Product platform flexibility planning by hybrid real options analysis

Abstract

Product platforms are believed to facilitate product design flexibility; however, the value and best form of such flexibility have yet to be fully understood. This article treats the design flexibility that is inherent in product platforms as being irreversible investment decisions that are crafted with a portfolio of platform real options that are continuously exercised to fulfill expected returns on investment. While options thinking has been appealing to the design community, the existing design real options models suffer from poor validity of the basic assumptions about the real options. Most existing work intuitively imitates real options decision making based on modularity and configuration. The missing link lies in the lack of an explicit time horizon, in which real options theory has its roots. This article proposes to craft platform real options in line with the management flexibility that is staged along the design project life. A hybrid real options analysis framework is developed by incorporating product-related and project-related flexibility to synthesize both financial and technical analyses of product platforms within a coherent framework. A case study of vibration motor platform planning demonstrates the potential of the proposed hybrid approach for the valuation of platform flexibility under uncertainty and for supporting optimal product platform planning.