Managing sequential innovation: product design, sourcing and distribution decisions

Sequential Innovation involves the serial commercialization of improving products based on technologies that improve over time. In many industries such as semiconductors, electronics and computers, fundamental advances have presented firms with opportunities to substantially improve their product's capabilities in very short periods of time. Customers who invest in these products may, however, react adversely to rapid improvements that obsolete their previously purchased products. In the case of breakthrough products that create categories of their own, potential consumers might even be unaware of their own valuation for new products. In this dissertation, I identify and analyze some means by which a firm can engage in sequential innovation in the face of such apprehensions. In particular, I focus on three aspects of product development that have important implications for its eventual success in the market: product design, sourcing of components and distribution channels. In the first essay, motivated by an emerging trend in industrial markets, I analyze the role of modular upgradable designs in managing the introduction of rapidly improving products. I show that modular upgradability can reduce the need for slowing the pace of innovation or foregoing upgrade pricing. In the second essay, I study a dual set of challenges that arise for the modular innovator in the presence of strategic consumers and suppliers. The firm's ability to credibly signal its future design strategy could be adversely affected under various sourcing arrangements for peripheral components of the modular product. Even when consumers strategically plan their purchases while taking into account the firm's incentives, they often have limited understanding of their own valuation of a product before they buy it. In the third essay, I consider the role played by channels of distribution that play an educational role when selling sequentially improving products to such consumers who are uncertain about their preferences. The contribution of this dissertation is to formalize the sequential innovation problem and propose solutions that can help firms in synchronizing product development decisions with customers and other value-chain partners.