Sequential Product Innovation: The Role of Operational and Development Flexibility
Publication Date
8-5-2024
Abstract
Sequential product innovation, where a new product is developed to replace an existing product, creates several logistical challenges for innovating firms. This is because critical operational decisions, including inventory levels of an existing product have to be determined before observing key performance measures of a new product. In this paper, we jointly model inventory and new product introduction decisions and characterize optimal inventory and launch policies, considering that extending the development cycle can improve new product quality. We also explore the effects of product architecture and development capability on the firm's product transition strategy. When a firm also faces the threat of competitive entry, we show that the firm can pursue two broad strategies-competitive overstocking or competitive understocking-depending on whether the inventory levels are greater or lower relative to a rival's time of entry. Through a large-scale simulation based on estimated parameters from the Thermostat market, which motivated this study, we demonstrate that development and operational flexibility complement each other when product modularity is high, while they act as substitutes when modularity is low. Our results thus provide an alternate view of inventory as a hedge against development uncertainty that is inherent to product development and highlight the importance of integrating operational inventory decisions with design and development considerations.
Document Type
Article
Keywords
product development, inventory management, sequential innovation, design
Disciplines
Business Administration, Management, and Operations
DOI
10.2139/ssrn.4919673
Source
SMU Cox: IT & Operations Management (Topic)
Language
English
