Optimal Portfolio Strategies for New Product Development

65 Pages Posted: 18 Oct 2015

See all articles by Emre Nadar

Emre Nadar

Bilkent University - Department of Industrial Engineering

Mustafa Akan

Carnegie Mellon University

Laurens Debo

Dartmouth College - Tuck School of Business

Alan Andrew Scheller-Wolf

Carnegie Mellon University

Date Written: October 16, 2015

Abstract

We study the portfolio selection problem in a new product development setting with many projects in parallel, each lasting several stages, in the face of uncertainty. Each stage of the process performs an experiment on a selected number of projects in the stage, depending on the amount of (scarce) budget allocated to the stage. Projects become differentiated through their experimental results, and all available results for a project determine its category.

We model the problem as a Markov decision process. We seek an optimal policy that specifies, for every configuration of projects in categories, which projects to test and/or terminate. For two special cases we characterize the optimal project promotion policy as following a new type of strategy, state-dependent non-congestive promotion (SDNCP). SDNCP implies that a project with the highest expected reward in any stage is advanced to the next stage if and only if the number of projects in each successor category is below a congestion-dependent threshold. For the general problem, numerical experiments reveal the outstanding performance of SDNCP (optimal in 72 of 77 instances with maximum deviation from optimal of 0.67%), highlighting when and how a fixed non-congestive promotion policy, which is easier to implement, may fall short.

Keywords: New product development, Markov decision processes, Bayesian updating, optimal control

Suggested Citation

Nadar, Emre and Akan, Mustafa and Debo, Laurens and Scheller-Wolf, Alan Andrew, Optimal Portfolio Strategies for New Product Development (October 16, 2015). Available at SSRN: https://ssrn.com/abstract=2675317 or http://dx.doi.org/10.2139/ssrn.2675317

Emre Nadar (Contact Author)

Bilkent University - Department of Industrial Engineering ( email )

06800 Bilkent
Ankara
Turkey

Mustafa Akan

Carnegie Mellon University ( email )

Pittsburgh, PA 15213-3890
United States

Laurens Debo

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

Alan Andrew Scheller-Wolf

Carnegie Mellon University ( email )

Pittsburgh, PA 15213-3890
United States

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