The impact of an integrated marketing and manufacturing innovation

Suppose you are a Marketing Manager envisioning a new product, or an Operations Manager contemplating a process improvement, or a CEO who commissioned an integrated new product development team. If our assumptions hold, our model offers you a single numerical measure, called the degree of product/process innovation, to determine your initiative's impact on potential sales, prices, market segments, and profits. Our simple, single-period model is a variation of the existing vertically differentiated products model: there are two competing substitute products, and customers will buy at most one of them. Our contribution is to allow new relationships between the valuations of the two products by potential customers, and to allow differing unit production costs. We identify equilibrium results when two competing firms each offer one product, and find the profit maximizing result when one (monopolistic) firm offers both products. The new product infringes on the market in one of two ways: High-end encroachment results when the new product attracts the best customers (those with the highest reservation prices), while low-end encroachment identifies a situation where the new product attracts fringe (lower-end) customers. Low-end encroachment may help explain why an incumbent sometimes fails to recognize the threat of an entrant's product, as we illustrate with an example from the disk drive industry. In short, we offer insight into the value of both a marketing objective (enhancing the product design attributes) and a manufacturing goal (lowering the production cost) in a product and/or process improvement project.