Product Portfolio Strategies: The Case of Multifunction Products

Motivated by the proliferation of multifunction products, we investigate product portfolio decisions of a single firm by analyzing the impact of three major factors. First, because multifunction products provide complete or partial functionalities of single‐function products, we incorporate substitution or cannibalization effects between the potential products. Second, we explicitly model the variable costs of manufacturing the single‐function and multifunction products. Third, we examine the firm's pricing decisions because of their impact on the degree of cannibalization between the multifunction product and one or more single‐function products. Using an economic model, we first characterize the firm's optimal product portfolio (through a quantity‐based decision), which in turn determines the market equilibrium prices for each product in its portfolio. Some of the unique insights stemming from our analysis are: (a) the optimal product portfolio choice is driven primarily by maximum profit margins for the single‐function products weighted by the demand substitution effects; and (b) from a product design perspective, the complete functionality of the base single‐function product is always included in the optimal product offering, but this is not necessarily the case with the complete functionality of the nonbase single‐function product.     

Managing Product Rollovers

We study the product rollover strategy decision, where a firm decides whether to phase out an old generation of a product to be replaced by a new with either a dual or single roll. Our model considers a final build of the old product and preannouncement of the new, and incorporates dynamic pricing and inventory decisions. We find that the optimal price path closely follows changes in reservation price curves for the two products over time. We also identify the drivers of the rollover strategy decision, finding that lower market risk (faster diffusion, higher market responsiveness to preannouncements) and higher performance improvement for the new generation are associated with the single roll strategy.     

Segmentation Opportunities for a Social Planner: Impact of Limited Resources

In this research note, we investigate segmentation opportunities for social planners such as government agencies, nonprofits, and public organizations. These opportunities arise when the potential products are vertically (quality) differentiated and the consumers are heterogeneous in their preferences toward quality. In these cases, whether to offer quality differentiated products and what quality level to choose are important decisions for a social planner. In this research note, we identify the conditions where it is socially optimal to offer either one homogenous or two quality differentiated products. We find that the resource limitations may result in a single product offering and that the quality of the product depends on the maximum surplus per unit resource consumed by the products. We also compare our findings to a profit‐maximizing firm. We find that the resource limitations may cause a profit‐maximizing firm to provide a better service to some consumers than the social planner. Contrary to common wisdom, we also show that the capacity limitations may force the social planner to act like a profit‐maximizing firm in terms of its pricing and product mix choice.     

Seeking Closure: Competition in Complementary Markets*

When offering a product that has a complementary product in a different market, a firm must consider the interdependence between the complementary products as well as the competition within markets. If the firm participates in both markets, the balancing act becomes even more challenging. This article provides insights about strategies in this latter setting: when should the firm seek to keep its products closed to competing complementary products, and when would the firm be better off by accepting a common standard? To address these questions, we employ standard game theoretic analysis to a simple spatial model that captures aspects of both intermarket externalities and intramarket competition. We find that if a firm participates in both markets and chooses a closed standard, it achieves lower profits compared to an open standard, but gains greater market share. Surprisingly, we find that customers are better off when standards are kept closed.     

When to Offer Lower Quality or Remanufactured Versions of a Product

We investigate the profitability of adding a lower quality or remanufactured product to the product portfolio of a monopoly firm, both in single‐period and steady‐state settings. Consumer behavior is characterized by a deterministic utility function for the original product and a nonlinear relative utility function for the lower quality product. We find a threshold for the cost of the low‐quality product below which it is optimal to add it to the firm's portfolio, and show that while a cost advantage is necessary to make the lower quality offering profitable under linear or convex relative utility functions, market segmentation alone can justify the addition of the lower quality product under concave relative utility functions. In particular, we characterize (i) the new product cost under which it is optimal to offer a lower quality version of the product even if it is as costly to produce as the original product; and (ii) the weighted average of new and remanufactured product costs in the steady state under which it becomes cost effective to offer new products under the remanufactured label. Finally, we also identify the maximum possible profits from customer segmentation and the form of the relative utility function that achieves them. We discuss the implications for the common marketing practices of branding and generics.     

Supply Chain Management of Fresh Products with Producer Transportation*

This article considers a class of fresh‐product supply chains in which products need to be transported by the upstream producer from a production base to a distant retail market. Due to high perishablility a portion of the products being shipped may decay during transportation, and therefore, become unsaleable. We consider a supply chain consisting of a single producer and a single distributor, and investigate two commonly adopted business models: (i) In the “pull” model, the distributor places an order, then the producer determines the shipping quantity, taking into account potential product decay during transportation, and transports the products to the destination market of the distributor; (ii) In the “push” model, the producer ships a batch of products to a distant wholesale market, and then the distributor purchases and resells to end customers. By considering a price‐sensitive end‐customer demand, we investigate the optimal decisions for supply chain members, including order quantity, shipping quantity, and retail price. Our research shows that both the producer and distributor (and thus the supply chain) will perform better if the pull model is adopted. To improve the supply chain performance, we propose a fixed inventory‐plus factor (FIPF) strategy, in which the producer announces a pre‐determined inventory‐plus factor and the distributor compensates the producer for any surplus inventory that would otherwise be wasted. We show that this strategy is a Pareto improvement over the pull and push models for both parties. Finally, numerical experiments are conducted, which reveal some interesting managerial insights on the comparison between different business models.     

A Competitive Model of Customization with Lead‐Time Effects

In this article, we study the competitive interactions between a firm producing standard products and a firm producing custom products. Consumers with heterogeneous preferences choose between n standard products, which may not meet their preferences exactly but are available immediately, and a custom product, available only after a certain lead time l. Standard products incur a variety cost that increases with n and custom products incur a lead time cost that is decreasing in the lead time l. We consider a two‐stage game wherein at stage 1, the standard product firm chooses the variety and the custom firm chooses the lead time and then both firms set prices simultaneously. We characterize the subgame‐perfect Nash equilibrium of the game. We find that both firms can coexist in equilibrium, either sharing the market as local monopolists or in a price‐competitive mode. The standard product firm may offer significant or minimal variety depending on the equilibrium outcome. We provide several interesting insights on the variety, lead time, and prices of the products offered and on the impact of problem parameters on the equilibrium outcomes. For instance, we show that the profit margin and price of the custom product are likely to be higher than that of standard products in equilibrium under certain conditions. Also, custom firms are more likely to survive and succeed in product markets with larger potential market sizes. Another interesting insight is that increased consumer sensitivity to product fit may result in lower lead time for the custom product.     

Entry and Exit in OTC Derivatives Markets

We develop a parsimonious model to study the equilibrium and socially optimal decisions of banks to enter, trade in, and possibly exit, an OTC market. Although we endow all banks with the same trading technology, banks' optimal entry and trading decisions endogenously lead to a realistic market structure composed of dealers and customers with distinct trading patterns. We decompose banks' entry incentives into incentives to hedge risk and incentives to make intermediation profits. We show that dealer banks enter more than is socially optimal. In the face of large negative shocks, they may also exit more than is socially optimal when markets are not perfectly resilient.     

Optimal Policies for a Two‐Product Inventory System under a Flexible Substitution Scheme

We study a two‐product inventory model that allows substitution. Both products can be used to supply demand over a selling season of N periods, with a one‐time replenishment opportunity at the beginning of the season. A substitution could be offered even when the demanded product is available. The substitution rule is flexible in the sense that the seller can choose whether or not to offer substitution and at what price or discount level, and the customer may or may not accept the offer, with the acceptance probability being a decreasing function of the substitution price. The decisions are the replenishment quantities at the beginning of the season, and the dynamic substitution‐pricing policy in each period of the season. Using a stochastic dynamic programming approach, we present a complete solution to the problem. Furthermore, we show that the objective function is concave and submodular in the inventory levels—structural properties that facilitate the solution procedure and help identify threshold policies for the optimal substitution/pricing decisions. Finally, with a state transformation, we also show that the objective function is ‐concave, which allows us to derive similar structural properties of the optimal policy for multiple‐season problems.     

Product Positioning in a Two‐Dimensional Market Space

This paper examines the optimal product portfolio positioning for a monopolist firm in a market where consumers exhibit vertical differentiation for product performance and horizontal differentiation for product feature. Our key results are as follows: (i) Variable costs drive vertical differentiation. In the presence of significant volume‐dependent manufacturing costs, the optimal portfolio contains a mix of vertically and horizontally differentiated products and an increase in the variable cost makes adding vertically differentiated products relatively more profitable; if fixed volume‐independent design costs dominate, the portfolio exhibits solely horizontal differentiation. (ii) Horizontal differentiation is the main profit lever, and vertical differentiation brings only a marginal benefit; this is true even when most of the consumers exhibit low willingness to pay for performance, which is often used as an excuse to offer low‐end products. (iii) There are more low‐quality products than high‐quality ones, and market coverage increases when the willingness to pay for performance increases. In summary, the model shows how portfolio composition decisions depend on the product cost structure and the consumer preferences.     

The Influence of Cost and Quality Priorities on the Propensity to Outsource Production*

Outsourcing of production has escalated over the past decade due to unprecedented competition and worldwide access to low‐cost labor markets. This article examines how cost and quality priorities—two key attributes of manufacturing strategy—influence a manufacturer's propensity to outsource. By doing so, we bridge the existing gap between research on manufacturing strategy and firm boundaries. We develop a theory‐based model that links a manufacturer's cost and quality priorities to its plans to outsource production. Our empirical analyses, based on survey data obtained from 867 manufacturing business units, control for firm‐specific factors previously shown to impact outsourcing, including asset specificity, uncertainty, and current capabilities in cost and quality. We found that the competitive priority placed on cost played an integral role in sourcing decisions, while, surprisingly, conformance quality priorities did not. The cost result is consistent with our expectations and observations in practice. The significant effect of cost priority on outsourcing shows that any theory of firm boundaries that fails to consider competitive priorities is incomplete. The finding regarding quality, which was counter to our expectations, may partially explain why there is an emergence of so many nonconforming products associated with outsourcing. Taken together, our results provide theoretical insights for future research into how manufacturing managers can improve their decision making on outsourcing production.     

Offshore Remanufacturing with Variable Used Product Condition

We consider the acquisition and production decisions of a remanufacturer who acquires used products of variable condition and allocates remanufacturing activity to domestic and offshore facilities. The problem is formulated as a multicommodity network flow model with economies of scale and product obsolescence. We show that the remanufacturer's optimal strategy can be chosen from a finite set of simple policies in which each product is routed to a facility based on its condition. We then numerically investigate the impact of key parameters on optimal decisions regarding offshore remanufacturing.     

Managing Multiple Facets of Risk in New Product Alliances*

The trend of forming alliances to develop new products continues; however, many of these new product alliances fail. As such we explore how key risk types intrinsic in new product alliances, performance, relational, and knowledge appropriation risks, influence alliance success. Further, we theorize that different alliance governance mechanisms can reduce the negative impact of risks on alliance success. To disentangle possible heterogeneous factors across firms that may affect the interplay of risk assessments and the use of governance mechanisms, we employ latent class regression analysis on survey data collected from 128 new product alliance firms and find support for a two‐regime solution. Longer alliance relationships and lower technological turbulence are factors for some firms (regime one), while the opposite are factors for other firms (regime two). These two regimes show different patterns in the interplay of risk assessments and governance for alliance success. Our theory and results support viewing risk as a multiple‐factor concept and by understanding the different impacts of the risk types in new product alliances and how governance mechanisms mitigate such effects, we aid managers' decision making regarding the balance of contractual versus normative governance in new product alliances. Understanding the heterogeneous factors inherent in these complex relationships enables managers to understand the conditions in which various governance mechanisms promote new product alliance success.     

Supply Chain Sourcing in Remanufacturing Operations: An Empirical Investigation of Remake Versus Buy

Despite recent attention to closed‐loop supply chains and remanufacturing, there is scant information about what drives the re‐make versus buy decision for original equipment manufacturers (OEMs) engaging in remanufacturing. Based on the extant remanufacturing literature and transaction cost economics, we formulated hypotheses related to the drivers of in‐house versus contracted remanufacturing operations. The hypotheses were investigated via quantitative and qualitative data, thus offering a rich test of the formulated relationships. Consistent with the theory, the quantitative results showed that intellectual property, operational assets, and remanufacturing frequency are significant drivers of the re‐make versus buy decision. However, counter to the theory, the quantitative results did not support the significance of brand reputation, technological uncertainty, condition uncertainty, product complexity, and volume uncertainty. The qualitative results were used to enrich these findings by providing theoretical extensions and pragmatic insights of the remake versus buy decision in remanufacturing.     

Large Market Asymptotics for Differentiated Product Demand Estimators With Economic Models of Supply

IO economists often estimate demand for differentiated products using data sets with a small number of large markets. This paper addresses the question of consistency and asymptotic distributions of instrumental variables estimates as the number of products increases in some commonly used models of demand under conditions on economic primitives. I show that, in a Bertrand–Nash equilibrium, product characteristics lose their identifying power as price instruments in the limit in certain cases, leading to inconsistent estimates. The reason is that product characteristic instruments achieve identification through correlation with markups, and, depending on the model of demand, the supply side can constrain markups to converge to a constant quickly relative to sampling error. I find that product characteristic instruments can yield consistent estimates in many of the cases I consider, but care must be taken in modeling demand and choosing instruments. A Monte Carlo study confirms that the asymptotic results are relevant in market sizes of practical importance.     

消费者导向类型与电商全渠道决策研究

从现实出发，基于不同消费者导向类型研究了电商的全渠道决策问题。首先建立电商单渠道销售的基础模型，并得出最优产品组合、价格和交付时间。在此基础上，给出了消费者为产品导向型和渠道导向型情况下电商采取全渠道决策的条件，得出双渠道产品组合、价格及交付时间的最优决策；并进行了数值验证。研究发现，同一渠道提供的产品其最优价格相同，最优交付时间只和消费者耐心程度及交付成本函数有关。若消费者为产品导向型，仅当双渠道运营成本之差较小且消费者耐心程度较低时，电商进入线下渠道才有利可图，且在线下渠道提供最受欢迎的产品，线上渠道提供剩余产品。若消费者为渠道导向型，电商进入线下渠道必然有利可图，且在线下渠道提供最受欢迎的产品，线上渠道提供所有产品。     

The Effect of Competition on R&D Portfolio Investments

Although project portfolio management has been an active research area over the past 50 years, budget allocation models that consider competition are sparse. Faced with the competition, firms contemplating budget allocation for their project portfolio cannot limit their attention to the returns from their projects' target markets, as is the case for monopoly firms, but must also anticipate the competitive effects on these returns. Assuming firms allocate their budgets between projects offering incremental innovation targeting a mature market and projects offering radical innovation targeting an emerging market, we show that while the monopoly firm bases its budget allocation decision solely on the marginal returns of the markets, competing firms—as they take into account their counterparts' investment decisions—need to also consider the projects' average returns from their respective markets. This drives competing firms into incrementalism: faced with competition, firms invest larger portions of their budgets into projects targeting mature markets. This effect is amplified as the number of competing firms increases and firms allocate an even greater share of their budget into projects targeting a mature market. We further demonstrate the effects that changes to firms' individual budgets, as well as to market characteristics, have on firms' budget allocation decision.     

Product Positioning Using a Self‐Organizing Map and the Rings of Influence

In this article, we propose a new product positioning method based on the neural network methodology of a self‐organizing map. The method incorporates the concept of rings of influence, where a firm evaluates individual consumers and decides on the intensity to pursue a consumer, based on the probability that this consumer will purchase a competing product. The method has several advantages over earlier work. First, no limitations are imposed on the number of competing products and second, the method can position multiple products in multiple market segments. Using simulations, we compare the new product positioning method with a quasi‐Newton method and find that the new method always approaches the best solution obtained by the quasi‐Newton method. The quasi‐Newton method, however, is dependent on the initial positions of the new products, with the majority of cases ending in a local optimum. Furthermore, the computational time required by the quasi‐Newton method increases exponentially, while the time required by the new method is small and remains almost unchanged, when the number of new products positioned increases. We also compute the expected utility that a firm will provide consumers by offering its products. We show that as the intensity with which a firm pursues consumers increases, the new method results in near‐optimal solutions in terms of market share, but with higher expected utility provided to consumers when compared to that obtained by a quasi‐Newton method. Thus, the new method can serve as a managerial decision‐making tool to compare the short‐term market share objective with the long‐term expected utility that a firm will provide to consumers, when it positions its products and intensifies its effort to attract consumers away from competition.     

Coping with Gray Markets: The Impact of Market Conditions and Product Characteristics

Gray markets, also known as parallel imports, have created fierce competition for manufacturers in many industries. We analyze the impact of parallel importation on a price‐setting manufacturer that serves two markets with uncertain demand, and characterize her policy against parallel importation. We show that ignoring demand uncertainty can take a significant toll on the manufacturer's profit, highlighting the value of making price and quantity decisions jointly. We find that adjusting prices is more effective in controlling gray market activity than reducing product availability, and that parallel importation forces the manufacturer to reduce her price gap while demand uncertainty forces her to lower prices. Furthermore, we explore the impact of market conditions (such as market base, price sensitivity, and demand uncertainty) and product characteristics (“fashion” vs. “commodity”) on the manufacturer's policy towards parallel importation. We also provide managerial insights about the value of strategic decision‐making by comparing the optimal policy to the uniform pricing policy that has been adopted by some companies to eliminate gray markets entirely. The comparison indicates that the value of making price and quantity decisions strategically is highest for moderately different market conditions and non‐commodity products.     

Organizational Integration for Product Development: The Effects on Glitches,On‐Time Execution of Engineering Change Orders,and Market Success

Deviations from requirements during the product development process can be considered as glitches. Fixing glitches, or problems, during the product development process consumes valuable resources, which may adversely affect product development time and hamper the firm's goal to pursue a first‐mover advantage. It is posited that an integrated organizational response can diminish incidences of glitches and improve the ability of the firm to respond to engineering changes, subsequently leading to improved market success. This organizational response frequently includes heavyweight product development managers who are seen as essential catalysts for internal integration. Though internal integration is vital, it is equally important to integrate with customers and suppliers alike because such network partners can provide access to information, knowledge, and unique and complementary resources that are otherwise unavailable to the firm. Findings, which are based on a sample of 191 product development projects in the automotive industry, suggest that some integration routines have a positive impact on product development outcomes and market success, while other routines can in fact hamper the collective effort.