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

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...

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Main Authors: Fisch, Jan Hendrik, Ross, Jan-Michael
Format: Others
Language:en
Published: Wiley-Blackwell 2014
Subjects:
Online Access:http://epub.wu.ac.at/4385/1/StartOfNPD_final.pdf
http://dx.doi.org/10.1111/jpim.12114
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spelling ndltd-VIENNA-oai-epub.wu-wien.ac.at-43852016-05-04T05:37:35Z Timing the Start of Material Substitution Projects: Creating Switching Options under Volatile Material Prices Fisch, Jan Hendrik Ross, Jan-Michael New product development / timing decisions / input-cost uncertainty / material substitution / real options 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) Wiley-Blackwell 2014-05 Article PeerReviewed en application/pdf http://epub.wu.ac.at/4385/1/StartOfNPD_final.pdf http://dx.doi.org/10.1111/jpim.12114 http://onlinelibrary.wiley.com/ http://dx.doi.org/10.1111/jpim.12114 http://epub.wu.ac.at/4385/
collection NDLTD
language en
format Others
sources NDLTD
topic New product development / timing decisions / input-cost uncertainty / material substitution / real options
spellingShingle New product development / timing decisions / input-cost uncertainty / material substitution / real options
Fisch, Jan Hendrik
Ross, Jan-Michael
Timing the Start of Material Substitution Projects: Creating Switching Options under Volatile Material Prices
description 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)
author Fisch, Jan Hendrik
Ross, Jan-Michael
author_facet Fisch, Jan Hendrik
Ross, Jan-Michael
author_sort Fisch, Jan Hendrik
title Timing the Start of Material Substitution Projects: Creating Switching Options under Volatile Material Prices
title_short Timing the Start of Material Substitution Projects: Creating Switching Options under Volatile Material Prices
title_full Timing the Start of Material Substitution Projects: Creating Switching Options under Volatile Material Prices
title_fullStr Timing the Start of Material Substitution Projects: Creating Switching Options under Volatile Material Prices
title_full_unstemmed Timing the Start of Material Substitution Projects: Creating Switching Options under Volatile Material Prices
title_sort timing the start of material substitution projects: creating switching options under volatile material prices
publisher Wiley-Blackwell
publishDate 2014
url http://epub.wu.ac.at/4385/1/StartOfNPD_final.pdf
http://dx.doi.org/10.1111/jpim.12114
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