Sequential Product Development and Introduction by Cash-Constrained Start-Ups

Sreekumar Bhaskaran (), S. Sinan Erzurumlu () and Karthik Ramachandran ()
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Sreekumar Bhaskaran: Cox School of Business, Southern Methodist University, Dallas, Texas 75275
S. Sinan Erzurumlu: Technology, Operations, and Information Management, Babson College, Babson Park, Massachusetts 02457
Karthik Ramachandran: Scheller College of Business, Georgia Institute of Technology, Atlanta, Georgia 30308

Manufacturing & Service Operations Management, 2021, vol. 23, issue 6, 1505-1523

Abstract: Problem definition : Firms developing novel and innovative products regularly face a canonical product development and introduction problem: introduce a proven and immediately available product or delay product introduction until the successful development of an advanced version. Academic/practical relevance : Limited access to resources for the development of an advanced version adds another wrinkle to this problem, particularly for cash-constrained start-ups. For such start-ups, the introduction of an on-hand product can generate additional funds to support the development of an advanced product. However, the lower performance of the on-hand product can negatively impact the perception of the firm’s future products and lower future profitability. Methodology : We study the trade-off between revenues that an on-hand product generates for research and development funding and the negative effect it has on future profits. We characterize the optimal introduction timing of the on-hand product as a function of the financial resource constraints, the interdependence between these sequential products and the cost of development. Results : We identify important differences between the optimal product introduction strategies of a start-up and an established firm. Specifically, although it is always optimal for an established firm to accelerate the launch of a better-quality on-hand product, a start-up might find it optimal to delay its launch. The impact of technological failure and different forms of learning on the optimal strategy of the start-up are also explored. We translate our analytical findings into a managerial framework and illustrate these results using examples from the pharmaceutical and medical devices industries.

Keywords: start-up; new product development; entrepreneurial operations; sequential innovation (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormsom:v:23:y:2021:i:6:p:1505-1523

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