Optimal Prototyping with Noisy Measurements

Problem definition : Prototyping and testing are an integral part of almost any new product development process, helping firms navigate the inherent uncertainties of creating new products. Recent developments in rapid prototyping, including technologies that enable cheaper low-fidelity tests, have opened up the possibilities for firms in reconfiguring their product development processes. Firms can, by choosing the level of evaluation fidelity, alter the traditional cost-quality trade-offs inherent in sequential prototyping. Methodology/results : The current article formulates a general model of sequential search where firms can proceed by obtaining noisy low-fidelity evaluations of their prototypes. Our results demonstrate that the imperfect fidelity of evaluations alters the firm’s optimal experimentation, with the starkest difference being that it may make it optimal for the firm to select and launch a prototype that did not yield the best evaluation. In addition, our analysis of optimal measurement technology reveals that the focal firm should demand the most precise measurements when their ex-ante uncertainty is moderate (not too high or low). We also consider extensions analyzing how the optimal choice of evaluation fidelity is affected by the number of available prototypes, by operational flexibility (to dynamically change measurement technology), and by the ability to outsource evaluations to an experimentation platform. Managerial implications : We develop managerial insights for how the optimal choice of fidelity and the optimal length of the evaluation cycle should be planned depending on the evaluation costs and the firm’s ex-ante uncertainty. The resulting framework offers guidance to product and software development firms to successfully leverage imperfect fidelity experiments.