Search

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.

Firms that operate in high-velocity markets must configure and utilize diverse technological innovation capabilities (TICs). TICs provide the firm with technological strength and adaptability to manage technological changes with respect to demand changes on the customer value trajectory. In this paper, we examine the configuration of a high tech firm’s TICs involving R&D, manufacturing and marketing capabilities to develop technology exploring or market exploiting activities in response to shifts in the customer value trajectory. We analyze the cases of micro, electrical, mechanical systems (MEMS) accelerometer innovators, and identify strategic configuration of TICs that has been necessary to trace the customer value trajectory with technological changes. We further show how the stability of the customer value trajectory plays a role for the firm in market transition to configure and utilize its TICs for exploring or exploiting the market. Based on our findings, we offer a managerial decision-making framework regarding strategic management of TICs with respect to the customer value trajectory in high-velocity markets.

High market uncertainty impedes an entrepreneur's ability to evaluate the state of the market for a business opportunity. For many entrepreneurial ventures, data collection and analysis techniques and technologies are becoming an important source to manage uncertainty. This trend is often referred to as “data-driven entrepreneurship.” We consider a dynamic approach using data to overcome market uncertainty for business opportunity-related evaluations. In particular, we examine the entrepreneur's investment portfolio in which each investment generates expected returns and some information about a specific aspect of the market for a single business opportunity. We develop a model that analyzes imperfect market data (e.g., financial, social, regulatory), while factoring in the entrepreneur's risk preference and operational shortages of resources, routines, reputation, and regulations. Our numerical findings show that, rather than pursuing the highest expected returns, an entrepreneur may choose perfect information, risk hedging, or market-controlling investments based on his/her cash level and risk preference. Hence, the entrepreneur, fueled by the availability of data analysis, could overcome uncertainties and obtain better insights for business opportunity decisions.

The purpose of this paper is to examine sustainability-oriented innovations within the electric and energy utility industry in US through the lens of innovation theory and obtain insights on the development and commercialization of sustainability-oriented utility innovations. This research focuses on the top MSCI ESG-rated U.S. utility companies and explores a mix of innovations and strategies that differentiate these top companies. The three emerging propositions from this study are the importance for companies to diversify their innovation portfolio, engage their customers, and establish an intrapreneurial culture. The conjoining of these three propositions offers an evaluation and decision making framework for the companies to maximize the efficacy of profitable and sustainable innovations at all levels and gain a competitive edge against their competitors.

We draw upon stewardship theory to formally derive bounds on the investment amount in a business prospect, and to characterize ownership sharing when investors offer two-stage financing along with know-how to increase the prospect’s valuation. In the early-development stage, we show that the direct effect of investor know-how increases the entrepreneur’s share while the indirect effect from that know-how due to its interaction with the investment size, decreases it. In the subsequent growth stage, the direct effect decreases the entrepreneur’s share while the indirect effect increases it. These tradeoffs offer theoretical and practical implications for writing investment contracts involving investor know-how.

Problem definition: We examine how the presence of capital market frictions influences the decision to invest in production cost reduction and the resultant production volume. This investment can increase the firm’s cash flow by increasing the profit margin, but it can also decrease the firm’s risk-free cash reserves and thus affect its exposure to capital market frictions. Academic/practical relevance: Process improvement aimed at production cost reduction has generated myriad of theoretical questions about efficient investment options and capacity choices. From a managerial perspective, process improvement is a fundamental concern in operations strategy. Nevertheless, its analysis typically excludes financial constraints by assuming a perfect capital market. Methodology: We formulate a two-stage profit maximization model in which a capital-constrained firm commits to a cost-reduction investment in the first stage in anticipation of its production decision in the second stage of this two-stage decision process. The firm considers capital market frictions when making decisions at each stage, while considering uncertainty in demand for its offering and in reducing its unit production cost. Results: When a firm faces small initial capital and low preinvestment unit production costs, it can benefit from investing in production cost reduction in the presence of capital market frictions more so than in their absence. Moreover, uncertainty in the production cost reduction mitigates the impact of market frictions on the net benefit (i.e., additional profit), whereas demand uncertainty decreases the feasible parameter space, where investing in production cost reduction is optimal. Managerial implications: A firm’s decision to invest in production cost reduction affects its operational and financial capabilities. Managers should thus consider this investment as an operational hedge not only against the uncertainty of matching supply and demand but also against exposure to capital market frictions and the resultant financial risk.

The climate change debate and economic recovery strategies in various industries demand highly innovative projects featuring stretched performance goals for developing clean technology. These projects face multiple sources of uncertainty in high risk situations, and require specialized know-how and longer periods for revenue growth than their counterparts in other industries. We use data from 207 clean technology projects funded by the U.S. Advanced Research Projects Agency-Energy to conduct a comparative study of how operations design can hedge risk and enhance project valuation in technology development and deployment stages. We find that deployment feasibility is significantly and positively related to project valuation. On the other hand, stretched technical performance goals, development feasibility and market growth targets are associated with lower valuation. We also find some significant differences for these results across institution types: mature firms, start-ups, universities, and research centers. We examine the risk profile of these projects by technology and institution type, and discuss the managerial and policy implications for these findings.

Many durable products provide value only when used together with contingent services or consumable components, e.g. light fixtures (bulbs), printers (ink), electronics (batteries). Consumers need only have access to the contingent consumable components to continue to derive service from a durable. In fact, many firms rely primarily upon the revenues generated from the contingent services or consumables as the primary source of profitability, e.g. giving away the razors to make money on the blades. Such firms often invest considerable effort into making sure that consumers of their durables are held captive to their own branded consumables by impeding their access to generically available consumables. They do so by designing their products in such a way that they are not readily compatible with the generic consumables. We consider the implications of competition from third-party manufacturers that can provide generic consumables and the manufacturer’s production decisions of a durable good under such contingencies. This allows us to draw managerial insights about how a firm should decide on his product compatibility and production quantity when the generic contingent consumables enter the market.

Open innovation through collaboration could be beneficial for various reasons, but participating firms must also consider the strategic consequences of their formation on the supply chain. This study is concerned with how open innovation through inter-firm collaboration and strategic alliances may generate value for competing suppliers by stimulating the adoption of the new component innovation by the downstream supply chain. The analysis specifically examines three types of firm interaction representing different levels of open innovation. First, in the joint venture, fully integrated suppliers would develop and market the component. Second, in the development alliance, partially integrated suppliers share the development outcome, but compete in marketing. Finally, independent suppliers do not form any kind of collaborative formation. The findings reveal that the value of open innovation comes not only from technology development, but also how well it stimulates the downstream OEM to invest.

Whether to invest in process development that can reduce the unit cost and thereby raise future profits or to conserve cash and reduce the likelihood of bankruptcy is a key trade-off faced by many startup firms that have taken on debt. We explore this trade-off by examining the production quantity and cost reducing R&D investment decisions in a two period model wherein a startup firm must make a minimum level of profit at the end of the first period to survive and operate in the second period. We specify a probabilistic survival measure as a function of production and investment decisions to track and manage the risk exposure of the startup depending on three key market factors: technology, demand, and competitor's cost. We develop managerial insights by characterizing how to create operational hedges against the bankruptcy risk: if a startup makes a "conservative" investment decision, then it also selects an optimal quantity that is less than the monopoly level and hence sacrifices some of first period expected profits to increase its survival chances. If it decides to invest "aggressively," then it produces more than the monopoly level to cover the higher bankruptcy risk. We also illustrate that debt constraint shrinks the decision space, wherein such process investments are viable.

The price of professional portfolio management provided by the mutual fund adviser depends not only on the fund characteristics but also on the fund objective, the adviser's portfolio related and management based decisions, and the portfolio performance. We analyze the advisory fee, using a survivorship bias free data set of 176 equity funds managed by 125 different advisers. Advisers benchmark the objective average but this benefit the shareholders only when the objective trend is descending. Advisers tend to reduce the cost of their marginal product through the use of derivatives or manipulate by engaging in soft dollar agreements. We find that the advisers actively manage the advisory fee contracts responding to the outcome of their management decisions. The advisory fee increases after voluntary fee reimbursement or if the adviser is not fully reimbursed for the compensation of independent directors and officers. Risk taking behavior is the main motivation behind the structure of the advisory contracts. Advisers who adopt more linear contracts that would motivate them to take on more risk tend to use derivatives arguably for better risk management and are less likely to engage in research agreements that would require a reduction in the advisory fee.