Resource title

Dynamic portfolio selection of new products under uncertain market conditions

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Resource description

Selecting program portfolios is an important challenge in the management of new product development (NPD). At the aggregate level of business management a key decision is the allocation of resources across product lines or market segments. This paper develops a dynamic model of resource allocation, taking into account multiple interacting factors, such as uncertain market payoffs that change over time, increasing or decreasing returns from the NPD investment, carry-over of the investment benefit over multiple periods, and interactions across segments. The authors characterize optimal policies in closed form and derive qualitative decision rules for managers. In the presence of increasing returns, the whole budget is optimally allocated to one product line, while decreasing returns lead to a split of the budget. The optimal allocation properties are subtle and partly counter-intuitive. For example, neither the longevity of the product line, nor market size in future periods always increase the investment. For a risk-averse decision maker, a higher variance in next period's market potential makes a product line less attractive, but a higher variance in a future period may increase the optimal allocation. If the product lines interact, the complement/substitution effect acts as an additional/reduced carry-over benefit.

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Resource language

en

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application/pdf

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http://flora.insead.edu/fichiersti_wp/inseadwp2001/2001-13.pdf

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Copyright INSEAD. All rights reserved