Timing Product Replacements under Uncertainty—The Importance of Material–Price Fluctuations for the Success of Products That Are Based on New Materials

Being first to market with new products is one of the most enduring pieces of strategic advice handed to managers. This view also emphasizes the importance of launching new products that are based on new materials as soon as possible. However, when the input costs of products that embody new materials are uncertain because of volatile material prices, the advantage of being an early mover comes along with the risk of paying unexpectedly high material prices. Real‐option theory suggests delaying material substitution under uncertainty even if the new material enables superior product performance. Firms who have created the flexibility to switch between alternative inputs can benefit from responding to opportunities or threats that arise from changes in the environment. The current study formalizes this logic in a switching‐option model and tests it on a sample of material substitution projects from the manufacturing sector. Our findings shed light on how input‐cost fluctuations influence the timing–performance relationship and bring into question the common advice to launch new products as soon as possible. Instead, our results suggest that firms who align the timing of market launch to trends and fluctuations of material prices improve their competitive positions. These insights suggest novel ways for new product development (NPD) managers how to successfully use external information at the back‐end of the NPD process and how to compete in an era defined by volatile material prices and technological change.     

The venture capital entry model on game options with jump-diffusion process

This paper aims to apply game options to construct the optimal decision-making and management tool for venture capital (VC) firms. This model emphasizes the inferences with game options on the market structures formed by different competition and investment strategies of the two VC firms to reflect the investment returns. These market structures are classified into an entry-deterred game (specific monopoly), a leader's dominated strategies (duopoly), and simultaneous investment. It is considered how to select investment timing to avoid any potential competitive threats in order to provide the optimal expected threshold values for the investment decisions of VC firms.     

Strategic NPV: Real Options and Strategic Games under Different Information Structures

Research summary : Among the most difficult firm strategic choices is the trade‐off between making a long‐term commitment or holding off on investment in the face of uncertainty. To operationalize strategic management theory under demand, technological and competitive uncertainty, we develop a Strategic Net Present Value (NPV) framework that integrates real options and game theory to quantify value components and interactions at the interface between NPV, real options, and strategic games. Our approach results in new propositions clarifying the way learning‐experience conditions, technological uncertainty, and proprietary information interact to tilt the balance in the interplay between wait‐and‐see flexibility and strategic commitment. As such, Strategic NPV adds to our understanding of the conditions where NPV, real options, or strategic thinking are more relevant. Managerial summary : This study develops and elucidates implementation of a new valuation construct, “Strategic Net Present Value (NPV),” that integrates real options and game theory to more accurately portray strategic decisions underlying management theory. Among the most difficult firm strategic choices in capital intensive industries, such as energy, mining, chip manufacturing, and infrastructure development, is the trade‐off between making a long‐term commitment or holding off on investment in the face of demand, technological, and competitive uncertainties. The study provides new insights on the way various conditions, such as learning‐experience effects, technological uncertainty, and proprietary information, interact to tilt the balance in the interplay between commitment and wait‐and‐see flexibility. As such, Strategic NPV adds to our understanding of when NPV, real options, or strategic thinking matter more critically for decision making. Copyright © 2017 John Wiley & Sons, Ltd.     

Resource Dedication and New Product Performance: A Resource‐Based View

Corporate investments in new product development (NPD) initiatives are strategically effective activities that are instrumental in contributing to new product performance. Given that a fundamental nature of product development is the ability to exploit new product opportunities, the authors investigate the firm‐level impact that corporate investments in knowledge workers and financial NPD resources have on new product performance. They track the resource dedication and new product financial performance of 41 firms over a seven‐year period. Our results provide evidence that financial investments have a contemporaneous return on investment while knowledge worker investments provide companies with both contemporaneous and carryover returns. When formulating strategy and making NPD resource allocation decisions, managers must remain cognizant of the time‐dependent nature of resource investments, the need for persistent investment, and the resulting performance impact.     

Which Tangible and Intangible Assets Matter for Innovation Speed in Start‐Ups?*

The launch of the first product is an important event for start‐ups, because it takes the new venture closer to growth, profitability, and financial independence. The new product development (NPD) literature mainly focuses its attention on NPD processes in large firms. In this article insights on the antecedents on innovation speed in large firms are combined with resource‐based theory and insights from the entrepreneurship literature to develop hypotheses concerning the antecedents of innovation speed in start‐ups. In particular, tangible assets such as starting capital and the stage of product development at founding and intangible assets such as team tenure, experience of founders, and collaborations with third parties are considered as important antecedents for innovation speed in start‐ups. A unique data set on research‐based start‐ups (RBSUs) was collected, and event‐history analyses were used to test the hypotheses. The rich qualitative data on the individual companies are used to explain the statistical findings. This article shows that RBSUs differ significantly in their starting conditions. The impact of starting conditions on innovation speed differs between software and other companies. Although intuition suggests that start‐ups that are further in the product development cycle at founding launch their first product faster, our data indicate that software firms starting with a beta version experience slower product launch. The amount of initial financing has no significant effect on innovation speed. Next, it is shown that team tenure and experience of founders leads to faster product launch. Contrary to expectations, alliances with other firms do not significantly affect innovation speed, and collaborations with universities are associated with longer development times.     

Differentiating Major and Incremental New Product Development: The Effects of Functional and Numerical Workforce Flexibility*

This study seeks to explain the differential effects of workforce flexibility on incremental and major new product development (NPD). Drawing on the resource‐based theory of the firm, human resource management research, and innovation management literature, the authors distinguish two types of workforce flexibility, functional and numerical, and hypothesize differential effects on NPD outcomes. A large‐scale sample of 284 Dutch firms across various manufacturing goods and business services industries serves to test these hypotheses. The results suggest that functional flexibility positively influences incremental NPD only, internal numerical flexibility negatively influences incremental NPD only, and external numerical flexibility positively influences major NPD only. Thus, differences between major and incremental NPD are grounded in the human resource flexibility of the firm. This complements research that found that such differences lie in critical development activities, learning processes, and capabilities. It also complements product innovation research on flexibility in NPD processes and on flexibility in organizational structures and routines. It extends the resource‐based theory of the firm suggesting that human resource flexibility is part of the dynamic capabilities that allow firms to reconfigure existing competencies. The conclusions imply that managers of manufacturing and service firms may use training and education and create a functional flexible workforce that can progressively enhance incremental NPD outcomes. They may want to avoid paying overtime, because such internal numerical flexibility hampers incremental NPD, but use fixed‐term contracts to expand external numerical flexibility to enhance major NPD.     

Dark Fiber Valuation

Valuation of dark fiber has recently generated controversy, sparked particularly by the large sums booked for swaps of dark fiber between companies. One of the issues raised is valuation: i.e., what is the value of an asset that generates no revenue now and may do so at some unknown point in the future but only after investment, in an uncertain business climate, and where prices are dropping? The picture is further complicated because the result of investing to bring the asset to market (i.e. lighting the fiber) changes the supply and demand conditions of the market itself and hence invalidates price predictions. A realistic and consistent valuation methodology is necessary for increasingly cautious companies, auditors, and investors. In this paper we describe such a valuation methodology for dark fibre based on real options. Publicly available bandwidth price services start to make this practical by providing market price information. For dark fibre valuation the real option to be valued are the lighting decisions. We specifically include the effect on the market of adding new capacity by using the price-elasticity of demand within the stochastic price process itself, conditional on lighting decisions. Prices are generally volatile and decreasing with time. The evolution of lighting costs and maintenance are included in the valuation. The real options technique used here is novel in that it combines economic and market factors explicitly with mathematical finance to arrive at a valuation and optimal decisions. We found that the optimal lighting riming and capacity decisions to depend on many of the factors included in the analysis with no simple triggers: the details really matter.     

Examining Proactive Strategic Decision‐Making Flexibility in New Product Development

While strategic flexibility is widely accepted as a prerequisite for a firm's success, its application in strategic decision making to a firm's new product development (NPD) activities is limited to only a few studies. Furthermore, many organizations still have difficulties creating proactive strategic flexibility in their decision‐making processes. Past research studies have largely ignored the relationship between strategic decision‐making flexibility and firms' resources and/or capabilities and success in the context of NPD. This study advances strategic flexibility by adopting the proactive approach of NPD decision‐making flexibility and by examining its role in translating organizational resources and capabilities into NPD success. This study draws upon the resources, capabilities (i.e., flexibility), and performance framework to show how proactive strategic decision‐making flexibility plays a crucial role in developing new products that can create new opportunities and comply with market needs. Therefore, this research aims to (1) develop an operational definition of strategic decision‐making flexibility and (2) propose a framework to understand the drivers and the subsequent new product performance outcomes of strategic decision‐making flexibility. This study adopts the proactive perspective of strategic decision‐making flexibility and defines it as a capability that enables firms to develop NPD strategies to respond to future changes in the environment. The analysis, based on data collected from 103 European firms, shows that that the effects of long‐term orientation, strategic planning, internal commitment, and innovative climate on proactive strategic decision‐making flexibility are significant. The findings indicate specifically the roles of both champions and gatekeepers, who infuse a firm's knowledge with a clear understanding of its resources, constraints, and market needs, thereby enhancing decision makers' motivation to behave proactively to precipitate transformation. The results also reveal a positive association between proactive strategic decision‐making flexibility and NPD performance outcomes. As such, strategic flexibility provides firms with an ability to adapt to changing environments and to create new market opportunities, product, and technological arenas, and to deliver successful new products. When firms open new market, technological, and product arenas, they can easily foresee their new demands and changes and successfully deliver new products, meeting customer needs/demands, and offering benefits such as quality, cost, and timeliness. This study therefore provides a valuable reference point for future research in strategic decision‐making flexibility in NPD.     

REAL OPTIONS VOLATILITY ESTIMATION WITH CORRELATED INPUTS

Real Options Analysis (ROA) provides a framework for valuing reactive and proactive managerial flexibility in investment decisions. Estimating the volatility parameter for a real options model is challenging because there are typically no historical returns for the underlying asset and no current market prices. A previously developed method of using simulation to estimate the volatility parameter for a real investment is demonstrated. The effects of serial price correlation and price-demand cross-correlation on volatility parameters developed with this method are explained. Finally, managerial implications of these findings are discussed.     

DO OLIGOPOLISTS POLLUTE LESS? EVIDENCE FROM A RESTRUCTURED ELECTRICITY MARKET*

Electricity restructuring has created the opportunity for producers to exercise market power. Oligopolists increase price by distorting output decisions, causing cross‐firm production inefficiencies. This study estimates the environmental implications of production inefficiencies attributed to market power in the Pennsylvania, New Jersey, and Maryland electricity market. Air pollution fell substantially during 1999, the year in which both electricity restructuring and new environmental regulation took effect. I find that strategic firms reduced their emissions by approximately 20% relative to other firms and their own historic emissions. Next, I compare observed behavior with estimates of production, and therefore emissions, in a competitive market. According to a model of competitive behavior, changing costs explain approximately two‐thirds of the observed pollution reductions. The remaining third can be attributed to firms exercising market power.     

MARKET POWER AND PRICE MOVEMENTS OVER THE BUSINESS CYCLE*

This paper develops and tests implications of an oligopoly‐pricing model. The model predicts that during a demand expansion, the short run competitive price is a pure strategy Nash equilibrium but in a recession, firms set prices above the competitive price. Thus, price markups over the competitive price are countercyclical. Prices set during a recession are more variable than prices set in expansions because firms employ mixed strategy pricing in recessions. The empirical analysis utilizes Hamilton's time series switching regime filter to test the predictions of the model. Fourteen out of fifteen industries have fluctuations consistent with this oligopoly‐pricing model.     

Asymmetric price adjustments: A supply side approach

Using a model of dynamic price competition, we provide an explanation from the supply side for the well-established observation that output prices react faster in response to input cost increases than to decreases. When costs decline, the opportunity of profitable storing in anticipation of higher future costs allows competitive firms to coordinate on prices above current marginal costs. The initial price response is only partial and profitable storing relaxes competition. Conversely, when costs rise, storing is not beneficial in anticipation of lower future costs and firms immediately adjust their prices to current marginal costs, which entails the standard Bertrand outcome. Our results shed new light on the empirical evidence about asymmetric pricing and can stimulate further empirical investigation on this puzzle.     

Creating Growth in New Markets: A Simultaneous Model of Firm Entry and Price*

Sales in a new market generally follow a hockey‐stick pattern: After commercialization, sales are very low for some time before there is a dramatic takeoff in growth. Reported sales takeoffs across products vary widely from a few years to several decades. Prior research identifies new firm entry or price declines as key factors that relate to the timing of a sales takeoff in new markets. However, this literature considers these variables to be exogenous and only finds unilateral effects. In the present article, new firm entry and price declines are modeled as being endogenous. Thus, the simultaneous relationship between price declines and firm entry in the introductory period of new markets when industry sales are negligible is studied. Using a sample of new markets formed in the United States during the last 135 years, strong support for a simultaneous model of price and firm entry is found: Price decreases relate to the competitive pressures associated with firm entry, and, in turn, firm entry is lower in new markets with rapidly falling prices. Furthermore, a key driver of firm entry during the early years of a new market involves the level of patent activity, and a key driver of price decreases is the presence of large firms. In contrast to the recommendations from other research, these results indicate that rapid price declines may further delay sales takeoff in industries by dampening new firm entry. Instead, rapid sales takeoffs in new markets come from encouraging greater innovative activity and the entry of large firms.     

The adoption of radical manufacturing technologies and firm survival

The emergence of dramatically innovative, or radical, new manufacturing technologies can force pivotal and life‐threatening decisions for industry competitors. These technologies can represent a huge cost for adopting firms, but may also offer the chance to achieve competitive advantage through superior manufacturing. While prior research has considered a range of production process decisions (e.g., JIT, mass customization) and outcomes for end‐product technologies, little attention has been given to adoption decisions relative to core manufacturing technologies. This study examines an industry's adoption of major manufacturing technologies over several decades and demonstrates that two groups of contingencies related to adoption (e.g., timing and cumulative effects) have a significant impact on firm performance. Based on a sample of over 1,000 firms, the results provide insights into the effects of adoption timing and ‘manufacturing technology bundles’ on firm survival. We also find that adoption of manufacturing technologies prior to the inflection point of the estimated Bass diffusion curve for each technology leads to significant reduction in firm mortality. Thus, we are able to demonstrate the ability of the Bass model to predict the survival outcomes of firms facing manufacturing technology adoption decisions. The strategic implications of these pivotal decisions are considered. Copyright © 2008 John Wiley & Sons, Ltd.     

Project Suspensions and Failures in New Product Development: Returns for Entrepreneurial Firms in Co‐Development Alliances

Entrepreneurial biotech and large pharmaceutical firms often form alliances to co‐develop new products. Yet, new product development (NPD) is fraught with challenges that often result in project suspensions and failures. Considering this, how can firms increase the chances that their co‐development alliances will create value? To answer this question, the authors build on insights from signaling theory to argue that prior project suspensions provide positive signals leading to an increase in value creation, while project failures have the opposite effect. In addition, drawing on insights from temporal construal theory, this research predicts that the strength of these effects is contingent on the stage along the exploration–exploitation continuum at which the alliance is formed. The authors undertook event study analyses of 248 alliances formed by 104 biotechnology firms from the United States and Europe listed on eight stock exchanges over an 8‐year period between 1996 and 2003. The results confirm that prior NPD project suspensions have a stronger value creation effect (or prior failures have a weaker value destruction effect) in the case of exploration alliances in the upstream of NPD processes than in the case of moderate‐scale exploitation alliances in the downstream of NPD. This study is among the first to examine how both prior NPD project suspensions and failures of firms affect the abnormal returns achieved from co‐development alliances. This research therefore contributes to the innovation literature by honing a better understanding of setbacks and failures in NPD. Moreover, the findings contribute to the literature on strategic alliances by identifying new conditions under which firms can create or preserve value. This research also contributes to signaling theory by providing evidence of the moderation effect caused by the signaling environment. Finally, this study contributes to the entrepreneurial literature on value creation for entrepreneurial firms in alliances following adverse events.     

Personalized pricing and advertising: Who are the winners?

This paper investigates who wins and who loses when firms depart from a mass advertising/uniform pricing strategy (benchmark model) to a targeted advertising/price discrimination one. Considering a duopoly market in which firms simultaneously compete in prices and advertising decisions, we examine the competitive and welfare effects of personalized pricing with targeted advertising by comparing equilibrium outcomes under customized advertising/ pricing decisions to the results arising under mass advertising and uniform pricing. We show that, when both firms compete in both market segments, all segment consumers are expected to pay higher average prices under the personalized advertising/pricing strategy. We also show that, in the context of our simultaneous game, targeted advertising with price discrimination might boost firms’ profits in comparison to the case of mass advertising and uniform prices. The overall welfare effects of the personalized strategy are ambiguous. However, even when the personalized strategy boosts overall welfare, consumers might all be worse-off. Thus the paper gives support to concerns that have been raised regarding the firms’ ability to adopt personalized strategies to boost profits at the expense of consumers.     

ASYMMETRIC MARKET SHARES,ADVERTISING AND PRICING: EQUILIBRIUM WITH AN INFORMATION GATEKEEPER*

We analyze how asymmetric market shares impact advertising and pricing decisions by firms that have loyal, non‐shopping customers and can advertise to shoppers through a ‘gatekeeper.’ In equilibrium, the firm with the smaller loyal market advertises more aggressively but prices less competitively than the firm with the larger loyal market. Our results differ significantly from earlier literature which assumes that shoppers observe all prices and finds that the firm with the smaller loyal market adopts a more competitive pricing strategy. The predictions of the model are consistent with advertising and pricing behavior observed on price comparison websites such as http://Shopper.com .     

The influence of competition from informal firms on new product development

Research summary : Existing research describes a broad range of determinants of new product development (NPD), a fundamental competitive activity of firms. A considerable share of this work has occurred in the context of developed economies, raising a concern that some important determinants may remain unexamined. We suggest that one such determinant is competition from informal (unregistered) firms. Drawing from the attention‐based view, we investigate the effects of informal competition on NPD in a large sample of firms located across Eastern Europe and Central Asia. We examine not only the direct effect but also how this effect is moderated by characteristics of the competitive and institutional context. Managerial summary : The purpose of this research is to examine the relationship between competition from informal (unregistered) firms and new product development (NPD) by formal firms. We argue that NPD is an effective response to differentiate from informal firms, and our analyses of over 9,000 firms located in emerging economies across Eastern Europe and Central Asia indicate that NPD activities are more likely in formal firms who rate informal competition as a greater obstacle. The strength of this direct relationship depends on aspects of the competitive and institutional environment: it is weakened when levels of competition from other formal firms are higher, when alternative responses such as corruption are more available, and when managers are more optimistic about the regulatory environment. Copyright © 2016 John Wiley & Sons, Ltd.     

New Product Development Practices and Early‐Stage Firms: Two In‐Depth Case Studies

New product development practices (NPD) have been well studied for decades in large, established companies. Implementation of best practices such as predevelopment market planning and cross‐functional teams have been positively correlated with product and project success over a variety of measures. However, for small new ventures, field research into ground‐level adoption of NPD practices is lacking. Because of the risks associated with missteps in new product development and the potential for firm failure, understanding NPD within the new venture context is critical. Through in‐depth case research, this paper investigates two successful physical product‐based early‐stage firms' development processes versus large established firm norms. The research focuses on the start‐up adoption of commonly prescribed management processes to improve NPD, such as cross‐functional teams, use of market planning during innovation development, and the use of structured processes to guide the development team. This research has several theoretical implications. The first finding is that in comparing the innovation processes of these firms to large, established firms, the study found several key differences from the large firm paradigm. These differences in development approach from what is prescribed for large, established firms are driven by necessity from a scarcity of resources. These new firms simply did not have the resources (financial or human) to create multi‐ or cross‐functional teams or organizations in the traditional sense for their first product. Use of virtual resources was pervasive. Founders also played multiple roles concurrently in the organization, as opposed to relying on functional departments so common in large firms. The NPD process used by both firms was informal—much more skeletal than commonly recommended structured processes. The data indicated that these firms put less focus on managing the process and more emphasis on managing their goals (the main driver being getting the first product to market). In addition to little or no written procedures being used, development meetings did not run to specific paper‐based deliverables or defined steps. In terms of market and user insight, these activities were primarily performed inside the core team—using methods that again were distinctive in their approach. What drove a project to completion was relying on team experience or a “learn as you go approach.” Again, the driver for this type of truncated market research approach was a lack of resources and need to increase the project's speed‐to‐market. Both firms in our study were highly successful, from not only an NPD efficiency standpoint but also effectiveness. The second broad finding we draw from this work is that there are lessons to be learned from start‐ups for large, established firms seeking ever‐increasing efficiency. We have found that small empowered teams leading projects substantial in scope can be extremely effective when roles are expanded, decision power is ground‐level, and there is little emphasis on defined processes. This exploratory research highlights the unique aspects of NPD within small early‐stage firms, and highlights areas of further research and management implications for both small new ventures and large established firms seeking to increase NPD efficiency and effectiveness.     

The effect of air traffic delays on airline prices

A legislative change in takeoff and landing restrictions at LaGuardia Airport provides an opportunity to study the effect of an exogenous shock to product quality on prices in the airline industry. I test how the price response varies with the degree of competition in the market. I find that prices fall by $1.42 on average for each additional minute of flight delay, and that the price response is substantially larger in more competitive markets.