EVALUATING PRODUCT PLANS USING REAL OPTIONS

Product planning helps a company to strategically plan its current and future product platforms and offer product variants in the marketplace. Product platforming is widely touted as a successful strategy for mass cus-tomization. However, due diligence should be exercised before implement-ing any product platform strategy. The product planning exercise should account for future uncertainties. Traditional financial tools such as the net present value (NPV) are static since they do not compensate for any exoge-nous and endogenous uncertainties during the course of the project. The crux of the problem lies in the evaluation model that is used for evaluating the product planning projects. While many view uncertainties in a product planning project as problematic, it can also be viewed as a source of new opportunities. We argue that uncertainties should be an integral part of the evaluation model. If the future possibilities (or strategic options) are not considered in the evaluation model, a corporation may face a “myopic syndrome.” In this article, we consider two important product planning decisions— platform decisions and product variant decisions. The platform decision involves strategic selection of a concept product platform from various pos-sible alternative concept product platforms. The product variant decision involves deciding how long a company should continue to offer its cur-rent product variant in the marketplace and whether the existing produc