University of Connecticut School of Business

New Product and Service Innovation Management

STRATEGIC INNOVATION SIMULATION

BACK BAY BATTERY

KSHITIJ SHARMA

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 STRATEGIC INNOVATION SIMULATION: BACK BAY BATTERY

The Back Bay Simulation taught me how to strategize in a managerial position. I was faced with

tough decisions on how to spend in Research and Development. I had two options, either to

spend in R&D of NiMH or to spend in R&D of innovative disruptor which is Ultracapacitor. I

faced the dilemma in deciding where to invest my money, either in Research and Development

on existing technologies or in new technology.

When I first started the simulation I didn’t exactly have a strategy, but I did not just invest

blindly. I looked at the information provided; consumer desires, revenue details, potential

customers and feature performance. With the foreground reading of Back Bay Battery Ltd., I

understood that NiMH has competitive advantages in three markets namely power tools, two-

way radios and power packs. However, as li-ion batteries and lithium batteries were introduced

to the market, they have almost replaced NiMH in the market for laptop computer batteries and

stolen some other markets as well. As a result of improving li-ion and lithium, NiMH is facing a

big risk in the three primary market segments where might be cut into by li-ion and lithium. On

the other hand, a new Ultracapacitor was developed, and has much better performance in most

features but energy density and price.

Strategy 1: Examining by increasing NiMH and Ultracapacitor price according to news

To start with, when I looked at the news of 2012 that there is 37% increase in sales of power

tools, I decided to keep the unit price of NiMH batteries at $10.00 and decreased the price of

Ultracapacitor from $20.00 to $18.00 in the notion that I would be able to increase my revenues

from NiMH which is still used heavily in all fields. Besides, I invested $1 million in energy

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density of NiMH batteries along with $4 million in Ultracapacitor, specifically $2 million each in

energy density and process improvement. I kept the price same for NiMH batteries for another 2

years i.e. from 2013 to 2014, even though I found in the news that overall sales of Two Way

Radios and Power Packs have declined. However, when I found in the news of 2015 that

competitors are requesting price reduction because of the mature competition, I decided to

reduce the price of NiMH batteries to $9.10 per unit so as to be competitive in the market. But

still I found that my revenues dropped heavily and my profit was slowing down. I found that the

reason for this is decrease in sales during this year. Next year, when I found that sales have

dropped and competitors are requesting more price reduction, I was flexible enough to drop my

prices for NiMH to $8.60 according to the news. Still, I found that my profit decreased with

reduction in revenues. I thought this might be because of my competitors who might have

reduced the price of batteries more and my customers are moving away from me. With this

thought, I reduced my prices to $6.8 per unit in 2018. I also increased the price of Ultracapacitor

to $21.43 in the notion that competitors are moving towards innovative technology which for

better efficiency. I though this might improve the profit for my organization. But I was

disappointed to know that my profits still fell further.

Now, I decided to increase my price of NiMH batteries because I invested heavily in R&D and

thought that it might give my company leverage. I increased the NiMH price from $6.02 to $8.30

in 2019 and decreased the price of Ultracapacitor from $21.43 to $20.90. I found that my profit

went up because of the revenues from both NiMH and Ultracapacitors. In 2020, when I saw the

news that overall sales in all the market have declined, I decided to reduce the price of NiMH

batteries to $7.50 but to increase the price of Ultracapacitor to $22.40. I thought that this might

improve the profits further as competitors will be shifting towards my organization because of

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the price reduction. Also, I invested lot of money throughout in Ultracapacitor, I thought it will

pay the price in the last year. The profits for NiMH went down this time with little increase in

revenues. On the other hand, the revenues and profits for Ultracapacitors rose high. When I

completed one round of iteration, I found that my revenues for NiMH reduced from $134 million

in 2010 to $118.3 million in 2020. Also, my profits suffered during this 10 years. The profits fell

from 31% to 18%. However, I was able to increase the revenues and profits for Ultracapacitors

from 2010 to 2020. My revenues increased from $50 million to $131 million and profits

increased from -25% to 7%. Overall, my cumulative profit was $30.7 million and operating

profit was -$4.63 million at the end of 2020.

I thought that my strategy for Ultracapacitors was working but I was lagging some important

aspects in NiMH batteries. When I analyzed the situation I thought it might be because of higher

R&D investments in Ultracapacitors which paid the price ultimately. I also analyzed that it is

better to invest in energy density, recharge cycles and process improvement for Ultracapacitors. I

found that the market is highly fickle. There are times when the market conditions were good

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and I thought to increase the price of NiMH batteries. At times when the market conditions were

poor, I dropped the prices of NiMH batteries. APrt from it, the R&D investments were not

constant. Sometimes I had as much as $11 million to invest and sometimes I had as low as $3

million to invest. The challenging task was to cope up with the market conditions and to invest

pragmatically in the R&D. Now I thought to improve my NiMH strategy in the next iteration.

With this view I moved to my next iteration.

Strategy 2: Investing in R&D cautiously while juggling with prices

In my 2nd iteration, I kept the price of NiMH battery and Ultracapacitor same at $10.00. I found

my profit went up a little. In second year I increased the price of NiMH batteries to $10.20 while

I kept the price of Ultracapacitor constant. I was happy to see that my profits and revenues for

NiMH batteries were improving. In the coming years I dropped the price of NiMH as per the

news I received. In 2015, the price of NiMH was $10.50 and in 2016 I placed the price as $8.50

according to the drop in sales and the request from competitors. However, I increased the price

of Ultracapacitors from $20.00 to $20.50 in 2015 as I thought I would make up the loss of NiMH

batteries from ultracapitors. When I found that my profit from Ultracapacitor fell, I decided to

decrease the price of my Ultracapacitor to $19.70. In the year 2017, I received the news that

competitors are requesting price reduction to $7.50 and overall sales from all the markets were

down. I still kept the prices same for NiMH batteries which is $8.50. I applied this approach

because I reduced my prices in iteration 1 as I heard this news. Also, I increased the price of the

Ultracapacitor to $19.80 as against $19.70 so that it will cover the gaps of price reduction.

For the next year, although the news stated the increase in sales in Power Tools and Power

Packs, I reduced the price of NiMH to $7.30 thinking I would be able to cope up my loses as my

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sales would increase because of highly competitive prices set. On the other hand, I increased the

prices of Ultracapacitors to $20.93 with a view that market will be shifting to Ultracapacitor.

However, this time my revenue and profit were hit badly. To increase my profit, I had to increase

the price of my NiMH batteries and I set the price to be $10.30 as the news showed overall

increase in sales. Similarly, I set the Ultracapacitor price to $22.10 to gain the profits from new

technology. I discovered that the revenue and profit from both NiMH and Ultracapacitor went up

although the sales were not that good. In the last year i.e. 2020, I decreased the price of NiMH to

$9.30 as the overall sales decreased. Since the sales from Ultracapacitor were good throughout, I

increased the price of Ultracapacitor to $23.80. The profits from NiMH slided down little bit

whereas profit from Ultracapacitor rose although the revenue generated was less. Throughout the

year from 2011 to 2020, I invested heavily in NiMH, particularly in energy density and self-

discharge and energy density in Ultracapacitor. I did not invest in process improvement in this

iteration because I wanted to see the difference it will make. The revenue and profit for NiMH at

the end of the year 2020 or iteration was $85 million and 34% as against $134 million and 31%

in year 2010 respectively. Similarly, the revenue and profit for Ultracapacitor at the end of the

year 2020 or iteration was $28 million and 5% as against $50 million and -25% in year 2010

respectively.

I discovered that my sales from Ultracapacitor remained constant but sales from NiMH varied

heavily. I also noticed that my profit from Ultracapacitor kept on going up throughout the

iteration but profit from NiMH varied heavily. I still had to figure out the strategy for NiMH

because the market of NiMH suffered heavily with ups and downs of market condition. One of

the important things that I learned is that I have not taken variable cost into picture. I found that

variable cost of Ultracapacitor was huge but I was selling my product cheaply.

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During my next three or four iterations I juggled with the pricing of NiMH from the initial years

to see the difference I would get in profit. I also changed by investing perspective. I invested in

energy density and recharge cycles of Ultracapacitor. I knew that power tools sector bank on

energy density and NiMH batteries of Bay Back can improve in energy density if company

invested in its R&D. I invested heavily in this feature because I thought that it would be leverage

for my company in increasing the sales. During the iterations I discovered that investing in

process improvement is beneficial because it leads to 10% - 56% reduction in unit costs for

NiMH and 10% - 74% reduction in unit costs for Ultracapacitor. Moreover, it is better to invest

in R&D of disruptive technology as it will eventually pay the price. I have learned that I would

invest in the new technology. The new technology would have acted as a disruptive technology

and pushed the old battery out of the market. To successfully make the switch I had to set price

below cost for the old battery to increase demand and the revenue as it was being pushed out,

while simultaneously investing the rest of the allowed money on the R&D of the new battery.

This would make the new battery more successful, and show consumers that it was worth the

cost.

Strategy 2: Decreasing NiMH price and increasing Ultracapacitor price with R&D

investment

In this iteration, I had the strategy to push out old battery out of the market and create demand

for innovative technology i.e. Ultracapacitor. I thought to implement this strategy by gradually

decreasing the price of NiMH battery so that I can sell them and gain profits and revenues from

it. At the same time, I thought to invest in Ultracapacitor to create demand in the market. In

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2013, I set the price of NiMH battery to $11.00 as against the variable cost of $6.31. Apart from

this, I invested its process improvement so that the unit cost keeps on decreasing. I invested 1

million in process improvement till 2020. This led to the increase in profit for year 2013. Also, I

set the price of Ultracapacitor at $19.00 as against the variable cost of $23.99 so as to gain

market initially. I knew that I had to decrease the variable cost so that I can get maximum benefit

from Ultracapacitor. I invested $3 million in process improvement feature of Ultracapacitor

continuously till 2017. Also, I invested $4 million in its energy density for 5 years. Now I started

decreasing the price of NiMH battery because I knew that my investment in process

improvement would decrease the variable cost.

In 2014, I set the price of NiMH battery to $10.00 with variable cost of $6.21. Similarly, I

increased the price of Ultracapacitor to $19.50 to create demand for this technology. For the year

2015, I set the price of NiMH battery to $9.30 because of the increase in overall sales from all

the segments of the market. The variable cost kept on decreasing and was $6.06 in 2015. For

Ultracapacitor, the price remained at $20.00, although variable cost reduced to $22.67 as against

$23.45 in 2014. The profit and revenue for Ultracapacitor kept on increasing steadily. However,

profit and revenue showed some inconsistencies in NiMH battery, though the variations were

marginal. In 2016, I decreased the price of NiMH battery to $8.80 because of the decrease in

sales and also because I wanted to push back the old battery. The variable cost was down to

$5.90 which resulted in high revenue. Similarly, I increased the cost of Ultracapacitor to $20.50

because of R&D investment that would enhance the features of Ultracapacitor. Although the

variable cost decreased to $21.67, it was higher than the price of Ultracapacitor. The profit and

revenue of NiMH and Ultracapacitor showed consistency and kept on increasing.

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In 2017 and 2018, I kept the same price of NiMH battery and Ultracapacitor. I noted that there

was significant reduction in variable cost for Ultracapacitor. In 2018, the variable cost of

Ultracapacitor went down with respect to the price of Ultracapacitor which I set in the market. I

found that revenue and profit surged for NiMH battery because of the decrease in overall sales.

In 2019 and 2020, I decided to decrease the price of NiMH further and increase the price of

Ultrcapacitor because of better conditions of the market. The variable cost kept on decreasing for

both NiMH battery and Ultracapacitor. This resulted in steep increase in revenue for both NiMH

and Ultracapacitor. The cumulative profit at the end of iteration was $231.36 million. The

operating profit at the end of 2020 was $44.98 million. I was relieved to see that my

understanding was correct. The strategy to rule out NiMH battery and create demand for new

technology was correct. Also, my perspective of investing in process improvement for both

NiMH and Ultracapacitor was right.

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Consequently, the ideal strategic plan for Back Bay Battery is to invest R&D in both products.

For NiMH, the main focus is to decrease the price in order to compete with existing and potential

competitors. At the same time, the company should increase the performance of energy density

and self-discharge gradually by investing a small portion of the budget. On the other hand, the

goal for Ultracapacitor is to store energy density as much as possible in a few years to meet

market demands. In the meantime, price is also a big concern for consumers. Customers always

want a better product, but with a lower price. Thus, Back Bay Battery not only needs to improve

the feature of energy density, but also needs to improve process to decrease production cost for

Ultracapacitor.

Conclusion:

From the simulation, I understood that the market does not always go according to your will, and

that sometimes to save the business you have to take a leap of faith into a new product or service.

The simulation helped me in examining the approaches on how to address the difficulty in

aligning the timing and levels of R&D spending to support innovation or disruptive technology.

Besides, I was able to explore the need to meet specific short-term financial targets that can

constrain an organization’s ability and willingness to innovate. Lastly, I was able to examine the

links between the current health of the business, investment decisions for disruptive innovation,

and the subsequent pathway to profitability.