The components of risk in new product development: Project New Prod

Abstract

Abstract Although new product development is one of the riskiest activities of a modern corporation, relatively little account is taken of risk measurement in the R & D project selection literature. The existing consensus is that risk is measured by some combination of the total amounts at stake and the uncertainties of the situation. The paper describes a project aimed at more exactly identifying and defining the components of risk as perceived by a decision‐maker within a firm undertaking new product ventures. The project is based on data from a study of the behaviour of 103 firms and 197 ventures. The results show broadly that managers perceive risk to be highest when the product shows least synergy with the firm's current business. In contrast, the possibility of reducing uncertainty components of risk through information‐seeking seems to be of little account in risk perception. The author concludes from this that decision‐makers are much more influenced by factors that control the amounts at stake (in general, the less the synergy the greater the resources needed to back a new product entry) than by uncertainty as to the outcome. The latter must constitute an important element of risk in reality. Its neglect may be because managers find they can deal conceptually more easily with concrete matters like the amount at stake than with the intangibles of uncertainty reduction. This may explain why many firms fail to integrate information into their new product development process.

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