Product price and performance level in one market or two separated markets under various cost structures and functions

Market characteristics, including intrinsic demand and customer sensitivity on price and product performance level, are distinct at different markets. Comparisons of various product development strategies in one market or two geographically separated markets are conducted for three classes of products: development intensive products (DIPs) with constant unit cost, marginal cost-intensive products (MIPs) with constant fixed cost, and marginal and development intensive products (MDIPs) with non-constant unit cost and fixed cost. Results show that larger demand size, less customer sensitivity on price and/or more sensitivity on performance level lead to more profit, a higher sale price and a not-lower product performance. The customer reservation or the saturation performance level should be generally adopted though the optimal performance level does exist occasionally. Unit cost and/or fixed cost must increase in performance at an increasing rate for the existence of one optimal performance level. Due to the impact of demand size, one high-end (low-end) MDIP or DIP could be introduced into one low-end (high-end) market at a different price if the demand size is significantly large in the low-end market. For DIPs, offering one niche high-end product is not worse than offering the low-end product into two markets. For MIPs with negligible fixed cost, the product line strategy is not worse than the standard product development strategy. Additionally, the product cost reduction approach adopted in one product line has significant effects on the best product development strategy and sequence.     

Licensing Strategies in the Presence of Patent Thickets

Many key industries (e.g., biomedical, pharmaceuticals, telecommunications, and information technologies) are characterized by cumulative innovations, where the introduction of a new product or service often requires many complementary technologies. When these technologies are protected by intellectual property rights owned by many firms, patent thickets exist, which researchers have argued may hinder the development of cumulative innovations. Specifically, patent thickets may lead to excessive royalty burdens for potential licensees, which is called “royalty stacking,” and if such costs are passed on to consumers, prices of products based on cumulative technologies will be driven up, dubbed as “double marginalization.” The literature, however, does not address these issues under different forms of licensing contracts. This article develops a game‐theoretic model where a downstream firm seeks to license N patents that read on its product from upstream firms. It discusses a variety of licensing forms widely used in practice and attempts to discover whether royalty stacking and double marginalization occur under these forms of licenses. It also studies the impact of bargaining power between parties. It is found that when patent ownership becomes more fragmented, neither royalty stacking nor double marginalization occurs under profit‐based royalty, fixed fee, and hybrid licenses. Such problems occur only under pure quantity‐based or pure revenue‐based royalty licenses when the downstream firm's bargaining power is low. It is also shown that no matter how fragmented the ownership structure of patent is, hybrid licenses consisting of a fixed fee and a quantity‐ or revenue‐based royalty rate lead to the same market outcomes as a fully integrated firm that owns all the patents and the downstream market. This article has interesting implications for both research and practice. First, the results show that even under the same patent ownership structure, different forms of licenses lead to quite different market outcomes. Therefore, it is suggested that firms and policy makers pay more attention to contractual forms of licenses when trying to minimize the negative impact of patent thickets. Second, the extant literature has largely assumed that quantity‐based royalties are used, where double marginalization is the most severe. In practice, revenue‐based royalties are most common, under which double marginalization is much milder. Third, the results show that patent pools can be most effective in mitigating royalty stacking and double marginalization when quantity‐based or revenue‐based royalties are the sole or primary payment form, especially when downstream firms have low bargaining power.     

The sufficiency of product and variable costs for production-related decisions when economies of scope are present

This article examines the usefulness of product and variable costs for pricing, product mix, and capacity expansion decisions when economies of scope are present. A numerical example demonstrates that the sufficiency of product and variable costs are diminished when economies of scope are present, even under economic conditions that are the most conducive for product and variable costs to lead to an optimal decision. Further analysis of production-related decisions with hard constraints indicates that the usefulness of variable costing incorporating the effect of a bottleneck activity is also diminished when economies of scope are present. Since economies of scope are one of the primary conditions necessary for firms to produce multiple products in a competitive economy [Panzar, J., Willig, R., 1981. Economies of scope. American Economic Review 71 (2), 268–272], the findings of this article bring into question the sufficiency of product and variable costs for production-related decisions.     

Complementarity, coordination and compatibility: The role of fixed costs in the economics of systems

We analyze industry equilibrium and incentive to compatibility when goods produced by different producers generate utility only when consumed as component parts of a system. We assume the presence of two systems, each composed of some basic component and a set of differentiated complementary products. The combination of complementarity between the two components of the system and of fixed costs in the production of the complementary product results in a form of network effect. We focus on the role played by the size of the fixed costs in the production of the complementary products in determining the size of this system effect and, by this means, the structure and types of equilibria that may be observed: monopolistic or duopolistic, symmetric or asymmetric. We also highlight the consequence of the same fixed costs for the private and social incentives to render the systems compatible.     

SCOR template—A simulation based dynamic supply chain analysis tool

The supply chain operations reference model model (SCOR) is developed and maintained by the Supply Chain Council (SCC). The SCOR model is a reference model that can be used to map, benchmark, and improve supply chain operations. SCOR template is a simulation based analysis tool, developed to capture the dynamics of supply chain operations. The first version of the SCOR template was presented in a previous article by Persson and Araldi (2009). Since the finalisation of the first article concerning the SCOR template, a second version of the SCOR template has been constructed and tested in at a case company; Alfa Laval at Ronneby, Sweden—a manufacturer of heat exchangers. Version 2 of the SCOR template is more complete than the previous version. More metrics were introduced and the return processes included. Emphasis has been on making supply chain analysis simple with the introduction of a new building block—the metric module. The case study at Alfa Laval has been based on data from a value stream mapping (VSM) and aimed at comparing different scenarios in the production networks for one specific product. The results of the comparison are one of the pieces of data that the company managers will use when deciding where to allocate production resources in the international production network.     

Factors Influencing the Adoption of Mass Customization: The Impact of Base Category Consumption Frequency and Need Satisfaction

Mass customization has received considerable interest among researchers. However, although many authors have analyzed this concept from different angles, the question of which factors can be used to spot customers most likely to adopt a mass‐customized product has not been answered to a satisfactory extent until now. This article explicitly deals with this question by focusing on factors related to the base category, which is defined as the group of all standardized products within the same product category as the mass‐customized product under investigation. Specifically, this article investigates the influence of a customer's base category consumption frequency and need satisfaction on the decision to adopt a mass‐customized product within this base category. A set of competing hypotheses regarding these influences is developed and subsequently evaluated by a combination of partial least squares and latent class analysis. This is done by using a sample of 2,114 customers surveyed regarding their adoption of an individualized printed newspaper. The results generated are threefold: First, it is shown that there is a significant direct influence of base category consumption frequency and need satisfaction on the behavioral intention to adopt. The more frequently a subject consumes products out of the base category or the more satisfied his or her needs are due to this consumption, the higher the behavioral intention to adopt a mass‐customized product within this base category. Second, the article provides an indication that base category consumption frequency has a significant moderating effect when investigating the behavioral intention to adopt in the context of the theory of reasoned action and the technology acceptance model. The more frequently a subject consumes products out of the base category, the more important will be the impact of perceived ease of use mediated by perceived usefulness. Finally, this article shows that different latent classes with respect to unobserved heterogeneity regarding the latent variables base category need satisfaction or dissatisfaction have significantly different adoption behaviors. Individuals who show a high level of need dissatisfaction are less interested in the ease of use of a mass‐customized product than its usefulness (i.e., increase in need satisfaction). On the other hand, subjects who have a high degree of base category need satisfaction base their adoption decision mainly on the ease of use of the mass‐customized product. These results are of managerial relevance regarding the prediction of market reactions and the understanding of the strategic use of product‐line extensions based on mass‐customized products. This work provides an indication that base category consumption frequency and need satisfaction positively influence the behavioral intention to adopt a mass‐customized product. Hence, mass customization can be seen as one way to deepen the relationship with existing clients.     

Complementarity,Compatibility, and Product Change: Breaking with the Past?

Product managers are caught between a rock and a cliche (or two). The market response to “new” Coke seems to support those who argue, “If it ain't broke, don't fix it.” On the other hand, rapidly shrinking product life-cycles lend credence to the notion that the only constant is change. Preserving the status quo places both the product and the company on a fast track to obsolescence. To remain competitive, companies need a structured approach to understanding and managing product change. Anirudh Dhebar offers such an approach by focusing on three interrelationships in which a product is involved. These interrelationships, or complementarities, are between a product and its users, other products with which the product is typically used, and databases that are created and repeatedly modified with the help of the product. These complementarities define the context in which the product is used. By understanding them, a company can better anticipate how a planned product change will affect consumers. In planning product changes, it is important to remember that effective use of the product requires compatibility between the product and its complements. A change that somehow disrupts the product's complementarities can be viewed as a break with the past. In other words, such a change creates a new version of the product which is incompatible with the old version. This type of change results in a switching cost for the consumer. That is, the consumer may have to invest time, money, and effort to reestablishing the complementarities that have been disrupted by the product change. For example, if a new software release includes significant changes to the user interface, consumers must weigh the potential benefits of any new features against the time and effort involved in relearning the interface. If these switching costs are too high, the new release will fail in the marketplace. When planning product changes, a company must recognize the extent of a product's complementarities, and assess how a break in any of them will affect consumers' switching costs. It is important to recognize that the switching costs and the perceived benefits of the new product version may not be the same for all consumers. Finally, careful consideration must be given to the implementation of the product change. For example, the company must decide whether to offer some sort of bridge that helps consumers make the break with the past. The company also needs to decide whether the change is implemented throughout the product line or only in selected models.     

APPLYING MONTE CARLO SIMULATION AND RISK ANALYSIS TO THE FACILITY LOCATION PROBLEM

Facility location problems have become a more strategic decision than just finding the lowest cost space to house a company's product. When choosing the placement of a distribution center, a company must weigh the new freight costs and the cost of a new or leased structure against its necessary service levels, as well as several other factors. Companies can also save on logistics costs in choosing the correct location by incorporating the inherent risk and variability that are involved in a facility location decision. However, in reality, most companies do not analytically consider risk and variability in choosing a location. This article presents a methodology to help determine candidate locations and then conduct a financial risk analysis to determine the ideal location of a new facility.     

Production planning of a hybrid manufacturing-remanufacturing system under uncertainty within a closed-loop supply chain

This paper deals with the production planning and control of a single product involving combined manufacturing and remanufacturing operations within a closed-loop reverse logistics network with machines subject to random failures and repairs. While consumers traditionally dispose of products at the end of their life cycle, recovery of the used products may be economically more attractive than disposal, while remanufacturing of the products also pursues sustainable development goals. Three types of inventories are involved in this network. The manufactured and remanufactured items are stored in the first and second inventories. The returned products are collected in the third inventory and then remanufactured or disposed of. The objective of this research is to propose a manufacturing/remanufacturing policy that would minimize the sum of the holding and backlog costs for manufacturing and remanufacturing products. The decision variables are the production rates of the manufacturing and the remanufacturing machines. The optimality conditions are developed using the optimal control theory based on stochastic dynamic programming. A computational algorithm, based on numerical methods, is used for solving the optimal control problem. Finally, a numerical example and a sensitivity analysis are presented to illustrate the usefulness of the proposed approach. The structure of the optimal control policy is discussed depending on the value of costs and parameters and extensions to more complex reverse logistics networks are discussed.     

Internationalization and the Dynamics of Product Adaptation—An Empirical Investigation

Firms competing in foreign markets can choose to make no changes to the physical product and packaging, called a product standardization policy, which keeps costs low. The main drawback of such a policy is that the product might not satisfy customers. Conversely, firms may choose to modify, or to adapt, the physical characteristics or attributes of a product and its packaging to fit the needs and desires of consumers in different countries better, but this increases development, manufacturing, marketing, packaging, and distribution costs. Though product adaptation is a core aspect of customizing an export market offering, little research has investigated modifying the physical product and packaging. To be successful, an adapted product must add sufficient incremental revenue (through increased sales due to better satisfying customer needs and wants relative to competitive product offerings) such that the additional manufacturing and marketing costs that result from adapting the product are recovered. In this article, a model of the product adaptation process is developed. Using mail surveys, information is gathered from managers in 239 U.S. organizations and 302 South Korean organizations, all of which export products. The goal was to understand better the motivation of firms to adapt their products for export markets as well as the performance implications of adapting products. Furthermore, the model was tested in these two countries to determine if the model is robust and to uncover differences between the United States and South Korea. Using structural equation modeling to analyze the data, a positive association was found between the level of product adaptation and profitability at the project level. Second, U.S. firms appear to be more reactive when adapting products for export markets, doing so when laws and regulations in the export market mandate changes relative to the U.S. market. Conversely, South Korean firms appear to be more proactive and to adapt products even when not required by the governments of export markets. Third, greater international product adaptation is linked to a more responsive marketing organization with customer‐focused practices. Fourth, while a positive link was expected between business unit experience and the extent of international product adaptation, inconsistent results were found between the two country samples. For U.S. firms, it was found that greater experience in international business and product design capability is linked to a higher level of international product adaptation. For South Korean firms, however, a negative relationship was found. Greater international product adaptation occurred with less international business and product design experience. These findings are discussed, and areas for future research are noted.     

Strategic safety stock placement in supply chain design with due-date based demand

We present a strategic safety stock placement model in supply chain design for assembly-type product with due-date based demand, where demand data are based on dates when company has to ship to customers rather than order receiving dates. We formulate multi-echelon stock placement by guaranteed-service model with demand propagation equations through backward explosion, where demand can be either stationary or nonstationary. The stock placement model is incorporated into network design problem and its optimization procedure is provided. We show effectiveness of the optimization procedure and other significant features of the model through numerical examples of a machinery product supply chain.     

User Toolkits for Innovation: Consumers Support Each Other

User toolkits for innovation were recently proposed as a means to eliminate (costly) exchange of need-related information between users and manufactures in the product development process. The method transfers certain development tasks to users and thereby empowers them to create their own desired product features. This article examines the implications of different levels of opportunities for consumer involvement (OCI) in product development to learn what happens when firms pass design tasks on to consumers. It explores this issue by studying the relation between the employment of user toolkits and the need for firms to support their consumers. An analysis of 78 computer games products and the amount of support given by firms to the consumers of these products suggests that a share of the costs firms save on information acquisition by letting consumers "do it themselves" may eventually reemerge as costs in consumer support. In other words, an increase in opportunities for consumer involvement seems to increase the need for supporting consumers. A promising solution to the problem of support costs is identified, namely, the establishment of consumer–consumer support interaction. A case study of an outlier in terms of firm support to consumers—Westwood Studios—shows that consumers who use toolkits may be willing to support each other. Such interactive problem solving in a firm-established user community is advantageous to the firm, because the process reduces the amount of resources that the firm itself needs to dedicate to the support of consumers using toolkits. Generally, consumer-to-consumer interaction can facilitate problem-solving in the consumer domain, can aid the diffusion of toolkit related knowledge, and potentially can enhance the outcomes produced by the toolkit approach.     

Product profitability: Causes and effects

The aim of this study was to determine the extent and the reasons for variation in the profitability of a product. The underlying hypothesis was that all products are not profitable. Furthermore, it was assumed that activity-based costing (ABC) would indicate greater differences in the profitability of products than the previously used marginal costing system. The case study was conducted in a company in the metal industry that manufactures and assembles industrial goods. First, the activity chains were modeled and the activity-based costs were calculated. Second, the activity-based cost of the final products was compared with the selling prices to determine the profitability. The results show that the profitability varies significantly. The most profitable 20% of the products generate more than 150% of the profits and 50% of the net sales. Finally, the study identifies the characteristics of the most profitable products and discusses the reasons for the profitability.     

Applying fuzzy linguistic quantifier to select supply chain partners at different phases of product life cycle

Owing to rapidly growing global competition, enterprises are increasingly focusing on their core competencies. The focal company faces the challenge of creating alliances with more suppliers to create outsourcing synergy and provide heterogeneous products for customers. This study proposes a fuzzy multiple attribute decision making (FMADM) method based on the fuzzy linguistic quantifier. An attempt is made to ensure that the evaluation results satisfy the current product competition strategies, and also improve the effectiveness and efficiency of the entire supply chain. The fuzzy concept is applied to both the ordinal and cardinal information. Furthermore, the fuzzy linguistic quantifier guided order-weighted aggregation (FLQG-OWA) operator can be used to satisfy the enterprise product development strategy based on different phases of product life cycle.     

From Experience: Linking Product Innovation to Business Growth

Industry pundits often take managers to task for their supposedly myopic approach to planning and decision making. These sweeping generalizations gloss over the complex challenges confronting the managers who must ensure that their firms enjoy ongoing revenue growth opportunities. In place of pat answers, those managers require analysis and planning tools that offer clearer insights into the effects their decisions have on their firms' continued business success. As Marv Patterson points out, however, determining the effects of product innovation decisions poses a particular challenge for management, because the consequences of those decisions typically do not become evident until long after the decisions have been made. Presenting a conceptual model that links product innovation activities to revenue growth, he identifies three drivers of revenue growth, and explains how these growth drivers are linked by a set of mathematical relationships that can be presented in the form of an enterprise-specific growth table. He applies the model to three types of enterprises, and he discusses the key implications that the model holds for the business leaders who must keep shareholders satisfied. He depicts the relationship between a company and its customers as a closed-loop system in which the company converts labor, parts, and material into products, which it delivers to customers. The company invests a portion of the resulting revenue stream in the resources that generate new products. By effectively and continually applying a sufficiently large investment in this innovation engine, the company creates an ongoing stream of new products. The revenues from these new products more than offset the drop in revenues from products that are approaching obsolescence. He identifies three factors that drive revenue growth from these investments in the innovation engine: the fraction of revenues invested in product innovation, new product revenue gain, and the behavior of revenue over time for a particular business. Using a graph called a product vintage chart, he demonstrates that for a large company, the revenue contributions of a particular new-product year (or vintage) fall into a regular pattern over time, which enables a company to determine mathematical relationships for revenue growth as a function of R&D investment and new product revenue growth. In this way, senior managers can gain clearer understanding of the interplay between product innovation, R&D investment, revenue growth, and profitability over time.     

Optimal inventory and pricing policies for remanufacturable leased products

In this paper we consider a company which leases new products and also sells remanufactured versions of the new product that become available at the end of their lease periods. When the amount of end-of-lease items in stock is not sufficient to meet the demand for remanufactured products, the firm may purchase additional cores from a third-party supplier. We develop a dynamic programming formulation for determining the optimal price of remanufactured products, and optimal payment structure for the leased products. Our objective is to maximize the discounted system-wide profit over a finite horizon. The profit function consists of revenues that are obtained from remanufactured product sales and leasing, remanufacturing and manufacturing costs, inventory holding and shortage costs. We consider a consumer choice based demand model for mapping a potential customer into one of the product segments (a remanufactured product customer or a customer for a leased product with a particular lease period) for a given price/lease payment vector. We explore several properties of the discounted profit function and provide insight on the behavior of pricing and inventory policies. We also investigate the effect of key product characteristics such as deterioration in age, cost of shortage in remanufacturable product inventory, and key market characteristics such as relative willingness-to-pay for buying a remanufactured product and relative willingness-to-pay for leasing a new product on optimal pricing policies through a computational study.     

The functions of project evaluation

In trying to explain the difficulties of implementing evaluation models it can be useful to study how evaluations of product development proposals are carried out in practice when they are not influenced by normative models. In this article some results are reported from an in-depth study of how project proposals were evaluated in two Swedish companies operating in the same industry. One was among the most innovative in the industry, its product development activities had led it into a series of new products and had resulted in a very high profitability and an extremely high rate of growth. The product development of the other company had resulted much more in variations in existing products than in major innovations. Growth was very slow and profitability was approaching a critically low level. The way project proposals were evaluated in the companies proved to differ substantially. In one company the dominating evaluation mode was one where the task is considered to be to estimate what effect an acceptance of the project proposal will have on overall goals, such as profitability and growth. This is called the rationalistic approach. In the other company an evaluation mode with the opposite characteristics was used. The evaluators consider a few conspicuous or at least easily visible characteristics of the project proposal. On the basis of these a picture of the project is created which is perceived as good or bad. This picture is the basis for the decision. This is called the impressionistic approach. In the case reported here the rationalistic mode was used by the least successful and least innovative company while the impressionistic mode was used by the most successful and most innovative company. The paper presents arguments for interpreting the relationship between evaluation mode and performance not as coincidental but as causal. It is argued that even if the impressionistic mode may seem irrational from a traditional point of view, it is superior to the rationalistic one in some important respects.     

Competitor analysis: Some practical approaches

Analysis of the intentions and capabilities of key competitors is an essential component of effective business strategy. This article places major emphasis on the often neglected area of competitive cost analysis. An overview of secondary and primary sources, including competitors themselves, is provided. Case examples illustrate the use of these sources in analyzing key strategic cost differentials between a company and its competitors. New approaches to competitor cost analysis are reviewed: 1) statistical techniques estimate fixed and variable components of cost; and 2) an analytical “force-out” technique estimates categorical costs (materials, wages, selling costs, etc.).     

Do Retailers Really Profit from Ambidextrous Managers? The Impact of Frontline Mechanisms on New and Existing Product Selling Performance

When manufacturers introduce a new product to the market, downstream retail partners are faced with inherent trade‐offs. Retail sales personnel have to support the new product's introduction with substantial sales efforts but also sell the existing products in stock, before storage and devaluation costs spin out of control. This study shows how retail sales managers can guide sales personnel's performance of new and existing product selling, respectively. The authors argue that a manager may prioritize selling new products, existing products, or both (i.e., have an ambidextrous selling orientation). Based on data gathered from sales representatives and company databases of a large European consumer electronics retailer, the authors perform a time‐lagged partial least squares analysis to test empirically their conceptual model. The authors find that ambidextrous sales managers outperform their singular‐oriented counterparts if they properly align their orientation with a frontline management mechanism consisting of task autonomy, performance feedback, and employee age. More specifically, ambidextrous managers promote net profit obtainment if they grant their sales employees task autonomy and give little performance feedback. In addition, a remarkable finding is that older sales agents tend to outperform their younger counterparts when working under an ambidextrous manager. The authors discuss the implications of these findings.     

How does income inequality affect market outcomes in vertically differentiated markets?

The distribution of consumer incomes is a key factor in determining the structure of a vertically differentiated industry when consumer's willingness to pay depends on her income. This paper computes the Shaked and Sutton (1982) model for a lognormal distribution of consumer incomes to investigate the effect of inequality on firms' entry, product quality, and pricing decisions. The main findings are that greater inequality in consumer incomes leads to the entry of more firms and results in more intense quality competition among the entrants. More intense quality competition raises the average quality of products in the market as firms compete for the shrinking share of higher-income consumers. With zero costs of quality improvements and an upper bound on the top quality or when costs of quality are fixed and rise sufficiently fast, greater heterogeneity of consumer incomes also reduces firms' incentives to differentiate their products. Competition between more similar products tends to reduce their prices. However, when income inequality is very high, the top quality producer chooses to serve only the rich segment of the market and charges a higher price. The conclusion is that income inequality has important implications for the degree of product differentiation, price level, industry concentration, and consumer welfare.