Real options identification and valuation for the financial analysis of product family design

The rationale of product family design has been well recognized by both academia and industries alike. It is important to justify the economic latitude of product families. The traditional valuation approaches based on discounted-cash-flow analysis tend to ignore the upside potentials from managerial flexibility inherent in the product family design process. This paper adopts a real option approach to model product family design as an investment strategy being crafted by a series of options that are continuously exercised to achieve expected returns on investment. The focus is on the identification of real options associated with product family design. In accordance with the real options identified, a valuation framework is developed. To demonstrate the feasibility and potential of the real option framework, a case study of mobile phone vibration motor family design is reported.