New Product Launch Decisions under Competition and Uncertainty: A Real Options and Game-Theoretic Approach to New Product Development

New product development is central to many firms' future success. Not only as a means to continue to maintain their piece of the market, but product development can also be a strategic means for a company to diversify, and/or alter focus to adapt to changing market conditions. Most of the research in new product development has been on how to do it cheaper and faster than the next guy. However, early commercialization does not guarantee a position of strength in the market. Failures of EMI in CT scanners and Xerox in personal computers illustrate that being first to market does not ensure success or even survival. There are two main factors that inhibit managers from making educated decisions on when to introduce a new product. First, firms do not exist in a vacuum and any action they take will be countered by their competition. Second, with new products the only certainty is uncertainty. To allow such decisions to become "gut feeling" decisions puts a company's future at unnecessary risk. This is evidenced by the many firms that have had devastating results because of poor decisions with regard to launching a new product. While high level quantitative tools have recently begun to be used to evaluate corporate strategy, these tools are still mainly confined to research groups within large corporations. Both real options (to handle uncertainty) and game theory (to capture the effects of the competitions actions) have been evaluated and used by these groups. However, they have not been adequately integrated together in the academic world, let alone in industry. This thesis help bridge the gap between strategic decision making, and the theoretical world of economic decision analysis creating a prescriptive model companies can use to evaluate strategically important new product launches. To bridge this gap a method that is able to handle the integration of game-theoretic and options-theoretic reasoning to the strategic analysis of new product introduction is developed. Not only was a method developed that could incorporate the two methods it was done in a way that is accessible and useful outside of the academic world.