Assessing the product architecture decision about product features – a real options approach

Abstract

Product architecture decisions impact how a firm can introduce new products to the market and are therefore strategically important. This article presents an approach to financially assess the product architecture decision about the incorporation of a product feature. If demand for the feature arises, this can be met quickly and at a low implementation cost if the feature has already been included or if the product design has been specially prepared for it. However, if the feature will not be sold, it may be better to not consider it for the current product design or even to optimize the design by specifically excluding it. Four product architecture decisions are conceptually developed and operationalized in an assessment method, using real option reasoning. This method has been developed jointly by university researchers and consultants of P hilips A pplied T echnologies. In a pilot application, the method was practically usable, provided financial insights, and enabled cross‐functional cooperation.