A Product Design-Driven Approach to Managing Rapid Sequential Innovation

Global competition and major technological advances cause substantial performance improvements in many product categories including consumer electronics, computers and software. Rapid sequential innovation refers to the situation when firms launch a sequence of products in time whose performance quality improves not only in absolute terms but also in discounted terms from the perspective of customers. Managing such innovation presents certain unique challenges to profit-maximizing firms designing such products because the seller’s choices make buyers reconsider their purchase timing, with some customers possibly regretting their purchase timing decisions at a later time. Prior work has shown that firms planning to launch rapidly improving products without causing customer regret must either restrain their rate of innovation or forego their degrees of freedom in pricing their product upgrades. In this paper, we examine if product design can help firms manage rapid sequential innovation without constraints on the rate of innovation or upgrade pricing. In a two-period setting, we find that by following a product architectural approach called Modular Upgradability and by localizing performance improvements a firm can maximize its profits without causing customer regret. Two approaches to modular upgradability are considered that differ in the degree to which industry standard components are used with different implications for prices and profits. We derive conditions under which the modular upgradability approaches dominate other pricing-based approaches to this problem. Our key contribution in this paper is the identification, formalization, and analysis of a product design based approach to intertemporal price discrimination and sequential introduction of rapidly improving products. (