Warp Analysis the Personal Digital

¶ … Warp Analysis

The Personal Digital Assistant (PDA) market is one marked by exceptionally rapid levels of product lifecycles (Bayus, Barry, Jain, Sanjay, Ambar, 1997) and the need for continual focus on investments in innovation and R&D (Edwards, 2008). In addition, the market for PDAs is also known to be much less price-elastic or susceptible to price change than it is to technological shifts due to innovation being more important to many purchasers than price alone (Chwelos, Berndt, Cockburn, 2008). As a result, the simulations for Handheld Corporation indicate that the market is highly inelastic, initially sensitive to significant shifts in R&D spending that drive sales for a quarter or two then are lost due to product maturation, and susceptible to rapid product obsolescence. These three factors are responsible for much of the rapid pace of change and continual repositioning of products in the PDA market. Through four cycles of simulations the modifications made to pricing, R&D investment and the decision of whether to continue funding a product or not are made. The assumptions of the market being inelastic and therefore not susceptible to pricing moves yet more sensitive to increases in R&D spending pervade the simulation results.

Simulation Analysis

The initial period of the simulation was the most critical as R&D spending on the newest product, the X7, needs to be consistently invested in for its sales to increase. The X7 sells into a market segment that cares about both price and performance, and as a result, spending on R&D is critically important to the long-term success of this product, just a year old during the timeframes of the case study.

Despite the need for a high level of R&D spending that needs to be kept constant on the X7, there is must as much a critical need to keep the X5 and X6 R&D spending levels consistently high. Without R&D spending in such a competitive market, sales would drop precipitously, as innovation is more effective in selling these products than just relying on price (Chwelos, Berndt, Cockburn, 2008). The entire R&D process is also highly collaborative and requires an intensive amount of investment to keep products current with consumer and market requirements (Edwards, 2008). One PDA from Handheld Corporation cannot necessarily dominate R&D spending over the long-term. All of these products (X5, X6 and X7) must all be kept in balance with each other to ensure that consistent and even revenue growth occurs across all product categories. Add to this the fact that these markets are highly inelastic (Chwelos, Berndt, Cockburn, 2008) has also led to the decision to not increase or decrease price on any of the three models but rather hold them constant. A summary of the initial R&D spending percentages and pricing are provided in Table 1: Initial R&D and Pricing Decisions.

Table 1: Initial R&D and Pricing Decisions

Products

R&D Spending

Price

X5

33%

$250

X6

34%

$400

X7

33%

$200

The results of these initial selections, shown graphically in Figure 1, Outcome of Initial R&D and Pricing Analysis, illustrate how sensitive these technology-related products are to R&D investment. This rapid assimilation of R&D investment in each of the X Series products show how much customers in technology-related products buy more based on innovation and less so on price (Han, Chung, Sohn, 2009). This research finding validates the price inelasticity of the market, and paradoxically the sensitivity of this market to consistent and high level of R&D spending and investment.

Based on this assessment of the market it is not surprising to see the X6 attaining the highest levels of sales of all models due to its position in the product lifecycle of PDAs and the highest level of R&D investment (34%). 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.