Managing Product Transitions under Technology Uncertainty

Abstract

Sequential innovation, where a new product is developed to replace an existing product, creates several logistical challenges for innovating firms. We consider a firm that has to make the end-of-life inventory decision (or final build) for an existing product before identifying key performance measures of a new product. The firm also has the ability to improve the new product's quality during the transition, which we refer to as development flexibility. We jointly model the final build and new product introduction decisions, and characterize optimal inventory and launch policies. The effects of competition, product architecture and development flexibility on the firm's product transition strategy are also explored. In a competitive setting, we show that the optimal policy can be characterized as competitively overstocking or understocking, based on the inventory level relative to a rival's time of entry. Our results thus provide an alternative view of inventory as a hedge against development uncertainty that is inherent to product development.