Dynamic Portfolio Selection of New Products under Uncertain Market Conditions - 2002 Manufacturing and Service Operations Management Conference


^ Dynamic Portfolio Selection of New Products under Uncertain Market Conditions

Stylianos (Stelios) Kavadias, Christoph H. Loch


Selecting program portfolios is an important challenge in the management of new product development (NPD). At the aggregate Dynamic Portfolio Selection of New Products under Uncertain Market Conditions - 2002 Manufacturing and Service Operations Management Conference level of business management a key decision is the allocation of resources across product lines or market segments. This article develops a dynamic model of resource allocation, taking into account multiple interacting factors Dynamic Portfolio Selection of New Products under Uncertain Market Conditions - 2002 Manufacturing and Service Operations Management Conference, such as uncertain market payoffs that change over time, increasing or decreasing returns from the NPD investment, carry-over of the investment benefit over multiple periods, and interactions across segments. We characterize Dynamic Portfolio Selection of New Products under Uncertain Market Conditions - 2002 Manufacturing and Service Operations Management Conference optimal policies in closed form and derive qualitative decision rules for managers. In the presence of increasing returns, the whole budget is optimally allocated to one product line, while decreasing returns lead Dynamic Portfolio Selection of New Products under Uncertain Market Conditions - 2002 Manufacturing and Service Operations Management Conference to a split of the budget. The optimal allocation properties are subtle and partly counter-intuitive. For example, neither the longevity of the product line, nor market size in future Dynamic Portfolio Selection of New Products under Uncertain Market Conditions - 2002 Manufacturing and Service Operations Management Conference periods always increase the investment. For a risk-averse decision maker, a higher variance in next period's market potential makes a product line less attractive, but a higher variance in a Dynamic Portfolio Selection of New Products under Uncertain Market Conditions - 2002 Manufacturing and Service Operations Management Conference future period may increase the optimal allocation. If the product lines interact, the complement/substitution effect acts as an additional/ reduced carry-over benefit.

^ Pricing, Production, And Distribution Planning Under Exchange-Rate Dynamic Portfolio Selection of New Products under Uncertain Market Conditions - 2002 Manufacturing and Service Operations Management Conference Uncertainty

Burak Kazaz, Haresh Gurnani—University of Miami


Global companies face the challenge of coordinating production and allocation decisions with pricing strategies in a fluctuating exchange-rate environment. The natural sequence of decisions requires Dynamic Portfolio Selection of New Products under Uncertain Market Conditions - 2002 Manufacturing and Service Operations Management Conference that production plans be мейд prior to the selling season. Later, closer to the selling season, when the exchange rate is realized the company adjusts its prices influencing the demand.

We consider the case Dynamic Portfolio Selection of New Products under Uncertain Market Conditions - 2002 Manufacturing and Service Operations Management Conference of two production facilities – the first facility is home-based (referred to as the domestic plant) and is not directly exposed to exchange rate fluctuations; the second facility is located in the Dynamic Portfolio Selection of New Products under Uncertain Market Conditions - 2002 Manufacturing and Service Operations Management Conference foreign market (referred to as the foreign plant). Both production facilities supply to meet demand in a foreign market. Our study outlines a mathematical model that provides businesses in choosing the optimal Dynamic Portfolio Selection of New Products under Uncertain Market Conditions - 2002 Manufacturing and Service Operations Management Conference production, allocation, and pricing decisions. Our model is a two-stage stochastic program where production decisions are мейд at the first stage; based on the realized exchange rate, pricing and Dynamic Portfolio Selection of New Products under Uncertain Market Conditions - 2002 Manufacturing and Service Operations Management Conference allocation decisions are simultaneously мейд in the second stage. It should be noted here that demand is impacted by the second stage prices, and production decisions of the first stage are Dynamic Portfolio Selection of New Products under Uncertain Market Conditions - 2002 Manufacturing and Service Operations Management Conference мейд without knowing the exact value of demand.

In the analysis of the model, we start at the second stage where for a realized exchange rate and given production quantities at the two facilities, the Dynamic Portfolio Selection of New Products under Uncertain Market Conditions - 2002 Manufacturing and Service Operations Management Conference optimal distribution policy is determined along with the optimal selling price. Using the optimal policies at the second stage and taking expectation with respect to the exchange rate, we Dynamic Portfolio Selection of New Products under Uncertain Market Conditions - 2002 Manufacturing and Service Operations Management Conference determine the optimal production quantities at the first stage. Conditions are derived when it would be optimal to supply the foreign market using domestic or foreign plant only. In an extension to the model, we Dynamic Portfolio Selection of New Products under Uncertain Market Conditions - 2002 Manufacturing and Service Operations Management Conference plan to consider the impact of an additional domestic market on the optimal policies.

^ New Product Introduction: Timing, Design, and Pricing

Ted Klastorin, Weiyu Tsai—Department of Management Science, University of Washington


Short Dynamic Portfolio Selection of New Products under Uncertain Market Conditions - 2002 Manufacturing and Service Operations Management Conference product life cycles, diverse customer preferences, and rapidly changing technologies have created significant challenges for managers who develop and introduce new products and services. Among other factors, these managers must consider Dynamic Portfolio Selection of New Products under Uncertain Market Conditions - 2002 Manufacturing and Service Operations Management Conference the timing of the introduction of the new product, the design of the product (in terms of features and quality), as well as the price. The tradeoffs among these decisions are further Dynamic Portfolio Selection of New Products under Uncertain Market Conditions - 2002 Manufacturing and Service Operations Management Conference complicated when there is more than one firm entering a market.

In this paper, we consider the case when two profit-maximizing firms enter a new market with a competing product Dynamic Portfolio Selection of New Products under Uncertain Market Conditions - 2002 Manufacturing and Service Operations Management Conference that has a finite (and known) life cycle. We assume that both firms have similar product development capabilities and compete on the basis of product design, timing, and price. Product development Dynamic Portfolio Selection of New Products under Uncertain Market Conditions - 2002 Manufacturing and Service Operations Management Conference time is an increasing function of the product’s complexity that is measured by the number of features and the performance level of these features. We also assume that the customers’ willingness to Dynamic Portfolio Selection of New Products under Uncertain Market Conditions - 2002 Manufacturing and Service Operations Management Conference purchase a product in this market is a function of the price of the product, the design of the product, and the customers’ willingness to adopt a new innovation. The latter factor reflects Dynamic Portfolio Selection of New Products under Uncertain Market Conditions - 2002 Manufacturing and Service Operations Management Conference customers’ general reluctance to adopt new technologies as well as changing demands that may result from the impact of network externalities.

We consider two cases in this paper. In the first case Dynamic Portfolio Selection of New Products under Uncertain Market Conditions - 2002 Manufacturing and Service Operations Management Conference, we assume that both firms make design decisions simultaneously without information about the other firm’s decisions. The firm that designs its product with the fewer number of features enters Dynamic Portfolio Selection of New Products under Uncertain Market Conditions - 2002 Manufacturing and Service Operations Management Conference the market first; at that time, the “leader” firm sets a price for its product and enjoys a monopoly situation until the second firm (the “follower”) enters the market. When the second firm Dynamic Portfolio Selection of New Products under Uncertain Market Conditions - 2002 Manufacturing and Service Operations Management Conference enters the market, both firms simultaneously set (or reset) their product prices knowing the design of both products at that time (which we assume are fixed for the remainder of the product’s life Dynamic Portfolio Selection of New Products under Uncertain Market Conditions - 2002 Manufacturing and Service Operations Management Conference).

In the second case, we assume that one firm is a leader who independently begins development of the product. At some later point in time, the second firm (the follower Dynamic Portfolio Selection of New Products under Uncertain Market Conditions - 2002 Manufacturing and Service Operations Management Conference) becomes aware of this development effort and begins to develop its own product. At this point, the follower can choose to crash his product development time by allocating additional resources to this effort Dynamic Portfolio Selection of New Products under Uncertain Market Conditions - 2002 Manufacturing and Service Operations Management Conference. Again, firms set (or reset) prices when either firm enters the market.

We develop two models that represent these new product introduction processes. Using results from these models, we show that each Dynamic Portfolio Selection of New Products under Uncertain Market Conditions - 2002 Manufacturing and Service Operations Management Conference firm would like to differentiate its product from its rival’s (which may not occur in the first case). Specific decisions of each firm, however, depend on the distribution of Dynamic Portfolio Selection of New Products under Uncertain Market Conditions - 2002 Manufacturing and Service Operations Management Conference customer preferences, the innovation diffusion rate and the length of product life cycle. A numerical example illustrates our models and resulting managerial implications.


Competitive Location and Capacity Decisions for Facilities Serving Time Sensitive Customers


Anthony Dynamic Portfolio Selection of New Products under Uncertain Market Conditions - 2002 Manufacturing and Service Operations Management Conference Kwasnica, Euthemia Stavrulaki—Penn State University


Locating facilities around a customer base has received considerable attention in both the Economics and Management Science literature. The Economics literature has explored equilibrium location strategies in Dynamic Portfolio Selection of New Products under Uncertain Market Conditions - 2002 Manufacturing and Service Operations Management Conference a competitive environment, and the Management Science literature has studied location strategies that minimize travel times and/or transportation costs in a monopolistic environment. The novelty of our paper is that it Dynamic Portfolio Selection of New Products under Uncertain Market Conditions - 2002 Manufacturing and Service Operations Management Conference blends the Economics and Management Science research streams to investigate a competitive location problem that also considers travel times, capacity setting, and time sensitive customers. Our work aims to provide insights with respect Dynamic Portfolio Selection of New Products under Uncertain Market Conditions - 2002 Manufacturing and Service Operations Management Conference to interactions between competitive location, capacity and delivery performance.

Based on Hotelling’s linear city, we consider two firms offering a single product to time-sensitive customers who are located uniformly on Dynamic Portfolio Selection of New Products under Uncertain Market Conditions - 2002 Manufacturing and Service Operations Management Conference a line segment. Consumers send their orders to a distribution facility, then the firm processes (customizes) these orders on a first-come, first-served queue, and subsequently ships them Dynamic Portfolio Selection of New Products under Uncertain Market Conditions - 2002 Manufacturing and Service Operations Management Conference to customers. Thus, consumers incur delays due to both shipping leadtimes and queuing congestion within the facility, and decide to purchase from the firm that offers them the highest (non-negative) expected surplus.

Given a Dynamic Portfolio Selection of New Products under Uncertain Market Conditions - 2002 Manufacturing and Service Operations Management Conference fixed price and a fixed interval of customers, we explicitly model consumers’ waiting costs in the profit-maximizing objective function of each firm. We identify subgame perfect equilibria when firms first Dynamic Portfolio Selection of New Products under Uncertain Market Conditions - 2002 Manufacturing and Service Operations Management Conference choose capacities and then locations. We prove that depending on the problem parameters, three types of equilibria are possible; local monopoly (in which each customer is served by a single firm, and some Dynamic Portfolio Selection of New Products under Uncertain Market Conditions - 2002 Manufacturing and Service Operations Management Conference customers are left unserved), constrained local monopoly (in which firms are generally located at different points but serve the entire interval of consumers), and duopoly (in which firms are generally located Dynamic Portfolio Selection of New Products under Uncertain Market Conditions - 2002 Manufacturing and Service Operations Management Conference at different points and compete for some consumers). We also provide comparative statics results using numerical examples.

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