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Timing the Start of Material Substitution Projects: Creating Switching Options under Volatile Material Prices

Fisch, Jan Hendrik and Ross, Jan-Michael (2014) Timing the Start of Material Substitution Projects: Creating Switching Options under Volatile Material Prices. Journal of Product Innovation Management, 31 (3). pp. 567-583. ISSN 1540-5885

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Abstract

Firms developing new products often face the challenge of making investment decisions under uncertain input-cost conditions due to the price volatilities of the materials they use. These decisions need to be made long before the final products are launched on the market. Therefore, firms who invest in the opportunity to switch materials in a timely manner will have the flexibility to react to material price changes and realize competitive advantages. However, volatile material prices may also cause a firm to delay investment. Using real-options reasoning, this article studies the influence of input-cost fluctuations on the timing decision to start new product development (NPD) and thus create the follow-on opportunity to later replace an existing product. A model that combines waiting and switching options to derive influencing factors of the flexibility value which triggers the investment is developed and tested on a sample of material substitution projects from manufacturing firms. The results show how price uncertainty of the new and the old material, their joint price development, the expected project duration, and competitive preemption are related to the propensity to delay the start of NPD. The findings provide new insights on how timing in adopting materials can be used to hedge exposure to volatile material prices. The insights are relevant for adopters and producers of new materials, as well as for policy makers who strive for supporting the diffusion of new materials. (authors' abstract)

Item Type: Article
Additional Information: To see the final version of this paper please visit the publisher's website. Access to the published version requires a subscription. This is the accepted version of the following article: Fisch, Jan Hendrik, Ross, Jan-Michael. 2014. Timing the Start of Material Substitution Projects: Creating Switching Options under Volatile Material Prices. Journal of Product Innovation Management 31 (3): 567-583, which has been published in final form at http://dx.doi.org/10.1111/jpim.12114
Keywords: New product development / timing decisions / input-cost uncertainty / material substitution / real options
Divisions: Departments > Welthandel > International Business
Version of the Document: Accepted for Publication
Depositing User: ePub Administrator
Date Deposited: 28 Nov 2014 11:31
Last Modified: 03 May 2016 19:43
Related URLs:
FIDES Link: https://bach.wu.ac.at/d/research/results/66662/
URI: http://epub.wu.ac.at/id/eprint/4385

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