New product development considering product cannibalization, development cost and production cost

Abstract

This paper explores a situation in which a firm wants to add a new product to its existing product line in order to maximize its profit. A new product contains a group of attributes, and thus its development can be viewed as a configuration of attribute levels. Different attribute levels contribute to product variety and reduce cannibalization by product similarities. On the other hand, large variations in attribute levels often increase development cost and process variation cost. Thus, the impact of product cannibalization, development cost and production cost on new products should be evaluated. We formulate this selection of attribute levels as a nonlinear optimization problem. A heuristic is proposed to solve the problem efficiently, and managerial implications are provided.