Dynamics of successive product generation - A system dynamics perspective

Developing products faster, better, and cheaper than competitors has become a critical success in various markets. This is especially true in fast changing and technology-intense markets such as semi-conductor industry which is characterized by successive introduction of next generation products. One of the challenges of this industry is that product life cycles are relatively short and prices decay dramatically leaving less time for manufacturers to compensate for production, marketing and research and development expenditures. The success of the current product performance will dictate the company‘s future success since the resources gained from this current product will be used to develop new product generation in the future. It is because of this dynamicity, complexity and interconnectedness that makes decision processes under this industry more challenging. Therefore, it requires a system dynamics view of understanding the problem and consequences of the decisions made by the company. One of the key elements in the new product launch strategy is its introduction time. New product introduction and substitution effects will ultimately diminish the potential, if not the actual sales, of earlier technologies. Customers, who would otherwise have adopted the earlier device, will, instead adopt the later one. Furthermore, a substitutive new product that is introduced too early into the market could lead to product cannibalism. On the other hand, being too late could cause a sharp decline in sales or market position However, optimal introduction time is only one of the most important decisions to be made by a company. Decisions such as - When to phase out old generations? What pricing decisions mechanisms to follow for both old and new products? What marketing mix strategies to be implemented to make sure high profits, market position and returns in investment are achieved? - are also equally important as well, for the very reason that these measurements are interconnected with each other. The current models attempted to explain the diffusion and substitution of new product introduction through limited number of variables but they did not consider explicitly the operational or the intra-firm variables which deemed important in any management decisions, assessment of firm‘s performance as well as its implications to resource allocation and strategy/policy formulation. Moreover, understanding the complexity of the successive product introduction in a forecasting model may limit the process of understanding the structure of the system for these current models neglect time delay factor in the relationship of the model such as the order fulfillment process of the firm that includes capacity adjustments and production ramp-up especially in the earlier stage of its life cycle. This research would like to question the assumptions and the structure it was formulated. This research attempts to look back and see what happened in the past rather than the usual forward looking goal of forecasting models. Through v this approach, it questions now the assumptions made in the past that order fulfillment variables such as available production capacity, perceived delay in actual demand, production build-up delay, and the resource interdependency between the current and new product generation were treated as always available or can be adjusted instantly. However, based on other researches this may have an implication for it directly affects consumer buying behaviour either by the availability of products or by its attribute factors. This study has proven the need for considering simultaneously market and order fulfillment variables in understanding sales behaviour under successive product generation. The model emphasizes that market performance of an innovative product is heavily influenced by intra-firm factors. It is not only the product with its intrinsic attributes itself, nor the pricing strategy or the advertising efforts dictates its market success but also how goods were made, how resources are managed and on-time fulfillment of orders are also equally important as well. The study shows three important results. First, Increasing drastically the stock of waiting customers through the increased advertising effectiveness will lead to a more negative gross profit since it gives a shock to the production facility to drastically adjust its capacity leading to a more costly move. Second, The slower the rate (longer period between the introduction of new products) of new product introduction the greater the excess capacity/production capability that the company would have and therefore decreasing profit potential since the excess capacity/production capability will be sitting for a longer period of time. And lastly, the cautious strategy for the introduction of new product at its early stage will eventually backfire resulting to more excess capacity at the end of its life. Building-up larger capacity at the early stage of new product introduction will be more lucrative compared to the cautious investment strategy. The idleness that resulted to the increased capacity in early stage exceeded the benefit of the total cycle when demand gain momentum. Further studies can explore the possibility of expanding the model to include a much detailed decision making process of the consumers in buying successive product generations. Another research opportunity would be is to implicitly include competition in the model. Competition plays an important role in influencing consumer buying preferences and therefore by studying its factors would be very beneficial for market with several players competing in same need. Competition can be viewed from a company perspective or as a whole industry