Figure 1 provides a graphical representation of the effects of consistently high levels of R&D investments spread evenly across all product lines.
Figure 1: Outcome of Initial R&D and Pricing Analysis
For the implications to Total Income based on these decision points, see Table 2. Note that consistently high R&D spending, not price declines, are what is fueling the overall sales growth. At the end of the second iteration, Sales Volume is up 36% and Revenue Volume is up 40%. The lesson learned is that when there is a rapidly expanding market, investments in R&D and more powerful than price in driving sales (Chwelos, Berndt, Cockburn, 2008)
Table 2:
Total Income Based on Second Iteration Assumptions
Throughout the simulation, market data is periodically provided in addition to market lifecycle stage of each of the products in the company. By the third iteration it is apparent that the X5 is maturing rapidly and as a result is not as influenced by R&D spending as it had been earlier in the simulation. Based on this observation, R&D spending on the X5 is decreased by 3%. The result is an immediate reduction in sales. The 3% is however applied to the X6 which is still in its growth phase, yet struggling to gain market share. As the market is highly inelastic, pricing is left untouched. These factors are shown in Table 3, 3rd Iteration Assumptions.
Table 3: 3rd Iteration Assumptions
Products
R&D Spending
Price
X5
30%
$250
X6
37%
$400
X7
33%
$200
The resulting impact on sales is immediate and significant, and signals just how much technology-centric markets rely on R&D investment over price as their primary catalysts for growth....
Table 4, 3rd iteration of simulation shows the results of these selections on revenues, costs and profits. As the markets had reached a high level of saturation, there is single-digit revenue growth and small increases in profitability. This is to be expected due to the inelastic demand curve for these products, the rapid product lifecycles that favor R&D investment over just price declines.
Table 4: Financial Summary of 3rd Selections
Conclusion
The overall simulation illustrates how critical it is to balance and even consider stabilizing price and continually investing in R&D in new products to drive sales. It is critically important to focus on the design structure of a product (Bayus, Barry, Jain, Sanjay, Ambar, 1997) and its phase in the product life cycle (Denno, Thurman, 2005). These factors have significant implications on how and when new products are introduced, the structure of their costing and pricing, and the level of agility in both.
References
Bayus, Barry L, Jain, Sanjay, & Rao, Ambar G. (1997). Too little, too early: Introduction timing and new product performance in the personal digital assistant industry. JMR, Journal of Marketing Research, 34(1), 50-63.
Chwelos, P., Berndt, E., & Cockburn, I.. (2008). Faster, smaller, cheaper: an hedonic price analysis of PDAs. Applied Economics, 40(22), 2839.
Peter Denno, & Thomas Thurman. (2005). Requirements on information technology for product lifecycle management. International Journal of Product Development, 2(1,2), 109-122.
Mike Edwards. (2008, January). PDA design a collaborative effort. DPN: Design Product News, 36(1), 1,7.
Han, J., Chung, S., & Sohn, Y.. (2009). Technology Convergence: When Do Consumers Prefer Converged Products to Dedicated Products? Journal of Marketing, 73(4), 97.
