The Optimal Pace of Product Updates
39 Pages Posted: 17 May 2006
Date Written: 2005
Abstract
Some firms (e.g. Intel and Medtronics) use a time-pacing strategy for product development (PD), introducing new generations at regular intervals. If the firm adopts a fast pace (introducing frequently), it prematurely cannibalizes its old generation, incurring high development costs, while if it has a slow pace, it fails to capitalize on customer willingness-to-pay for improved technology. We develop a model to gain insight into which factors drive the pace. We consider the degree to which a new generation stimulates market growth, the diffusion rate (coefficients of innovation and imitation), the rate of margin decline, and PD cost. The optimization problem is non-concave and is solved numerically. Somewhat intuitively, we find a faster pace is generally associated with faster diffusion, a higher market growth rate and faster margin decay. Not so intuitively, we find that relatively minor differences in the development cost function can significantly impact the pace.
Keywords: new product introduction, diffusion, time pacing, clockspeed
Suggested Citation: Suggested Citation