Methodological approach to evaluate product adaptations based on real options

Abstract

Global business activities of companies grow continuously because cost savings must be achieved and new markets must be tapped into. Today's companies face the challenge to either satisfy local markets with their existing product portfolio or to develop locally adapted products. These products must not only be adjusted to the individual requirements of the customer but must also realise cost reduction potentials. Such an investment project in the form of product adaptations has to be calculated and evaluated at an early stage. This paper presents an approach to use the real option analysis in order to include uncertainties and flexibility during the development phase. Using this approach industrial companies are capable to identify the cause and effect relationships between product design and production technology adaptations, to calculate the costs of these adaptations and to evaluate the investment project regarding uncertainties and flexibility. © Springer-Verlag London 2013.