Effects of ,,Leapfrogging Behavior" in Innovative Markets on the Profit Situation of the
Company - A Theoretical and Empirical Simulation Analysis
DipI.-Kfm. Jorn W. Ewaldt
Dipl.-Kfm. techn. Thomas Harring
Both are Scientific Assistants
at the Chair of Managerial Economics, Management Accounting and Control Systems
Brandenburg Technical University of Cottbus
Faculty of Mechanical, Electrical and Electronical, and Industrial Engineering
P.O.Box 10 13 44/ 03013 Cottbus / Germany
j-ewaldt@rz.tu-cottbus.de / harring@rz.tu-cottbus.de
Abstract
Nowadays the technological progress and the abridgement of innovation cycles lead to a situation in which the risks
and opportunity costs of waiting for the next product generation become calculable and relevant for the bargaining
decision. The decision to wait causes a cannibalism process between the current and the future product and is
called the leapfrogging behavior.
Existing models typically concentrate on the buy-or-wait decisions of the potential customers (distinguished into
innovators, distribution agents, and adoptors) and present an ex-post distribution of the decision results. This model
focuses on the dynamic market interactions and their economic impacts on the gain and loss situation of the
observed company.
1. The Model
The competitive situation determines the fungibility of a product in its product life cycle. The main factors of influence
are the price and the speed of market penetration.
During the last few decades an additional factor has gained in importance. The customer's entitlement on product
performance and product quality increases continuously. This leads to the situation in which every market initiation
of a new product generation starts an ,internal ticker" decreasing its market fitness.
Companies react to this restriction of time, which is similar to the biological clock, in the same way nature does.
They reproduce their products generation by generation, in specifications which fit to the changing market conditions
(customer requirements). Of course their market initiation suits to the current competitive situation (selection). Ina
competitive market this process implicates the so-called ,innovation war". The main weapon of the contenders is to
reach the market faster and faster with the following product generation.
To keep your position in this war, it is necessary to retain your strength of innovation or even improve it. The model
(see fig. 1) illustrates the corresponding interactions.
CASH FLOW
+
GAINS
$e PERFORMANCE MARKET PERFORMANCE, STRENGTH OF
_ OFB - obs OFC INNOVATION
DEMARCATION TO COMPETITOR
R&D-COSTS OFC
LEAPFROGGING
<a
Ss TIME-GAINS
Figure 1: Causal Loop Diagram of Leapfrogging Effects
2. The Effects of Leapfrogging Behavior
If the company is able to shorten the R&D phase, the effects are generally positive up to a certain point. This critical
point is reached when the market initiation of the following product (Mlc) is earlier than the market exit of the current
product (Mlg). Compare to figure 2.
The earlier the product C emerges, the stronger the cannibalism effects between B and C become. In addition, the
company faces an extreme growth in its R&D costs.
simulation
$ 1
2 \
'
R&D-phase of C | market phase of C
R&D-phase of B
market phase of A 4
i i 4 4 4 4 4 4
T T T T ¥ T T T T T T T mt
R&De te Mie te Mic T
R&De Mic MFe
Mle MEe
ME,
R&D [Research & Development of producti i index of products
MI___| Market Initiation of product ALBLC | product &, Bor C
ME | Market Exit of producti cB.cC [competitive product to B or C
Figure 2: The Time Scheme
undecisive
customer |
diffusion
of information
x purchase of B
otential activated
P Ly!
customer customer
<—
a” x ‘y—fe} purchase of C 1H
search of information \ advertising
no purchase
price
‘1S before MEz = LEAPFROGGER
Figure 3: The Bargaining Decision Process
3. The Analysis and significant Results
Looking at the cannibalism effects in more detail, you can distinguish between two different aspects. On the one
hand, the impact on the distribution of product B is negative. On the other hand, potential customer base available to
product C has been reduced artificially by the time MEg is reached. Both aspects reduce the opportunity of
achieving additional revenue through the time advantage gained over competitors.
It can be proved that from a certain point of time onwards, the negative factors outweigh the benefits. Apart from the
effects of a longer market phase of product C, the reduction of its R&D phase has a negative effect. A shorter R&D
phase causes distortions in the early phases of information diffusion which impact particularly on the multiplicator
function of the innovators and distribution agents.
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