What are We Really Good at? Product Strategy with Uncertain Capabilities∗

Firms often learn about their own capabilities through their products’ successes and failures. This paper explores the interaction between such learning from experience and product strategy in a formal model. We consider a firm that can launch a sequence of products, where each product’s performance depends on the fit between the firm’s capabilities and the product. A successful new product always causes the firm to become more optimistic about the capability most relevant for that product; however, it can also cause the firm to become less optimistic about some of its other capabilities, including capabilities the new product does not use. A product launch generates useful information for future decisions if it leads to learning about capabilities used by potential future products. We find that a product sharing few or even no capabilities with potential future products may generate more useful information than a product with greater overlap. ∗We are grateful to Birger Wernerfelt, Juanjuan Zhang and seminar participants at Cambridge University, Chapman University, the Marketing Science Conference, the Utah PSI Conference, the Marketing Dynamics Conference, and the Strategic Management Society Conference for helpful comments. †Simon Business School, University of Rochester; e-mail: [email protected]. ‡Simon Business School, University of Rochester; e-mail: [email protected]. §Argyros School of Business and Economics, Chapman University; e-mail: [email protected].