IDEAS home Printed from https://ideas.repec.org/a/inm/ormsom/v2y2000i4p317-336.html
   My bibliography  Save this article

The Impact of an Integrated Marketing and Manufacturing Innovation

Author

Listed:
  • Glen M. Schmidt

    () (The McDonough School of Business, Georgetown University, Washington, DC 20057)

  • Evan L. Porteus

    () (Stanford Business School, Stanford, California 94305)

Abstract

Suppose you are a Marketing Manager envisioning a new product, or an Operations Manager contemplating a process improvement, or a CEO who commissioned an integrated new product development team. If our assumptions hold, our model offers you a single numerical measure, called the degree of product/process innovation, to determine your initiative's impact on potential sales, prices, market segments, and profits. Our simple, single-period model is a variation of the existing vertically differentiated products model: There are two competing substitute products, and customers will buy at most one of them. Our contribution is to allow new relationships between the valuations of the two products by potential customers, and to allow differing unit production costs. We identify equilibrium results when two competing firms each offer one product, and find the profit maximizing result when one (monopolistic) firm offers both products. The new product infringes on the market in one of two ways: High-end encroachment results when the new product attracts the best customers (those with the highest reservation prices), while low-end encroachment identifies a situation where the new product attracts fringe (lower-end) customers. Low-end encroachment may help explain why an incumbent sometimes fails to recognize the threat of an entrant's product, as we illustrate with an example from the disk drive industry. In short, we offer insight into the value of both a marketing objective (enhancing the product design attributes) and a manufacturing goal (lowering the production cost) in a product and/or process improvement project.

Suggested Citation

  • Glen M. Schmidt & Evan L. Porteus, 2000. "The Impact of an Integrated Marketing and Manufacturing Innovation," Manufacturing & Service Operations Management, INFORMS, vol. 2(4), pages 317-336, April.
  • Handle: RePEc:inm:ormsom:v:2:y:2000:i:4:p:317-336
    DOI: 10.1287/msom.2.4.317.12337
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/msom.2.4.317.12337
    Download Restriction: no

    References listed on IDEAS

    as
    1. Matthews, Steven & Moore, John, 1987. "Monopoly Provision of Quality and Warranties: An Exploration in the Theory of Multidimensional Screening," Econometrica, Econometric Society, vol. 55(2), pages 441-467, March.
    2. Jehoshua Eliashberg & Abel P. Jeuland, 1986. "The Impact of Competitive Entry in a Developing Market Upon Dynamic Pricing Strategies," Marketing Science, INFORMS, vol. 5(1), pages 20-36.
    3. Kelvin Lancaster, 1990. "The Economics of Product Variety: A Survey," Marketing Science, INFORMS, vol. 9(3), pages 189-206.
    4. Karl T. Ulrich & Scott Pearson, 1998. "Assessing the Importance of Design Through Product Archaeology," Management Science, INFORMS, vol. 44(3), pages 352-369, March.
    5. Stephen A. Smith, 1986. "New Product Pricing in Quality Sensitive Markets," Marketing Science, INFORMS, vol. 5(1), pages 70-87.
    6. Allan D. Shocker & V. Srinivasan, 1974. "A Consumer-Based Methodology for the Identification of New Product Ideas," Management Science, INFORMS, vol. 20(6), pages 921-937, February.
    7. Avner Shaked & John Sutton, 1982. "Relaxing Price Competition Through Product Differentiation," Review of Economic Studies, Oxford University Press, vol. 49(1), pages 3-13.
    8. Rabik Ar Chatterjee & Jehoshua Eliashberg, 1990. "The Innovation Diffusion Process in a Heterogeneous Population: A Micromodeling Approach," Management Science, INFORMS, vol. 36(9), pages 1057-1079, September.
    9. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
    10. Viswanathan Krishnan & Steven D. Eppinger & Daniel E. Whitney, 1997. "A Model-Based Framework to Overlap Product Development Activities," Management Science, INFORMS, vol. 43(4), pages 437-451, April.
    11. Jehoshua Eliashberg & Richard Steinberg, 1991. "Competitive Strategies for Two Firms with Asymmetric Production Cost Structures," Management Science, INFORMS, vol. 37(11), pages 1452-1473, November.
    12. Jaskold Gabszewicz, J. & Thisse, J. -F., 1979. "Price competition, quality and income disparities," Journal of Economic Theory, Elsevier, vol. 20(3), pages 340-359, June.
    13. Green, Paul E & Srinivasan, V, 1978. "Conjoint Analysis in Consumer Research: Issues and Outlook," Journal of Consumer Research, Oxford University Press, vol. 5(2), pages 103-123, Se.
    14. Waterson, Michael, 1989. "Models of Product Differentiation," Bulletin of Economic Research, Wiley Blackwell, vol. 41(1), pages 1-27, January.
    15. Greenstein, Shane & Ramey, Garey, 1998. "Market structure, innovation and vertical product differentiation," International Journal of Industrial Organization, Elsevier, vol. 16(3), pages 285-311, May.
    16. Itoh, Motoshige, 1983. "Monopoly, product differentiation and economic welfare," Journal of Economic Theory, Elsevier, vol. 31(1), pages 88-104, October.
    17. K. Sridhar Moorthy, 1988. "Product and Price Competition in a Duopoly," Marketing Science, INFORMS, vol. 7(2), pages 141-168.
    18. Brian T. Ratchford, 1990. "Commentary on “Marketing Applications of the Economics of Product Variety”," Marketing Science, INFORMS, vol. 9(3), pages 207-211.
    19. Morris A. Cohen & Jehoshua Eliasberg & Teck-Hua Ho, 1996. "New Product Development: The Performance and Time-to-Market Tradeoff," Management Science, INFORMS, vol. 42(2), pages 173-186, February.
    20. John R. Hauser, 1988. "Note—Competitive Price and Positioning Strategies," Marketing Science, INFORMS, vol. 7(1), pages 76-91.
    21. Mark B. Vandenbosch & Charles B. Weinberg, 1995. "Product and Price Competition in a Two-Dimensional Vertical Differentiation Model," Marketing Science, INFORMS, vol. 14(2), pages 224-249.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Fang, Xiang & Gavirneni, Srinagesh & Rao, Vithala R., 2013. "Supply chains in the presence of store brands," European Journal of Operational Research, Elsevier, vol. 224(2), pages 392-403.
    2. Guofang Nan & Xingtao Li & Zan Zhang & Minqiang Li, 0. "Optimal pricing for new product entry under free strategy," Information Technology and Management, Springer, vol. 0, pages 1-19.
    3. Guofang Nan & Xingtao Li & Zan Zhang & Minqiang Li, 2018. "Optimal pricing for new product entry under free strategy," Information Technology and Management, Springer, vol. 19(1), pages 1-19, March.
    4. Saibal Ray & Tamer Boyaci & Necati Aras, 2005. "Optimal Prices and Trade-in Rebates for Durable, Remanufacturable Products," Manufacturing & Service Operations Management, INFORMS, vol. 7(3), pages 208-228, January.
    5. Karniouchina, Ekaterina V. & Moore, William L. & van der Rhee, Bo & Verma, Rohit, 2009. "Issues in the use of ratings-based versus choice-based conjoint analysis in operations management research," European Journal of Operational Research, Elsevier, vol. 197(1), pages 340-348, August.
    6. Sergei Savin & Christian Terwiesch, 2005. "Optimal Product Launch Times in a Duopoly: Balancing Life-Cycle Revenues with Product Cost," Operations Research, INFORMS, vol. 53(1), pages 26-47, February.
    7. Huang, Xiao & Sosic, Greys, 2010. "Analysis of industry equilibria in models with sustaining and disruptive technology," European Journal of Operational Research, Elsevier, vol. 207(1), pages 238-248, November.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Glen M. Schmidt & Evan L. Porteus, 2000. "Sustaining Technology Leadership Can Require Both Cost Competence and Innovative Competence," Manufacturing & Service Operations Management, INFORMS, vol. 2(1), pages 1-18, March.
    2. Altug, Mehmet Sekip, 2016. "Supply chain contracting for vertically differentiated products," International Journal of Production Economics, Elsevier, vol. 171(P1), pages 34-45.
    3. Palsule-Desai, Omkar D. & Tirupati, Devanath & Shah, Janat, 2015. "Product line design and positioning using add-on services," International Journal of Production Economics, Elsevier, vol. 163(C), pages 16-33.
    4. George Deltas & Thanasis Stengos & Eleftherios Zacharias, 2011. "Product line pricing in a vertically differentiated oligopoly," Canadian Journal of Economics, Canadian Economics Association, vol. 44(3), pages 907-929, August.
    5. L. Colombo & L. Lambertini, 2003. "Dynamic Advertising Under Vertical Product Differentiation," Journal of Optimization Theory and Applications, Springer, vol. 119(2), pages 261-280, November.
    6. Luo, Zheng & Chen, Xu & Chen, Jing & Wang, Xiaojun, 2017. "Optimal pricing policies for differentiated brands under different supply chain power structures," European Journal of Operational Research, Elsevier, vol. 259(2), pages 437-451.
    7. Manez, J.A. & Waterson, M., 2001. "Multiproduct Firms and Product Differentiation: a Survey," The Warwick Economics Research Paper Series (TWERPS) 594, University of Warwick, Department of Economics.
    8. Yogesh V. Joshi & David J. Reibstein & Z. John Zhang, 2016. "Turf Wars: Product Line Strategies in Competitive Markets," Marketing Science, INFORMS, vol. 35(1), pages 128-141, January.
    9. L. Colombo & L. Lambertini, 2003. "Quality and Advertising in a Dynamic Duopoly," Working Papers 490, Dipartimento Scienze Economiche, Universita' di Bologna.
    10. MATHUR Sameer & DEWANI Prem Prakash, 2015. "Market Entry, Product Quality And Price Competition," Studies in Business and Economics, Lucian Blaga University of Sibiu, Faculty of Economic Sciences, vol. 10(2), pages 62-82, August.
    11. Byong‐Duk Rhee & André de Palma & Claes Fornell & Jacques‐François Thisse, 1992. "Restoring The Principle Of Minimum Differentiation In Product Positioning," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 1(3), pages 475-505, September.
    12. V. Krishnan & Karl T. Ulrich, 2001. "Product Development Decisions: A Review of the Literature," Management Science, INFORMS, vol. 47(1), pages 1-21, January.
    13. De Fraja, Giovanni, 1996. "Product line competition in vertically differentiated markets," International Journal of Industrial Organization, Elsevier, vol. 14(3), pages 389-414, May.
    14. Mariana Cunha & António Osório & Ricardo Ribeiro, 2016. "Endogenous product design and quality with rationally inattentive consumers," Working Papers de Economia (Economics Working Papers) 03, Católica Porto Business School, Universidade Católica Portuguesa.
    15. Bing Jing, 2006. "On the Profitability of Firms in a Differentiated Industry," Marketing Science, INFORMS, vol. 25(3), pages 248-259, 05-06.
    16. Justin P. Johnson & David P. Myatt, 2006. "Multiproduct Cournot oligopoly," RAND Journal of Economics, RAND Corporation, vol. 37(3), pages 583-601, September.
    17. Bing Jing & Roy Radner, 2004. "Nonconvex Production Technology and Price Discrimination," Working Papers 04-04, New York University, Leonard N. Stern School of Business, Department of Economics.
    18. de Palma, Andre & Leruth, Luc, 1996. "Variable willingness to pay for network externalities with strategic standardization decisions," European Journal of Political Economy, Elsevier, vol. 12(2), pages 235-251, September.
    19. Jonathan D. Bohlmann & Peter N. Golder & Debanjan Mitra, 2002. "Deconstructing the Pioneer's Advantage: Examining Vintage Effects and Consumer Valuations of Quality and Variety," Management Science, INFORMS, vol. 48(9), pages 1175-1195, September.
    20. Bhadury, J. & Eiselt, H. A., 1999. "Brand positioning under lexicographic choice rules," European Journal of Operational Research, Elsevier, vol. 113(1), pages 1-16, February.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormsom:v:2:y:2000:i:4:p:317-336. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Matthew Walls). General contact details of provider: http://edirc.repec.org/data/inforea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.