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

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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 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

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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 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.

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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 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.

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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 sales would increase because of highly

competitive prices set. On the other hand, I increased the prices of

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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.

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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.

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

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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 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

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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.

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.

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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.

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

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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.

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