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Capacity Expansion and Replacement in Growing Markets with Uncertain Technological Breakthroughs

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  • Sampath Rajagopalan

    (Marshall School of Business, University of Southern California, Los Angeles, California 90089-1421)

  • Medini R. Singh

    (The Amos Tuck School of Business Administration, Dartmouth College, Hanover, New Hampshire 03755)

  • Thomas E. Morton

    (Graduate School of Industrial Administration, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213)

Abstract

The accelerated pace of technological change has led to rapid obsolescence of productive capacity in electronics and other industries. Managers must consider the impact of future technologies while making acquisition and replacement decisions in such environments. We consider a problem where a sequence of technological breakthroughs are anticipated but their magnitude and timing are uncertain. A firm, operating in such an environment, must decide how much capacity of the current technology to acquire to meet future demand growth. It must also determine whether to upgrade any of the older vintages. We formulate this problem and present some structural results. Using these results, we then develop a highly efficient regeneration point-based dynamic programming algorithm. The effectiveness of the proposed algorithm is illustrated through a computational study. The sensitivity of the first period decision to various parameters is also explored.

Suggested Citation

  • Sampath Rajagopalan & Medini R. Singh & Thomas E. Morton, 1998. "Capacity Expansion and Replacement in Growing Markets with Uncertain Technological Breakthroughs," Management Science, INFORMS, vol. 44(1), pages 12-30, January.
    • Handle: RePEc:inm:ormnsc:v:44:y:1998:i:1:p:12-30
    DOI: 10.1287/mnsc.44.1.12
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    References listed on IDEAS

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