An Extreme-Value Model of Concept Testing

Abstract

W e model concept testing in new product development as a search for the most profitable solution to a design problem. When allocating resources, developers must balance the cost of testing multiple designs against the potential profits that may result. We propose extreme-value theory as a mathematical abstraction of the concept-testing process. We investigate the trade-off between the benefits and costs of parallel concept testing and derive closed-form solutions for the case of profits that follow extreme-value distributions. We analyze the roles of the scale and tail-shape parameters of the profit distribution as well as the cost of testing in determining the optimal number of tests and total budget for the concept phase of NPD. Using an example, we illustrate how to estimate and interpret the scale and tail-shape parameters. We find that the impact of declining concept-testing costs on expected profits, the number of concepts tested, and total spending depend on the scale/cost ratio and tail-shape parameter of the profit distribution.

Innovation Contests, Open Innovation, and Multiagent Problem Solving

“…the expressed purchase intent). Similar one-dimensional settings are considered by Dahan and Mendelson (2001) and Terwiesch and Loch (2004).…”

“…Given this uncertain performance, the solver will most likely engage in a search process by conducting a set of trials and experiments (see e.g. Loch et al 2001, Dahan andMendelson 2001 Given an expertise, i , an improvement e ort, e i , and an experimentation e ort, m i , the performance of the solution is assumed to be of the following additive form 3 :…”

“…The solver exerts e ort by experimenting (which increases the performance of the best solution stochastically) and there exists no way of obtaining a deterministic return to e ort. This case is equivalent to the model presented by Dahan and Mendelson (2001): Given the project type, the seeker faces two decisions. First, the seeker needs to decide if the problem should be solved internally or whether it should be posted to a broader community in the form of an innovation contest.…”

“…Moldovanu and Sela 2001) with models of product development and search (e.g. Dahan andMendelson 2001, Terwiesch and. We provide the following novel results.…”

Idea Generation and the Quality of the Best Idea

“…For most innovation challenges, an organization would prefer 99 bad ideas and 1 outstanding idea to 100 merely good ideas. In the world of innovation, the extremes are what matter, not the average or the norm (Dahan and Mendelson 2001, Terwiesch and Loch 2004, Terwiesch and Ulrich 2009). This objective is very different from that in, for example, manufacturing, where most firms would prefer to produce 100 units with good quality over making 1 unit with exceptional quality followed by 99 that have to be scrapped.…”