. The technical success of NPD projects is one source of uncertainty, and also how the market (customers) will respond to the new product. Often there is flexibility that firms can exploit to deal with uncertainty. Real options models can represent this uncertainty and flexibility. This paper presents a real options approach for valuing early-stage NPD projects, which is practically applicable in a complex setting: many uncertainties about technology and market; the order in which uncertainties are resolved and decisions will be made, cannot be fully specified in advance; transparency of the method is key; and interdependencies among NPD projects exist. The approach, implemented through a spreadsheet model, has been developed by Philips Lighting and university researchers, and it has been applied to support large NPD investment decisions.

Original language	English
Title of host publication	2009 IEEE International Conference on Industrial Engineering and Engineering Management
Place of Publication	Piscataway, NJ
Publisher	IEEE
Pages	1627-1631
ISBN (Electronic)	978-1-4244-4870-8
ISBN (Print)	978-1-4244-4869-2
DOIs	https://doi.org/10.1109/IEEM.2009.5373118
Publication status	Published - 8 Dec 2009
Event	2009 IEEE International Conference on Industrial Engineering and Engineering Management, IEEM 2009 - Hong Kong, Hong Kong Duration: 8 Dec 2009 → 12 Dec 2009

Conference

Conference	2009 IEEE International Conference on Industrial Engineering and Engineering Management, IEEM 2009
Abbreviated title	IEEM
Country/Territory	Hong Kong
City	Hong Kong
Period	8/12/09 → 12/12/09

Keywords

New product development
R&D
Investment decisions
Real options
Decision trees

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10.1109/IEEM.2009.5373118

Cite this

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title = "Valuation of R&D investments for new products: A real options approach focusing on key uncertainties",

abstract = "Firms make very significant investments in new product development (NPD) projects, yet the economic return on these investments is often uncertain. The technical success of NPD projects is one source of uncertainty, and also how the market (customers) will respond to the new product. Often there is flexibility that firms can exploit to deal with uncertainty. Real options models can represent this uncertainty and flexibility. This paper presents a real options approach for valuing early-stage NPD projects, which is practically applicable in a complex setting: many uncertainties about technology and market; the order in which uncertainties are resolved and decisions will be made, cannot be fully specified in advance; transparency of the method is key; and interdependencies among NPD projects exist. The approach, implemented through a spreadsheet model, has been developed by Philips Lighting and university researchers, and it has been applied to support large NPD investment decisions.",

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author = "M.J.F. Wouters and B. Roorda and R. Gal",

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Wouters, MJF, Roorda, B & Gal, R 2009, Valuation of R&D investments for new products: A real options approach focusing on key uncertainties. in 2009 IEEE International Conference on Industrial Engineering and Engineering Management. IEEE, Piscataway, NJ, pp. 1627-1631, 2009 IEEE International Conference on Industrial Engineering and Engineering Management, IEEM 2009, Hong Kong, Hong Kong, 8/12/09. https://doi.org/10.1109/IEEM.2009.5373118

Valuation of R&D investments for new products: A real options approach focusing on key uncertainties. / Wouters, M.J.F.; Roorda, B.; Gal, R.
2009 IEEE International Conference on Industrial Engineering and Engineering Management. Piscataway, NJ: IEEE, 2009. p. 1627-1631.

Research output: Chapter in Book/Report/Conference proceeding › Conference contribution › Academic › peer-review

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T1 - Valuation of R&D investments for new products

T2 - 2009 IEEE International Conference on Industrial Engineering and Engineering Management, IEEM 2009

AU - Wouters, M.J.F.

AU - Roorda, B.

AU - Gal, R.

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N2 - Firms make very significant investments in new product development (NPD) projects, yet the economic return on these investments is often uncertain. The technical success of NPD projects is one source of uncertainty, and also how the market (customers) will respond to the new product. Often there is flexibility that firms can exploit to deal with uncertainty. Real options models can represent this uncertainty and flexibility. This paper presents a real options approach for valuing early-stage NPD projects, which is practically applicable in a complex setting: many uncertainties about technology and market; the order in which uncertainties are resolved and decisions will be made, cannot be fully specified in advance; transparency of the method is key; and interdependencies among NPD projects exist. The approach, implemented through a spreadsheet model, has been developed by Philips Lighting and university researchers, and it has been applied to support large NPD investment decisions.

AB - Firms make very significant investments in new product development (NPD) projects, yet the economic return on these investments is often uncertain. The technical success of NPD projects is one source of uncertainty, and also how the market (customers) will respond to the new product. Often there is flexibility that firms can exploit to deal with uncertainty. Real options models can represent this uncertainty and flexibility. This paper presents a real options approach for valuing early-stage NPD projects, which is practically applicable in a complex setting: many uncertainties about technology and market; the order in which uncertainties are resolved and decisions will be made, cannot be fully specified in advance; transparency of the method is key; and interdependencies among NPD projects exist. The approach, implemented through a spreadsheet model, has been developed by Philips Lighting and university researchers, and it has been applied to support large NPD investment decisions.

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KW - R&D

KW - Investment decisions

KW - Real options

KW - Decision trees

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M3 - Conference contribution

SN - 978-1-4244-4869-2

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PB - IEEE

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Valuation of R&D investments for new products: A real options approach focusing on key uncertainties

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