Article ID: | iaor20073486 |
Country: | United States |
Volume: | 50 |
Issue: | 4 |
Start Page Number: | 537 |
End Page Number: | 549 |
Publication Date: | Apr 2004 |
Journal: | Management Science |
Authors: | Wagner Harvey M., Bayus Barry L., Souza Gilvan C. |
Keywords: | markov processes |
We study how industry clockspeed, internal firm factors, such as product development, production, and inventory costs, and competitive factors determine a firm's optimal new-product introduction timing and product-quality decisions. We explicitly model market demand uncertainty, a firm's internal cost structure, and competition, using an infinite-horizon Markov decision process. Based on a large-scale numerical analysis, we find that more frequent new-product introductions are optimal under faster clockspeed conditions. In addition, we find that a firm's optimal product-quality decision is governed by a firm's relative costs of introducing new products with incremental versus more substantial improvements. We show that a time-pacing product introduction strategy results in a production policy with a simple base-stock form and performs well relative to the optimal policy. Our results thus provide analytical support for the managerial belief that industry clockspeed and time to market are closely related.