What should happen to launch timing and production when start-ups compete with established firms?
This research develops a game theory model to predict how a start-up’s timing and production decisions are influenced by: 1) whether or not the firm is focuses on maximizing survival vs. profit; and 2) how an established competitor behaves.
What you need to know
The competitive interplay between a start-up and an established competitor can be predicted by understanding certain characteristics specific to each type of firm.
What did the researchers do?
Moren Levésque, Xuan Zhao and Junsong Bian study the interplay between a startup and an established rival using game theory. Their research is motivated by the stories of two start-ups entering new markets: 1) WeAre3D, a 3D printing firm from Waterloo, Canada; and 2) MetaOptima, a Vancouver-based firms creating technology for the dermatology market.
Although most operations and engineering management research on decision-making focuses on the context of profit maximization, this study also addresses the goal of survival-maximization. The authors model various scenarios to examine a start-up’s product launch time relative to an established rival. They also explore: game dynamics to understand the interplay between firms that differ in goal orientation (e.g. survival vs. profit maximization); settings where the established firm behaves strategically vs. non-strategically; and settings where the start-up seeks to maximize profit (as opposed to survival).
What did the researchers find?
The researchers find that the amount of investor funds accumulated by a ‘survival-maximizing’ start-up in order to enter the market defines its production volume. That is, the start-up should be aggressive with production. This result holds regardless of the actions of the established firm. The survival-maximizing start-up (rather than one seeking to maximize profit) is also able to delay its product launch and produce more when competing with the established rival. For established firms, it pays to behave strategically with start-ups, regardless of whether they are profit-maximizing or focused on survival.
How can you use this research?
Start-up tech firms can use this research to understand how having the goal of survival vs. one focused on profit maximization will influence the timing and scale of product launch. The research also offers specific implications for when it is sensible to delay product launch, and highlights the influence that external investment vs. internal funding can have on goals and thus, production decisions.
Established tech firms learn that should be cautious when competing with a start-up, especially if the start-up is survival-maximizing and has a large market-entry investment. This allows the start-up to improve design, increase price, and aggressively produce more output. While this delays the start-up’s launch, it also adversely impacts the established firm.
Want to know more?
Contact Xuan (Jen) Zhao
Article citation: Levésque, M., Zhao, X., and J. Bian (2018). Competitive Interplay of Production Decisions: Rivalry Between Established and Startup Firms, IEEE Transactions on Engineering Management, 65(1), 85-98.