Tuesday, November 15, 2011

Optimal Sequential Investments in New Product Development with Emerging Technologies and Learning
INSEAD Working Paper 2011/116/TOM

We address the challenge of determining the optimal investments for a firm with limited new product development (NPD) resources, when the product development opportunities come over time from two distinct technologies. Upfront investment in a product platform gives higher returns from opportunities based on the platform technology in the future, due to the associated learning effects. Contingent on the order that technologies arise, we formulate the resource allocation problem and characterize the optimal development investments that determine the firm product development roadmap. We show that the firm should invest more resources in platform development if the returns from subsequent opportunities to leverage the platform are high, and if opportunities arise intermittently. In addition, the investment in platform development decreases in the uncertainty about either the learning effect, or the resources budget. Finally, we analyze the competitive scenario where two firms develop offerings based on the two technologies, and we show that the competing firms benefit from focusing resource investment on the competitively intense product line. Insights are then provided into the properties of the firm NPD roadmaps based on multiple technologies.