Adapting real options to new product development by modeling the second Toyota paradox

Uncertainty in product development projects creates significant challenges for managers who are under intense competitive pressures to increase product quality, while reducing development time and costs. Traditional wisdom dictates the early selection of a single design in order to freeze interfaces...

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Bibliographic Details
Published in:IEEE transactions on engineering management 2005-05, Vol.52 (2), p.175-185
Main Authors: Ford, D.N., Sobek, D.K.
Format: Article
Language:English
Subjects:
Automobile industry
Automobiles
Automotive components
Automotive engineering
Automotive industry
Concurrent engineering
Management
Paradoxes
Product development
Project management
real options
set-based concurrent engineering
Strategy
Studies
system dynamics
Systems analysis
Uncertainty
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Summary:Uncertainty in product development projects creates significant challenges for managers who are under intense competitive pressures to increase product quality, while reducing development time and costs. Traditional wisdom dictates the early selection of a single design in order to freeze interfaces between product subsystems so that team members can work effectively in parallel, resulting in more productive product development efforts. Prior research, however, uncovered a paradoxical case. Toyota Motor Corporation achieves the fastest development times in its industry by intentionally delaying alternative selection, a strategy termed set-based development. The current work adapts real options concepts to product development management to partially explain this paradox. A formal simulation model is used to show that converging too quickly or too slowly degrades project value. Furthermore, the model demonstrates that the wisdom of set-based strategies can be explained by the application of a real options approach to product development management. Implications for managers and directions for future work are discussed.
ISSN:0018-9391
1558-0040
DOI:10.1109/TEM.2005.844466