The Impact of an Integrated Marketing and Manufacturing Innovation

Abstract

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.degree of product/process innovation, low-end encroachment, high-end encroachment, reservation price, disruptive technology, operations strategy, vertically differentiated products

Encroachment Patterns of the “Best Products” from the Last Decade*

“…Similarly, Van der Rhee, Schmidt, and Van Orden (2011) extend the high‐end encroachment work of Schmidt and Porteus (2000) by demonstrating that high‐end encroachment, which Schmidt and Druehl (2008) mapped to Christensen's sustaining technologies, could be segmented into three distinct sub‐types, the “immediate,”“new‐attribute,” and “new‐market” forms. Further delineating the high‐ and low‐end patterns into their sub‐types allows firms to be more discriminating in determining the best strategy for introduction of a new product.…”

Product variety and vertical differentiation in a batch production system

“…Any customer who has non-negative utility is willing to buy the product. The uniformly distributedỹ and linear utility function uðp,qÞ lead to a linear demand function which is not only widely adopted in the extant literature but also verified by empirical evidence such as the example of bicycle pumps in Schmidt and Porteus (2000).…”

Allocating Capacity Among Quality Differentiated Products: Evidence From Airline Industry

“…There has been a number of articles that studied the effects of component commonality on product-line design (Bernstein, Kok, & Xie, 2009;Desai, Kekre, Radhakrishnan, & Srinivasan, 2001;Heese & Swaminathan, 2006;Kim & Chhajed, 2000. Schmidt and Porteus (2000) studied the impact of process innovation on the production quantity choices of a multiproduct monopolist and single product duopolists. Netessine and Taylor (2007) investigated the impact of inventory holding and set-up costs on the quality levels and production quantities of the products in the line.…”