An Integrated Approach to Managing New Product Development Projects under Risk

Eileen New Yilin

Abstract

New product development is the process by which an organization uses its resources and capabilities to create a new product or improve on an existing one. The new product development cycle consists of 5 main stages starting with opportunity identification and selection, concept generation, concept / project evaluation, development and lastly the launch. Project evaluation is considered to be one of the most important stages as this is the phase whereby investment is committed after a "go" command is given by the management. Hence the main objective of this paper is to derive an integrated methodology to manage the new product development projects under risk.

The methodology includes modeling the factors influencing potential success of projects using the Bayesian network. This is a novel approach which has not been discussed in the past literature reviews. Following that, an optimization model is used to obtain the portfolio which will maximize net present value (NPV) while capping risk at an acceptable value. A numerical example illustrates the approach and the results are compared to those generated by AHP, a common project screening method used in industry today. The analysis shown that the portfolio generated from the proposed methodology is superior to those obtained from AHP. The portfolio obtained from AHP is suboptimal when compared to the efficient frontier.

Hence, this methodology improved on the current methods and obtained better results. This method is less tedious and improved on the effectiveness of usage of the investment to maximize NPV while capping risk.