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

41 Pages Posted: 18 Oct 2018

See all articles by Sreekumar R. Bhaskaran

Sreekumar R. Bhaskaran

Southern Methodist University (SMU) - Information Technology and Operations Management Department (ITOM)

Sinan Erzurumlu

Babson College

Karthik Ramachandran

Georgia Institute of Technology - Scheller College of Business

Date Written: September 5, 2018

Abstract

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. Limited access to resources for the development of an advanced version adds another wrinkle to this problem, particularly for cash-constrained startups. For such startups, 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 — i.e., cannibalize the payoffs of the advanced product — and lower future profitability. In this paper, we study this trade-off between revenues that an on-hand product generates for R&D funding and the cannibalization effect it has on future products. 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. Comparison of these results with that of an established firm (with no such cash constraints) show important differences between the optimal product introduction strategies of a startup and an established firm. Specifically, while it is always optimal for an established firm to accelerate the launch of a better quality on-hand product, a startup might find it optimal to delay its launch. We translate our analytical findings into a managerial framework and illustrate these results using examples from the pharmaceutical and medical devices industries.

Keywords: Introduction Timing; Sequential Innovation; Market Entry; Startup; New Product Development; Entrepreneurial Operations

Suggested Citation

Bhaskaran, Sreekumar R. and Erzurumlu, Sinan and Ramachandran, Karthik, Sequential Product Development and Introduction by Cash-Constrained Start-Ups (September 5, 2018). Georgia Tech Scheller College of Business Research Paper No. 18-39; SMU Cox School of Business Research Paper No. 18-34. Available at SSRN: https://ssrn.com/abstract=3255345 or http://dx.doi.org/10.2139/ssrn.3255345

Sreekumar R. Bhaskaran (Contact Author)

Southern Methodist University (SMU) - Information Technology and Operations Management Department (ITOM) ( email )

Dallas, TX 75275
United States

Sinan Erzurumlu

Babson College ( email )

231 Forest St.
Babson Park, MA 02457-0310
United States

Karthik Ramachandran

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States
(404) 894-8631 (Phone)

HOME PAGE: http://www.prism.gatech.edu/~karthik37/

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