Creating options while designing prototypes: value management in the automobile industry

Abstract

Purpose The purpose of this paper is to provide a general valuation model for the optimal design of the product development process, exemplified by automobile development. Underpinning this model is the identification of key business processes, which are analyzed in order to explain firm‐level efficiency advantages stemming from the design of the technical system. Design/methodology/approach Based on the case studies and literature on the role of organizational capabilities in creating value for the organization, a novel real option valuation model for set‐based concurrent engineering (SBCE) was proposed. Findings A numerical example demonstrates that it is possible for the optimal number of design alternatives to develop in parallel. Under certain circumstances, developing multiple design alternatives in parallel is shown to generate significant value, fully accounting for the increase in costs of doing so. Practical implications Five principles of product development are proposed as a managerial tool. These findings are aimed at both practitioners and academics and solve fundamental questions raised concerning optimal resource allocation within the development process. Originality/value SBCE is shown to be structurally analogue to a multivariate contingent claim, thereby assigning a value to the underlying technical and organizational capabilities.